Every week, Mansion Global poses a tax question to real estate tax attorneys. Here is this week’s question.
I’m a Chinese national with funds in Canada who’d like to buy residential properties in the United States. What is the Common Reporting Standard and how would that affect me?
The Common Reporting Standard (CRS) is a new international program for governments to share financial information about international investors with the investors’ home countries, said Max Dilendorf, co-founder and head of the real estate practice at Dilendorf Khurdayan, a law practice in New York City. The program is a network that creates what he likened to a “unified database.”
The United States, however, has its own international information sharing system and hasn’t adopted CRS, he said. Therefore, CRS wouldn’t affect foreign individuals who buy homes in the United States. But you would be affected indirectly because Canada and China are among 102 countries participating in CRS, which went into effect in September.
The program requires banks and other financial institutions in participating countries to identify any foreigners among their account holders, he said. “If an account is owned in the name of an entity, like a corporation or trust, the institution must determine whether the owners of that entity are foreigners,” he said.
The bank has to report those foreign account holders to those account holders’ home countries. This includes information about the account, such as the account holders’ names, addresses and taxpayer identification number, the account number and the balance at the end of the year, Mr. Dilendorf said.
If the Chinese national were to form a Canadian company to hold the U.S. real estate, Canada would likely disclose the company and its underlying holdings and/or net worth to China under CRS, said Dianne C. Mehany, partner at Caplin & Drysdale law firm in Washington, D.C.
Although the Organization for Economic and Cooperative Development (“OECD”) authored the CRS and is assisting the participating jurisdictions with implementing it, it doesn’t impose sanctions, she said. “Everyone generally follows what the OECD sets forth, but they are not technically bound by it.”’
The U.S. has the Foreign Account Tax Compliance Act (FATCA), its own system of international information sharing. It enacted FATCA in 2010 to prevent U.S. taxpayers from using offshore accounts or entities to avoid paying taxes, Ms. Mehany said.
It’s unlikely the United States will adopt the CRS soon, Mr. Dilendorf said, thus making the U.S. attractive to foreign buyers who want to maintain their privacy.
FATCA, unlike CRS, “is effectively a one-way street,” he said. Although other nations share financial details with the United States about U.S. citizens’ and residents’ foreign investments, the U.S. doesn’t do the same for foreigners’ investments in the United States, Mr. Dilendorf said, “particularly investments through U.S. entities like limited liability companies or trusts.” Under FATCA, the U.S. only reports individual bank accounts.
As a result, Chinese residents with investments in the United States can protect their privacy by holding their U.S. investments through a U.S. entity, he said.
The U.S. Internal Revenue Service and Department of Treasury will receive the financial information, he said. And the Chinese national will eventually be subject to a withholding tax in the U.S. when the property is sold, Ms. Mehany said. It’d be a 15% gross withholding tax on the sale. But he can apply for a withholding certificate from the IRS to reduce the tax to 15% of the net gain, she said.
Importantly, neither CRS nor FATCA affect the reporting and tax requirements that China imposes on its own residents, Mr. Dilendorf said.
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