Who Counts as a Foreign Seller (Subject to the 15% Withholding Tax) Anyway?

By: Michael W. Brooks, Esq.

Probably the trickiest area in the whole of FIRPTA is just who is a foreign seller to begin with.  Foreign seller- 15% withholding tax gets sent into the IRS; US seller- no 15% goes into the IRS.  Stakes are pretty high it seems….

First, remember it is the seller himself (or herself) who tells escrow (or title, or an attorney, depending on where in the US the sale is taking place) whether he or she is a foreign seller; it all starts with the seller and the seller’s declaration on the Certification of Nonforeign Status. It’s probably fair to assume the seller generally does not want to be considered a foreign seller (the seller does not want the 15% withheld and sent into the IRS at the time of closing). The seller probably wants to complete and sign the Certification of Nonforeign Status (and avoid the withholding), if that was proper. But completing the Certification of Nonforeign Status is not without its downside. Any person completing the Certification of Nonforeign Status is telling the IRS that they are a US person for tax purposes. US persons for tax purposes are legally required to complete their IRS 1040’s annually and on that IRS form 1040 they must declare their worldwide income (non-US persons for tax purposes need only file US income tax returns in any year in which they earn income in the US, plus they need only declare their US sourced income…big difference from having to inform the IRS as to your worldwide income in a given year). US persons for tax purposes are also required to annually disclose their non-US bank accounts (if they have any) via their annual FBAR (Report of Foreign Bank Accounts) filing, and if they don’t do that the IRS can impose heavy penalties. Non-US persons for tax purposes have no annual FBAR obligation. So it’s probably safe to say that, except for the required 15% withholding tax at closing on a real estate transaction, most persons would prefer to be considered a non-US tax person, and not a US tax person for tax purposes. So completing the Certification of Nonforeign Status is a big deal, and comes with a significant potential downside for those who are simply trying to avoid sending in the withholding tax to the IRS.

And what about the various components of the Certification of Nonforeign Status, what is the significance of the key components?

A. “I am not a nonresident alien for US Tax Purposes”

This horribly worded double negative statement appears on pretty much every Certificate of Nonforeign Status I’ve ever seen (because it comes from the model language provided in the Treasury Regulations at 1.1445-2). Who is a nonresident alien? A nonresident alien is someone who is neither a: (i) US Citizen, nor a (ii) US resident alien (which basically means someone who lives full-time in the US). So a nonresident alien is not a US citizen and is somebody who does not live in the US full-time. Someone who is certifying they are not a nonresident alien is either: (i) a US citizen, or (ii) someone who lives in the US full-time (and files annual US tax returns- for individuals that means annual 1040’s declaring their worldwide income to the IRS).

B. “My US Taxpayer ID Identification Number is”

The seller must provide either a US social security number or a US individual taxpayer ID number (an “ITIN”). If they cannot provide a number on the Certification of Nonforeign Status they are automatically deemed a non-US person for tax purposes (and the withholding tax must be sent into the IRS).

C. “Under the 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”

The seller must sign the form, and the wording (with the threat of penalty of penalty of perjury) is designed to make them tell the truth.

Note: If the form is completed and signed, must escrow (or other closing party) always honor the form? Escrow must honor the form if completed (fully) and signed. Escrow should only challenge the form if escrow “has actual knowledge that the transferor’s certification is false” (Treasury Regulation 1.1445-2).  The regulations appear to want the closing party to override a completed and signed certification only in instances of absolute fraud (known to the closing party).

So a lot to digest on the Certification of Nonforeign Status and on the ramifications of completing the certification…

Back to our overview of the 2021 trends in the next post.

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