The U.S. Treasury Department is working with the Internal Revenue Service to finalize rules that would encourage investments in the U.S. real estate market by foreign pension funds.
Rule (REG-109826-17) under tax code Section 897(l) clarifies a 2015 tax law that exempts foreign pension funds from gains in U.S. real estate. The rule would enable qualified foreign pension funds and their subsidiaries to be entitled to a tax exemption when selling U.S. real estate, including real estate investment trusts, or REITs, for a gain. This exemption is already available to U.S. pension funds. The 2015 law did not indicate what qualified as a foreign pension fund, and as such, has not been put into practice. Rather the IRS tends to handle such issues on a case-by-case basis.
Foreign investors are typically subject to U.S. tax under the Foreign Investment in Real Property Tax Act (FIRPTA). However, through the Protecting Americans from Tax Hikes Act of 2015 (“PATH Act”), many foreign pension funds could qualify for a tax exemption from gain or loss through the regulation.
The question has been what foreign pension fund systems or structures would qualify for the exemption. On June 6, 2019, the U.S. Treasury Department and Internal Revenue Service released proposed regulations to provide guidance, which was even published in the Federal Register with comments due by September 5, 2019.
The rule is expected to be largely unchanged from what was originally published and will include a broad range of pension funds. To qualify, the pension fund would need to be created outside the United States and provide retirement or pension benefits to participants who are current or former employees. No longer limited to single entities, the fund can now be a combination of qualified funds or wholly owned by another qualified entity that itself is wholly owned by a qualified entity.
If an entity meets the qualifications, they can start taking advantage of this exception both immediately and on a retroactive basis.
The IRS has indicated that the rules would be finalized in the coming months and will provide tax benefits on inbound U.S. investments.
Tax laws surrounding foreign pension funds are intricate and complex, and engaging the services of a qualified tax consultant-CPA and law firm specializing in international tax and business transactions will ensure compliance is met. Watch this space for further announcements and updates on IRS REG-109826-17.