BOSTON — Merger and acquisition agreements almost universally require the target or seller to deliver at closing a so-called “FIRPTA certificate” – i.e., an affidavit that either the target is not a “United States real property holding corporation” or that the seller is not a foreign person, in each case in accordance with Section 1445 of the U.S. Tax Code and the Treasury regulations thereunder. In this post, we’ll (1) explain why a FIRPTA certificate is required in most M&A deals, (2) help you determine which type of FIRPTA certificate is appropriate, and (3) provide model FIRPTA certificates to choose from.
Background
But first, a little background. It all starts with the legislation known as The Foreign Investment in Real Property Tax Act of 1980, or FIRPTA, which added Section 897 to the U.S. Tax Code to ensure that U.S. tax would be imposed on all gains realized by foreign persons from dispositions of U.S. real property. Although foreign investors generally are not subject to U.S. tax on capital gains that are not “effectively connected” with the conduct of a U.S. trade or business, Section 897 deems gain on the sale of a U.S. real property interest to be effectively connected with the conduct of a U.S. trade or business. But Section 897, by itself, was not sufficient. Four years after the enactment of FIRPTA, Section 1445 was added to the U.S. Tax Code to impose a withholding obligation on the buyer of a U.S. real property interest. Importantly, Section 1445 has serious teeth – a buyer that fails to withhold will be held liable for any underlying tax not paid by the seller.
Clearly, FIRPTA would apply to a company’s sale of assets that included U.S. real property. But FIRPTA also could apply to a corporate merger or a sale of corporate stock because stock in a domestic corporation is deemed to be a U.S. real property interest if fifty percent or more of the corporation’s assets, excluding cash, consist of U.S. real property interests. A corporation meeting this threshold is labeled a “United States real property holding corporation,” or “USRPHC.” In addition, the buyer of an interest in a partnership (including an LLC treated as a partnership) is required to withhold under FIRPTA if either (1) fifty percent or more of the value the partnership’s gross assets consist of U.S. real property interests, or (2) ninety percent or more of the value of the partnership’s gross assets consist of U.S. real property interests and cash.
Given the potential liability under Section 1445, a rational buyer would prefer to err on the side of caution and withhold taxes, even if such withholding may not be required. And of course, a seller would prefer to avoid such withholding if it isn’t required. Enter the FIRPTA certificate. Section 1445 and the underlying regulations provide that a buyer will be absolved of the seller’s failure to pay the appropriate tax if the buyer reasonably relies on a properly drafted affidavit that no withholding is required.
Determining Which Certificate Is Needed
Now that you know why a FIRPTA certificate is a common closing deliverable, let’s look at how to determine which FIRPTA certificate should be delivered. This will depend on the type of transaction, which likely will fall into one of the following categories:
• If a transaction is structured as a sale of assets, then the selling entity should provide an affidavit stating, under penalty of perjury, the seller’s name, address, U.S. taxpayer identification number, and that the seller is not a foreign person. If the selling entity is disregarded for tax purposes (e.g., a single-member LLC that has not elected to be treated as a corporation), then the selling entity’s owner must provide the certificate. See our “Form of Non-Foreign Person Certificate by Entity Transferors” and our “Form of Non-Foreign Person Certificate by Individual Transferor” below.
• If a transaction is structured as a merger or a sale of stock, then the selling shareholders could provide the applicable non-foreign person certificates described above. But if that’s not practical (e.g., because there are many selling shareholders) or not possible (e.g., because some shareholders are foreign), then the target corporation should provide an affidavit stating, under penalty of perjury, that either (1) it is not and has not been a USRPHC during the last five years, or (2) interests in the target corporation are not U.S. real property interests because the corporation currently does not own any U.S. real property interests and any U.S. real property interests that the corporation did own during the last five years were disposed of in transactions in which the full amount of the gain (if any) was recognized. See our “Form of Non-U.S. Real Property Holding Corporation Certificate (plus IRS notice)” below.
