A nonresident German national sold her condo which was held by a C corp. She was 100% owner/shareholder. The business is now to be dissolved and the proceeds will be paid to her. She will receive approximately $100K in excess of her original investment. Considering the tax treaty with Germany, is she required to pay US capital gains tax?
It's 1118 for corporations.
That's not her question. Rather, she wants to know if the liquidating distribution, presumably resulting in a gain, is taxable by the US to the shareholder of the dissolved corporation.
@sjrcpa was right on. The post as written was quite clear that the issue was about the repatriation of funds upon the dissolution.
There was no need to discuss the US corporation's tax liability on the real estate sale. It was quite clear that the "$100K in excess of the original investment" was the funds in the corporation ready to be distributed. If a tax preparer even missed the corporation's US taxation of the property sale, I would have no word for it. As such, to me, Form 1118 is not relevant to the question in issue at all. Conceptually, I would imagine the form would be relevant if the U.S. corp had to paid German tax on the sale of the U.S. real estate. Never dealt with a situation like that. The form didn't seem relevant here, and I'd just leave it at that.
Part of the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) was to ensure that NRAs are subject to at least one level of U.S. federal income tax when they dispose of U.S. real estate investments. In general, any gain or loss realized by a NRA or a foreign corporation on the sale
of U.S. real property interests (“USRPIs”) will be subject to U.S. tax.
A USRPI is an interest in U.S. real property held directly or through certain entities under specified conditions. In addition to direct ownership of U.S. real estate, interests in entities holding USRPIs, such as the stock of a corporation or a LLC interest, are treated as if the interests are USRPIs. See IRC 897 and 1445.
A significant disadvantage over direct individual ownership of US property by Non-resident Aliens (NRAs) is that there may be a 30% withholding tax (subject to treaty reductions) on the repatriation of various types of funds, e.g. current income or even refinance proceeds.
For a US corporation, to the extent that the distribution exceeds earnings and profits and the shareholder’s basis in the stock, there would be a FIRPTA tax to the shareholder. (Generally, NRAs have to pay US tax at 30% on dividends from a US corp.)
However, if there are no assets remaining in the corporation other than sale proceeds (I presumed net of US tax as discussed above) or other non-USRPI assets, the corporation can generally be liquidated and the proceeds repatriated free of a second level of tax. Thus, with proper planning, it may be possible for a US corporation with USRPIs to retain earnings until the USPRI is sold and avoid a second level of tax on repatriation.
*** Caution: The above is my understanding off the top and I hope it would serve as a general direction for your research. I have NOT dealt with the FIRPTA or USPIR issues for a few years. Update me if there were recent changes.
Hope this helps.
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