Leveling the Playing Field: Consequences of the FIRPTA Exemption for Non-US Pensions

“In this world, nothing can be said to be certain, except death and taxes.” — Benjamin Franklin

March 4, 2016

On December 18, 2015, US President Barack Obama enacted the Consolidated Appropriations Act of 2016. This Act includes a number of changes to the provisions of the Internal Revenue Code with respect to the tax treatment of US real property held by certain categories of non-US investors, real estate investment trusts (REITs) and REIT-related transactions.

The Act includes a significant change that is expected to increase non-US investor appetite for US real property. This change relates to an exemption for qualifying foreign pension plans (QFPs) from the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA). This is important because FIRPTA has historically treated a non-US investor’s gain or loss from the disposition of US real property, including interests in a holding corporation owning US real property, as subject to US federal income tax and withholdings.

Based on discussions with its tax and legal advisors, StepStone believes QFPs, which can invest in REIT-compliant US real property (USRP) via REITs, should now endure very little or zero tax leakage. This creates an attractive alternative to other more complex yet less tax efficient structures, such as taxable blocker corporations.

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