Changes to US tax withholding percentage for foreign memberships
ECLUB NEWS |
Does your club have refundable equity and memberships with individuals who are citizens of other countries? If so, please be aware the U.S. tax withholding percentage has changed.
If your club issues refundable memberships to non-U.S. members, the club may be subject to the “Foreign Investment in Real Property Tax Act” as a deemed U.S. Real Property Holding Corporation or “USRPHC”.
In general, a club is a USRPHC if during the previous 5 years the fair market value of its gross U.S. real property interests equals or exceeds 50 percent of the sum of the fair market value of its U.S. and foreign real property assets plus its other trade or business assets. In addition, an alternative test may be used for corporations to determine their USRPHC status. Under this test, a corporation is presumed not to be a USRPHC if the accounting book value of its U.S. real property is 25 percent or less of the total accounting book value of the three classes of assets (e.g. U.S. real property, foreign real property, and trade/business property).
If your club is considered a USRPHC and has refundable equity and non-U.S. memberships, when the non-U.S. member sells their membership, the club must withhold a certain percentage of the gross refund amount and remit it to the IRS. Historically, the withholding percentage has been 10 percent. Recent regulations have changed the withholding percentage on the sale of equity certificates after Feb. 16, 2016 from 10 percent to 15 percent. For example, if the club issued a $50,000 refund to the non-U.S. member and the date of the transaction was after Feb. 16, 2016, the club would be required to withhold $7,500 instead of $5,000. The withholding is required to be reported on Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests. The club is also required to report this transaction on Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interest. The club must file the Forms 8288 and 8288-A and transmit the tax withheld to the IRS by the 20th day after the date the club issued the equity membership refund.
In certain situations, non-U.S. members of the club may qualify as U.S. members and may not be subject to the withholding requirements. This could be due to the members U.S. residency tax status or holding a U.S. green card. The member’s tax advisor or attorney should provide the member’s U.S. tax status and it is not recommended that this determination be made by the club. In addition, a non-U.S. member may apply for a reduced rate of withholding on Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interest. However, the non-U.S. member must provide the club with written notice regarding the withholding certificate application on or before the date the equity membership refund is to be transferred and such notification must be in accordance with Treasury Regulations. It is recommend that the non-U.S. member’s tax advisor or attorney prepare and file the withholding certificate application and provide such notification to the club. Members and/or clubs should consult with their tax advisor for additional information and further clarification.