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Recently Proposed U.S. Treasury Regulations for Non-U.S. Investors

By Michael Mishik .

In December 2022, the United States (U.S.) Treasury and the Internal Revenue Service (IRS) proposed regulations that could significantly limit a non-U.S. investor’s ability to sell stock of a U.S. real estate investment trust (REIT) free from U.S. federal income tax. These proposed regulations would make it more difficult for REITs to be treated as domestically controlled, with the result that sales of interests in those REITs by a non-U.S. investor could be subject to full U.S. federal income tax and tax return filing requirements.


Under the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), a non-U.S. person’s sale of a United States real property interest (USRPI) is generally subject to U.S. federal income tax and a tax return filing requirement. Under FIRPTA, the purchaser of a USRPI from a non-U.S. person is generally required to withhold tax equal to 15 percent of the seller’s amount realized on the sale. USRPIs include stock in a U.S. corporation whose assets comprise largely other USRPIs. Thus, stock in a REIT is generally a USRPI.

Below are the exceptions to FIRPTA’s general rule of U.S. taxation that apply to sales of stock of certain REITs.

  • A non-U.S. person’s sale of stock in a publicly traded REIT is generally exempt from U.S. taxation if the non-U.S. person owns less than 10 percent of the stock of the REIT (directly or constructively).
  • Consequently, shares of a REIT are not USRPIs if the REIT is domestically controlled, and consequently a non-U.S. person’s sale of shares in a domestically controlled REIT is not subject to U.S. tax under FIRPTA.

What does it mean to be domestically controlled?

Under current law, a REIT is domestically controlled if less than 50 percent of the value of the REIT’s stock has been owned, directly or indirectly, by non-U.S. persons throughout the five-year period prior to the date of a sale of that REIT’s stock. The term indirect ownership has long been construed to mean ownership through a pass-through entity, such as a partnership. Thus, a U.S. corporation’s ownership of REIT stock is not looked through to the owners of that corporation’s stock to determine whether the REIT is domestically controlled (i.e., the U.S. corporation is treated as the owner of the REIT’s shares, no matter how much of the U.S. corporation’s stock is owned by non-U.S. persons). Additionally, certain qualified foreign pension funds (QFPFs) are treated as U.S. persons for these purposes, making it easier for a REIT to satisfy the requirement of being domestically controlled.

Proposed changes in regulations

The proposed regulations would change two significant elements of the current rules to determine whether a REIT is domestically controlled.

  1. QFPFs would no longer be treated as U.S. persons for purposes of the domestically controlled determination.
  2. A non-public U.S. corporation is 25 percent or more owned by non-U.S. persons, the U.S. corporation’s ownership of the REIT stock would be looked through and attributed to the corporation’s shareholders for purposes of the domestically controlled determination. The proposed regulations would also apply a look-through approach to REITs, regulated investment companies and non-publicly traded partnerships that own stock in another REIT to determine if the REIT is domestically controlled.

Both these changes would tend to increase the percentage of a REIT’s stock that is non-U.S. owned, thereby increasing the likelihood that the REIT’s shares are treated as USRPIs.

Under the proposed regulations, a common investment structure for ownership of the shares of REITs to satisfy the domestically controlled exception would be ineffective.

  • Many private investment funds make investments in non-public REITs by establishing a U.S. blocker corporation, owned by non-U.S. investors, to hold some of the equity interests in the REIT, while also making unblocked investments in the REIT shares. Under current law, the U.S. blocker is treated as owning the REIT stock for purposes of the domestically controlled determination, thereby increasing the percentage of U.S. ownership of the REIT and facilitating establishing the REIT as domestically controlled. This enables non-U.S. persons to make direct or flow-through investments in the REIT stock with greater confidence that sales of the REIT stock (or interim redemptions of the blocker shares) will not be subject to FIRPTA tax or U.S. return filing requirements.
  • Under the proposed regulations in making the domestically controlled determination, the U.S. blocker’s ownership of the REIT stock would be looked through if the U.S. blocker is 25 percent or more owned by non-U.S. persons, and thus the U.S. blocker’s shareholders will be treated as owning the stock of the REIT for this purpose. This will jeopardize the non-USRPI status of a non-U.S. person’s unblocked investment in the REIT’s stock and may subject the investor FIRPTA tax withholding and a return filing requirement on a sale of the REIT stock.

The proposed regulations would apply to transactions occurring on or after the date they are published as final. While significant pushback to these proposed restrictions on the domestically controlled determination is expected from the investment community, there can be no assurance that the U.S. Treasury will reconsider its position on the matter.

We strongly encourage our investment fund and non-U.S. clients to review their portfolios and investment structures to determine the effect of these significant proposed changes and consider potential alternatives should these rules be finalized without change. The delayed effective date may provide sufficient time to implement mitigation strategies prior to the regulations becoming effective.

If you have any questions on these proposed regulations, please contact Michael Mishik at or your Citrin Cooperman advisor.

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