Non Resident German national tax obligation

[Kemanda]

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?

[qbteachmt]

"She will receive approximately $100K in excess of her original investment."

It isn't clear if you understand this is a Sale of a corporate asset, or a personal sale. That's the first thing to realize. Separate the person and the corporation.

A corporation is its own entity.

A corporation sold a corporate asset.

She isn't getting anything from the real estate sale. She will get something from the dissolution of the corporation.

First, then, you focus on the corporation. It was not her condo.

[Kemanda]

Thanks for responding. I understand that the sale of the condo will be reported by the corporation and the gain will be taxed on the corporate return. The question is what must the nonresident German Shareholder pay if anything upon the distribution of proceeds from the dissolution of the company. When reading the German/US tax treaty it is not clear to me if tax is due in US.

[qbteachmt]

Form 1116 would show if tax is paid/owed to Germany, which reduces tax owed to US, to avoid double taxation. This is not sale of primary residence, of course. This is the same corporation that has been paying her payroll wages, dividends, and as investment capital gain.

[sjrcpa]

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.

[Kemanda]

She never lived in the US and has no Tax ID. After completing the corporate tax return and paying capital gains taxes, I need to send her the residual money upon closing the corporation. I am concerned about the need to withhold money if any taxes are due.

She originally invested $123500 to open the corporation and now upon closing it i can send her $220000. Will she owe the IRS taxes on approximately $100000 gain.

[qbteachmt]

I don't know enough to know if the corporation is subject to Form 1118. I would not expect a US C Corp to need to file Form 1118 for capital gain on the sale of its US real estate, unless the operations already require Form 1118. Then, the shareholder who is the German national will already have a Form 1116 for their activities in consideration of whatever else is reportable (and might be taxable) to Germany.

I wanted to point out that the initial phrasing was too intertwined to even work through the details or a worksheet. The foreign reporting issue is the same issue; two different entities, so they report accordingly.

[joshuabarksatlcs · Accepted solution]

@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.

[qbteachmt]

For me, it all started here: "A nonresident German national sold her condo which was held by a C corp."

"She" didn't own the condo and it was not hers in possession or ownership, since we now also know she never was in the US. It's an example of looking beyond the facts.

[Kemanda]

I appreciate you and all others for taking the time to consider this issue. Hopefully we will see the day when the IRS will be able to answer the phone and address a taxpayer's concern.

Considering that the corporation is paying tax on the sale and the corporation will be liquidated, I will be forwarding the balance of the cash assets to the shareholder without any further withholding.

Thanks to all.