Post by Tanenbaum on Feb 26, 2009 5:43:05 GMT 4
US Inbound: Advanced notice of proposed rulemaking under section 897
The Internal Revenue Service (IRS) and the US Treasury Department filed an advanced notice of proposed rulemaking with the Federal Register on October 30 2008 (announcement 2008-115), addressing the applicability of the Foreign investment in real property tax act of 1980 (FIRPTA) to certain permits, licenses, franchises or similar rights granted by the US government that are related to the lease, ownership or use of toll roads, toll bridges and other physical infrastructures. These proposed rules would amend Treasury regulation section 1.897-1 (Taxation of foreign investment in United States real property interests (USRPI), definition of terms).
Under current rules, a USRPI includes any interest in real property located in the US or the Virgin Islands and any interest (other than solely as a creditor) in a domestic corporation that is a US real property holding corporation (USRPHC). Real property includes land, unsevered natural products of the land, improvements (including buildings and any other inherently permanent structure) and personal property associated with the use of real property. An interest in real property includes fee ownership, co-ownership, leaseholds, options to acquire land or leaseholds and any right to share in the appreciation in the value or the gross or net proceeds or profits generated by real property.
Under these current rules—in transactions, for example, where a domestic partnership with domestic corporations as partners (with foreign persons as the ultimate shareholders) leases infrastructure assets (such as a toll road or toll bridge) in the US and also acquires the required governmental licenses, permits or similar rights—the IRS says that it is aware that taxpayers take the position that, for purposes of section 897, governmental permits, licenses or similar rights are not USRPIs, but assets used or held for use in a trade or business. Not treating governmental permits, licenses or similar rights as USRPIs would affect the determination of whether a corporation is a USRPHC for purposes of section 897.
The proposed regulations would provide rules regarding the definition of an interest in real property, and addressing licenses, permits, franchises or other similar rights granted by a governmental unit that are related to the value of the use or ownership of an interest in real property. The proposed regulations would provide guidance on how the fair market value of such licenses, permits or franchises would be taken into account when determining the fair market value of a corporation's USRPIs. If these rights are treated as USRPIs, pursuant to section 897(a)(1), the gain or loss of a foreign person arising from the disposition of such a USRPI is treated as if the foreign person were engaged in a trade or business in the US, and as if the gain or loss were effectively connected with such trade or business in the US.
The IRS has requested comments on the scope of the proposed rules and the allocation of the consideration paid for these rights for purposes of determining the fair market value of such property, and for the purpose of determining the fair market values of a corporation's real property interests.
Edward Tanenbaum (edward.tanenbaum@alston.com), New York
The Internal Revenue Service (IRS) and the US Treasury Department filed an advanced notice of proposed rulemaking with the Federal Register on October 30 2008 (announcement 2008-115), addressing the applicability of the Foreign investment in real property tax act of 1980 (FIRPTA) to certain permits, licenses, franchises or similar rights granted by the US government that are related to the lease, ownership or use of toll roads, toll bridges and other physical infrastructures. These proposed rules would amend Treasury regulation section 1.897-1 (Taxation of foreign investment in United States real property interests (USRPI), definition of terms).
Under current rules, a USRPI includes any interest in real property located in the US or the Virgin Islands and any interest (other than solely as a creditor) in a domestic corporation that is a US real property holding corporation (USRPHC). Real property includes land, unsevered natural products of the land, improvements (including buildings and any other inherently permanent structure) and personal property associated with the use of real property. An interest in real property includes fee ownership, co-ownership, leaseholds, options to acquire land or leaseholds and any right to share in the appreciation in the value or the gross or net proceeds or profits generated by real property.
Under these current rules—in transactions, for example, where a domestic partnership with domestic corporations as partners (with foreign persons as the ultimate shareholders) leases infrastructure assets (such as a toll road or toll bridge) in the US and also acquires the required governmental licenses, permits or similar rights—the IRS says that it is aware that taxpayers take the position that, for purposes of section 897, governmental permits, licenses or similar rights are not USRPIs, but assets used or held for use in a trade or business. Not treating governmental permits, licenses or similar rights as USRPIs would affect the determination of whether a corporation is a USRPHC for purposes of section 897.
The proposed regulations would provide rules regarding the definition of an interest in real property, and addressing licenses, permits, franchises or other similar rights granted by a governmental unit that are related to the value of the use or ownership of an interest in real property. The proposed regulations would provide guidance on how the fair market value of such licenses, permits or franchises would be taken into account when determining the fair market value of a corporation's USRPIs. If these rights are treated as USRPIs, pursuant to section 897(a)(1), the gain or loss of a foreign person arising from the disposition of such a USRPI is treated as if the foreign person were engaged in a trade or business in the US, and as if the gain or loss were effectively connected with such trade or business in the US.
The IRS has requested comments on the scope of the proposed rules and the allocation of the consideration paid for these rights for purposes of determining the fair market value of such property, and for the purpose of determining the fair market values of a corporation's real property interests.
Edward Tanenbaum (edward.tanenbaum@alston.com), New York