Caution: FIRPTA Withholding Exemption Certificates—Mirage or Oasis?
April 1, 2013
The Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”) requires foreign persons who sell U.S. real property (or certain U.S. real property interests) to pay a 10% U.S. withholding tax on the gross sale proceeds. If the foreign person’s final U.S. tax liability on the gain from the sale of the U.S. real property interest is less than the 10% withholding tax then the foreign person can file a Form 8288-B to obtain a FIRPTA withholding exemption certificate. The IRS instructions to the Form 8288-B indicate that it could take the IRS 90 days to issue a withholding certificate after the Form 8288-B is filed. If the foreign seller receives the FIRPTA withholding certificate from the IRS prior to the closing or settlement date of the sale, then the FIRPTA withholding should not be required. However, if the application for the FIRPTA withholding certificate is pending on the closing or settlement date of the sale, then, according to the regulations under I.R.C. Section 1445, the buyer is still obligated to withhold and the tax is required to be paid within 20 days of the date when the IRS mails the withholding certificate or notice of denial.
As a practical matter, the Form 8288-B may only provide an advantage to a foreign seller of a U.S. real property interest who is able to apply for the FIRPTA withholding certificate at least 90 days in advance of the closing or settlement date of the sale. The foreign seller must file the Form 8288-B with the calculation of the final tax on the gain from the sale of the property. Documentation of the sale price and the foreign seller’s basis in the property also must be provided to support the calculation of the 10% FIRPTA withholding and the foreign seller’s final tax on the gain. A copy of the sales contract showing the sale price must be provided to the IRS. This means that, in order to apply for the FIRPTA withholding certificate 90 days in advance of the closing or settlement date of the sale, the foreign seller must have an executed contract for the sale of the property 90 days in advance. This requirement could cause the foreign seller to lose an otherwise willing buyer. The buyer may not want to structure the sale so that the closing or settlement date is three months in the future in order to provide enough time for the foreign seller to receive the FIRPTA withholding certificate from the IRS. While foreign sellers technically may qualify for a FIRPTA withholding certificate, the procedural requirements could be a potential trap for the unwary. See the IRS website http://www.irs.gov/Individuals/International-Taxpayers/FIRPTA-Withholding.