[Ed. Note: Most of our FATCA articles are aimed at individuals. We do represent businesses, however, and those articles tend to be more technical. This is one such article.]
FATCA Impacts On U.S. Real Estate Projects
by Brian Mahany
As most readers already know, the Foreign Account Tax Compliance Act is directed at U.S. taxpayers that have offshore financial assets. The purpose of the legislation is to insure the IRS is collecting tax on income that is located outside the borders of the United States. By now, you are probably curious how such legislation impacts on U.S. real estate projects. Let me explain.
We are certainly living in a global economy. Americans are just as likely to have an offshore bank as foreigners are likely to bank in the U.S. That means many U.S. real estate developments – REITS, funds and joint ventures – may involve foreign investors or payments to foreign banks. Under the new FATCA law, foreign banks (the technical term is “foreign financial institution” or “FFI”), hedge funds and other financial firms may be subject to a 30% withholding.
Is the picture beginning to emerge?
If an FFI is considered “nonparticipating” by the folks at Treasury, payments to that FFI are subject to the withholding. That means U.S. real estate developers will have to check to see if any payment streams are going to foreign banks. If the answer is yes, then further inquiry and possibly withholding must be done.
There are literally hundreds of pages of IRS FATCA regulations that apply to U.S. real estate projects with foreign investors or lenders. These regulations include due diligence requirements and forms. FFI’s and payees without proper documentation are presumed to be nonparticipating. If the US based project fails to comply, they could be hit with substantial penalties.
Although the goal of FATCA may be to force foreign FFI’s to turn info information to the IRS, U.S. real estate development projects are also required to comply.
Just like the thresholds and definitions differ between FBARs and FATCA reporting, the new FATCA rules sometimes apply even though the transaction is not otherwise reportable under the Foreign Investment in Real Property Tax Act (FIRPTA). Sound confusing? It is.
FATCA has already caused many foreign banks to close the accounts of Americans. Some say that that some believe FATCA may also cause some FFI’s to simply avoid investment in U.S. property.
Obviously, we can’t summarize hundreds of pages of regulations in a short article. The purpose of this article is to remind that FATCA has serious impacts on U.S. businesses as well. Whether or not Congress intended this or not, the new regulations are quite far reaching. Now is the time to consider the impacts and form a compliance plan.
This post barely scratches the surface of the many unintended or unexpected consequences of FATCA. If you are an American real estate venture or REIT, foreign financial institution or foreign hedge fund and need advice or information, contact attorney Wassim Malas at . Individual taxpayers seeking answers? Contact attorney Bethany Kroes at . Both can also be reached at (414) 223-0464.
All inquiries are protected by the attorney – client privilege and are kept in strict confidence.
If you have questions, you are not alone. The tax attorneys at Mahany & Ertl can help with a wide variety of offshore and foreign reporting issues. FATCA compliance, FBARS, FIRPTA, foreign real estate investment, repatriation issues and foreign corporation and gift issues. We are the preferred legal services provider to the CPAmerica organization of accounting firms making us the place where the professionals come for answers.
Mahany & Ertl – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine; Minneapolis, Minnesota and coming soon, San Francisco, California (tax only). Services available worldwide.