• If a transaction is structured as a sale of partnership interests (or a sale of interests in an LLC that is treated as a partnership for tax purposes), then the selling partners could provide the applicable non-foreign person certificates described above. Alternatively, the partnership’s general partner could certify that either (1) less than fifty percent of the value the partnership’s gross assets consist of U.S. real property interests, or (2) less than ninety percent of the value of the partnership’s gross assets consist of U.S. real property interests and cash. See our “Form of Statement by Partnership” below.
As always, this summary is for informational purposes only and is not tax or legal advice. Always consult a professional tax advisor for advice in light of the taxpayer’s particular circumstances.
For more information on FIRPTA withholding, please contact:
Sample FIRPTA Certificates
[Form of Non-Foreign Person Certificate by Entity Transferor]
CERTIFICATION OF NON-FOREIGN STATUS
PURSUANT TO TREASURY REGULATIONS SECTION 1.1445-2(b)(2)(iv)(B)
Section 1445 of the Internal Revenue Code of 1986, as amended (the “Code”), provides that a transferee of a U.S. real property interest must withhold tax if the transferor is a foreign person. For U.S. tax purposes (including Section 1445 of the Code), the owner of a disregarded entity (which has legal title to a U.S. real property interest under local law) will be the transferor of the property and not the disregarded entity. To inform [NAME OF TRANSFEREE], as transferee, that withholding of tax is not required upon the disposition of a U.S. real property interest by [NAME OF TRANSFEROR], a [JURISDICTION AND TYPE OF ENTITY] (the “Company”), the undersigned hereby certifies the following on behalf of the Company:
1. The Company is not a foreign corporation, foreign partnership, foreign trust, or foreign estate (as those terms are defined in the Code and the Treasury Regulations promulgated thereunder);
2. The Company is not a disregarded entity as defined in Section 1.1445-2(b)(2)(iii) of the Treasury Regulations;
3. The Company’s U.S. employer identification number is [EIN]; and
4. The Company’s office address is [ADDRESS].
The Company understands that this certification may be disclosed to the Internal Revenue Service by the transferee and that any false statement contained herein could be punished by fine, imprisonment, or both.
Under penalties of perjury I declare that I have examined this certification and to the best of my knowledge and belief it is true, correct, and complete, and I further declare that I have authority to sign this document on behalf of the Company.
Executed as of [DATE].
[NAME OF COMPANY]
By:___________________________
Name:
Title:
[Form of Non-Foreign Person Certificate by Individual Transferor]
CERTIFICATION OF NON-FOREIGN STATUS
PURSUANT TO TREASURY REGULATIONS SECTION 1.1445-2(b)(2)(iv)(A)
Section 1445 of the Internal Revenue Code of 1986, as amended (the “Code), provides that a transferee of a U.S. real property interest must withhold tax if the transferor is a foreign person. For U.S. tax purposes (including Section 1445 of the Code), the owner of a disregarded entity (which has legal title to a U.S. real property interest under local law) will be the transferor of the property and not the disregarded entity. To inform [NAME OF TRANSFEREE], as transferee, that withholding of tax is not required upon my disposition of a U.S. real property interest, I, [NAME OF INDIVIDUAL TRANSFEREE] hereby certify the following:
1. I am not a nonresident alien for purposes U.S. income taxation;
2. My U.S. taxpayer identifying number is [SSN or ITIN]; and
3. My home address is [ADDRESS].
I understand that this certification may be disclosed to the Internal Revenue Service by the transferee and that any false statement I have made here could be punished by fine, imprisonment, or both.
Under penalties of perjury I declare that I have examined this certification and to the best of my knowledge and belief it is true, correct, and complete.
Executed as of [DATE].
