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A. Raw Land Investment. A qualifying foreign pension fund invests in a partnership that buys raw land in the United States. (This could be a vacant lot, timberland, oil and gas or mineral property, or other property interests that qualify for treatment as real property for federal income tax purposes.) The investment is a capital asset, as the partnership is not engaged in business. The partnership later sells the property to a developer, or the pension fund sells its partnership interest. Under prior law, the foreign pension fund's non-business capital gain would automatically be subject to US federal income tax because of FIRPTA. Under the new law, the foreign pension fund's long-term or short-term capital gain is exempt from U.S. income tax and FIRPTA withholding because FIRPTA does not apply.

B. Equity Kicker Mortgage Loan Investment. A foreign pension fund acquires an ownership interest in a mortgage loan secured by U.S. real property. The loan includes stated interest plus an equity kicker (e.g., additional interest equal to a share of gain realized on sale of the property). Such an equity kicker loan is treated as a U.S. real property interest under FIRPTA. Under prior law, gain realized by the foreign pension fund upon sale of the loan would automatically be subject to U.S. income tax under FIRPTA. Under new law, the gain realized on the sale of the mortgage loan would be exempt from U.S. income tax. (This conclusion is based on the assumption that the foreign pension fund is a mere investor and not engaged in an active lending business in the U.S.)

C. U.S. Blocker Corp. Investment. A foreign pension fund wants to make an equity investment in a U.S. real estate business that is organized as a partnership. The foreign pension fund forms a U.S. corporation to acquire the partnership interest and the corporation is capitalized with a mix of equity and debt held by the shareholder. The corporation is subject to U.S. income tax on its net income, but gets to deduct interest paid or accrued on the debt held by the shareholder. The foreign corporation later sells the stock of the corporation. Under prior law, the gain on sale of the stock would be subject to U.S. income tax because the corporation was a "U.S. real property holding corporation" under FIRPTA. Under new law, FIRPTA does not apply to the foreign pension fund, so the capital gain on sale of the stock is exempt from U.S. income tax. Note that the U.S.-source interest paid to the foreign shareholder could be subject to U.S. withholding tax under the regular rules of the Code, but if the pension fund is organized in a jurisdiction that has a tax treaty with the U.S. (e.g., UK, Germany, France, China, Japan, etc.), these interest payments could be exempt from U.S. withholding under such tax treaty.

2. FIRPTA EXEMPTION FOR INVESTMENTS IN PUBLICLY TRADED REIT STOCK INCREASED FROM 5 PERCENT to 10 PERCENT

For publicly traded REITs, the PATH Act opens the door to increased investment by expanding the current statutory exemption from FIRPTA for small portfolio investments by non-U.S. persons. The Act provides all foreign investors (not just pension funds) can now own up to 10 percent of the stock of a publicly traded REIT without triggering FIRPTA tax. Under prior law, FIRPTA tax would apply upon the foreign investor's sale of stock of the publicly traded REIT or the receipt of certain distributions from such REIT if the foreign investor holds more than 5 percent of the REIT's stock.

3. CLARIFICATION OF THE EXEMPTION FOR INVESTMENTS IN DOMESTICALLY CONTROLLED REITS

The PATH Act includes important clarifying presumptions that will allow publicly traded REITs and their shareholders to rely with greater confidence on the current law FIRPTA exemption for gains realized on sales of stock in "domestically controlled" REITS. In determining whether a REIT is domestically controlled, the REIT is now permitted to presume that any owner of less than 5 percent of any publicly traded shares of the REIT is a U.S. person, unless the REIT has actual knowledge to the contrary.

4. REVENUE RAISING PROVISIONS RELATING TO FIRPTA AND REITs

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