Yes, FIRPTA will likely to apply at the time of acquisition (15 percent of withholding on the purchase price) and then at the time of exit, one needs to pay the tax (compared with the tax withheld by the buyer at exit).
What impact does FIRPTA have on an LP investor?
We are an LP investor in a portfolio acquisition of six medical office buildings. The GP is an American entity. Are we still subject to FIRPTA? If so, how much are we responsible for, as we will not own the properties outright? Do we have any other options?
My understanding is there should have been a "blocker corp" set up to protect you against FIRPTA, but this would need to be confirmed by legal counsel.
It depends, mostly on how are you structured as the LP. For example: Are you acting as an individual, business, trust, shareholder, etc.? American or foreign? There are ways to avoid paying FIRPTA, as well as ways to defer tax liability as an LP or GP. I have never heard of anyone paying FIRPTA on an acquisition. I have only experienced FIRPTA withholding's on disposition. The IRS states that, "A partnership (foreign or domestic) that has income effectively connected with a U.S. trade or business (or income treated as effectively connected) must pay a withholding tax on the effectively connected taxable income that is allocable to its foreign partners. Note: The withholding tax rate for effectively connected income allocable to non-corporate foreign partners is 39.6 percent, and remains at 35 percent for corporate foreign partners."
One of the most common mistakes for inward JV investors is not fully vetting out their new partners in the US. We have seen time and time again when foreign investors join hands with new partners and within 6-12 months, the relations become sour due to issues that they did not know of before engaging into the partnership. It is very important to know exactly who you are engaging with and having a clear understanding of the historical experience of the partner, the relations they kept and how the community views them as business people. Take time with the approach and decision. A JV partnership is marriage and do not ever jump into the relationship unless you are 1000% confident it will be a long, mutually profitable relationship.