__________________________________
[NAME OF INDIVIDUAL TRANSFEREE]
[Form of Statement by Partnership]
STATEMENT BY PARTNERSHIP
PURSUANT TO TREASURY REGULATIONS SECTION 1.1445-11T(d)(2)(i)
The undersigned hereby certifies that fifty percent or more of the value of the gross assets of [NAME OF PARTNERSHIP] (the “Partnership”) does not consist of United States real property interests (within the meaning of Section 897(c)(1)(A) of the Internal Revenue Code of 1986, as amended), or that ninety percent or more of the value of the gross assets of the Partnership does not consist of United States real property interests plus cash or cash equivalents.
Under penalties of perjury I declare that I have examined this certification and to the best of my knowledge and belief it is true, correct, and complete, and I further declare that I have authority to sign this document on behalf of the Partnership.
Executed as of [DATE].
[NAME OF PARTNERSHIP]
By:______________________________
Name:
Title:
[Form of Non-U.S. Real Property Holding Corporation Certificate (plus IRS notice)]
STATEMENT OF NON-U.S. REAL PROPERTY HOLDING CORPORATION STATUS
PURSUANT TO TREASURY REGULATIONS SECTION 1.1445-2(c)
Section 1445 of the Internal Revenue Code of 1986, as amended (the “Code”), provides that a transferee of a “United States real property interest” must withhold tax if the transferor is a foreign person. To inform [NAME OF TRANSFEREE], as transferee, that tax is not required to be withheld upon a transfer of any interest in [NAME OF TARGET CORPORATION] (the “Company”), the undersigned hereby certifies the following on behalf of the Company:
1. Shares of capital stock of the Company do not constitute “United States real property interests” as that term is defined in Section 897(c)(1)(A)(ii) of the Code;
2. The determination in Paragraph 1, above, is based on a determination by the Company that the Company is not and has not been a “United States real property holding corporation” as that term is defined in Section 897(c)(2) of the Code during the five-year period preceding the date of this statement;
3. The Company’s U.S. employer identification number is [EIN]; and
4. The Company’s office address is [ADDRESS].
Under penalties of perjury I declare that I have examined this certification and to the best of my knowledge and belief it is true, correct and complete, and I further declare that I have authority to sign this certification on behalf of the Company.
Executed as of [DATE].
[NAME OF COMPANY]
By:______________________________
Name:
Title:
NOTICE TO THE INTERNAL REVENUE SERVICE
PURSUANT TO
TREASURY REGULATIONS SECTIONS 1.897-2(h)(2) AND 1.445-2(c)(3)
Internal Revenue Service
Ogden Service Center
P.O. Box 409101
Ogden, UT 84409
[This notice must be mailed to the address specified in the instructions to Form 8288 under “Where to File.”]
Dear Sir or Madam:
At the request of [NAME OF PURCHASER] (“Purchaser”), in connection with the acquisition of all of the outstanding capital stock of [NAME OF TARGET CORPORATION] (the “Company”) by Purchaser, the Company hereby provides notice to the Internal Revenue Service as follows:
1. This notice is provided pursuant to Treasury Regulations Sections 1.897-2(h)(2) and 1.1445-2(c)(3)(i). The attached certification was not requested by a foreign interest holder. It was voluntarily provided by the Company in response to a request from Purchaser in accordance with Treasury RegulationS Section 1.1445-2(c)(3)(i).
2. The Company’s address is [ADDRESS];
3. The Company’s U.S. employer identification number is [EIN];
4. The Purchaser’s address is [ADDRESS];
5. The Purchaser’s employer identification number is [EIN]; and
6. The interests in question (the capital stock of the Company) are not U.S. real property interests within the meaning of Section 897(c) of the Internal Revenue Code of 1986, as amended.
Under penalties of perjury I declare that I have examined this notice and the attached certification and to the best of my knowledge and belief they are true, correct and complete, and I further declare that I have authority to sign this notice on behalf of the Company.
Executed as of [DATE].
[NAME OF COMPANY]
By:_____________________________
Name:
Title: