Federal Income Tax Exemption Analysis | Cross Border Finance ...

Readers advising or working for foreign governmental institutions should note that on November 2, 2011 the IRS proposed new regulations under ?897. These changes allow government-owned entities and public international organizations (PIOs) to hold an interest in U.S. real property, while still maintaining their overall tax exempt status for non-commercial, investment income. The rules prior to this change classified any government controlled entity or PIO that had a net lease or owned U.S. real property a ?commercial entity? whose U.S. investment income would be subject to U.S. taxation.

However, even under the proposed regulations, government controlled entities or PIOs will still lose their U.S. tax exemption for U.S. investments if a preponderance of their real estate and business assets consists of U.S. real property. The U.S. federal income taxation of these entities now largely depends on how much U.S. real property they own and what other commercial activities they perform.

Foreign government controlled entities or PIOs must be mindful that even if they maintain tax exempt status, under ?1445 (FIRPTA) any gain received from the sale of the U.S. property will be subject to U.S. federal withholding or income taxes. Buyers of U.S. real property from any foreign sellers must automatically withhold 10 percent of the sale price, unless the foreign seller meets an exception provided under U.S. law or treaty or elects to be treated as a domestic U.S. corporation. Thus, U.S. federal taxation of the gain on U.S. property will depend on whether the governmentally controlled entities or PIOs are treated as resident in the U.S. and the terms of any applicable treaties.

State/Municipal Tax Exemption Consultation

U.S. state and local government rules and regulations applicable to these matters often differ substantially with those of the U.S. federal government, depending on where the U.S. real property is located. The reader should consult with a tax advisor regarding the state, local, or municipal sales, property or use taxes related to the planned acquisition and use of U.S. real property in addition to the federal rules.

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Source: http://www.clientlawyer.com/federal-income-tax-exemption-analysis/

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