Detail

Coalition Requests Changes to Treasury Tax Regulations Affecting Outbound Foreign Real Estate Investment

  • April 29, 2022

IRS BuildingThe Real Estate Roundtable and four other national trade groups submitted recommendations to modify proposed Treasury regulations regarding partnerships and other pass-through entities that own direct or indirect interests in a passive foreign investment company (PFIC). (Read PFIC comment letter, April 25) 

Passive Foreign Investment Companies and Proposed Regulations 

  • A PFIC is a foreign corporation that derives a significant share of its income from passive sources or primarily owns assets that are held for the production of passive income, including capital gains, interest, dividends and rent. PFICs commonly arise when structuring investment funds and pooling capital to invest in foreign real estate
  • Special U.S. tax rules apply to PFIC income. The rules generally accelerate the recognition of PFIC income by PFIC shareholders, or impose an interest charge if the income is deferred. PFIC shareholders can elect which tax regime to apply.   
  • Recently proposed Treasury regulations would require any U.S. partner of a partnership that directly or indirectly owns a PFIC to make PFIC-related tax elections at the individual partner level, in addition to other changes. 

Recommended Changes 

PFIC Coalition logos
  • The April 25 coalition letter suggests the proposed rules would result in an exponential increase in the number of separate PFIC filings, greater administrative burdens and a higher cost of compliance. The rules would also lead to inadvertent failures to file elections since small investors are less well-versed in the PFIC rules than the investment partnerships and their advisors. 
  • The letter letter also urges the IRS to allow partnerships to make PFIC elections at the entity level for all partners, including on behalf of indirect partners who own their interest through an upper-tier partnership. A partnership could make the election for a partner through a partner’s grant of a power of attorney to the general partner of the partnership. An implicit delegation of this authority (e.g., the authority in the partnership agreement to file tax returns) would be sufficient. 
  • “If Treasury incorporates these changes,” said Real Estate Roundtable President and CEO Jeffrey DeBoer, “the end result will be less friction and expense for real estate funds as they raise and deploy capital for productive real estate investment.” 

Other signatories of the letter include the Alternative Investment Management Association, the American Investment Council, the Managed Funds Association, and the S Corporation Association.

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