![]() ![]() ![]() (c) indirect exposures to counterparty risk.ģ. (b) indirect exposures to underwriting risk ![]() (a) indirect exposures to market risk other than collective investment undertakings and investments packaged as funds The look-through approach referred to in paragraph 1 shall also apply to the following: The Solvency Capital Requirement shall be calculated on the basis of each of the underlying assets of collective investment undertakings and other investments packaged as funds (look-through approach).Ģ. This causes further uncertainty for taxpayers and also raises the question of whether the look-through approach will be confined to this particular area or whether this is the beginning of a broader push to discourage the use of “blocker” corporations.1. What is more, although the look-through approach will take effect when the IRS publishes the final regulations, the preamble states that the IRS could challenge positions that are inconsistent with the proposed regulations even before the regulations are finalized. The proposed regulations would upend long-standing tax law that treats a domestic corporation as a single domestic person in the FIRPTA context (as well as most other contexts). The blocker itself would also be subject to tax on any sale of its REIT stock, although that would be the case regardless of whether the REIT is domestically controlled. In addition, any foreign persons who have invested indirectly in the REIT through a blocker will no longer be able to sell an interest in the blocker tax free because the blocker would be considered a United States real property holding corporation, the sales of which are subject to FIRPTA. As such, any foreign persons who have invested directly in the REIT will be subject to U.S. In that case, the REIT would not be domestically controlled because the rules would attribute more than 50% of the REIT’s interests to foreign owners. Suppose the remaining 20% of the REIT interests were held by another foreign person. This means that if a foreign corporation owns 40% of the stock of a domestic corporation, which owns 80% of a REIT, the look-through rules would attribute 32% of the REIT stock ( i.e., 40% x 80%) to foreign owners, despite a substantial majority of the REIT (80%) being owned by a domestic corporation. The proposed regulations would “look through” a nonpublic domestic corporation if at least 25% of such corporation’s stock is owned by foreign persons. The preamble states that the look-through rule is intended, among other things, to prevent the use of intermediary domestic corporations (“blockers”) by foreign investors to create domestically controlled REITs to avoid taxation under FIRPTA.Ī REIT is not domestically controlled if more than 50% is owned by foreign persons. The proposed regulations will make it more difficult for a REIT to qualify as domestically controlled by effectively disregarding any investment in the REIT through domestic corporations with 25% or more foreign ownership, which could significantly impact foreign investment in nonpublic REITs. ![]() Prior to the introduction of the proposed regulations, a domestic corporation with meaningful ownership by foreign persons would not have been treated as a foreign person under FIRPTA. effectively connected income under the Foreign Investment in Real Property Tax Act (“FIRPTA”). Sales of stock in a domestically controlled REIT by foreign persons are not subject to taxation as U.S. A REIT is domestically controlled if less than 50% of its outstanding interests are held by foreign persons. Proposed regulations issued on Deceminclude a new look-through rule that will affect the determination of whether a real estate investment trust (“REIT”) is considered to be domestically controlled. ![]()
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