A European group selling American real estate meets the Foreign Investment in Real Property Tax Act at closing. The buyer’s counsel asks for a certificate nobody has, the escrow agent holds back part of the price, and the money comes back on a return filed months later. All of it was avoidable.
The regime is not complicated. It is unforgiving about sequence. Almost every difficulty comes from treating the withholding as a closing mechanic rather than a filing started weeks earlier.
What the Act actually taxes
Section 897(a)(1) of the Internal Revenue Code provides that gain or loss of a nonresident alien individual or a foreign corporation from the disposition of a United States real property interest is taken into account as if the taxpayer were engaged in a trade or business within the United States. The gain becomes effectively connected income and is taxed on a net basis at the rates that apply to that taxpayer, which for a foreign corporation means the 21 per cent rate in section 11(b).
That is the charge. The withholding is a separate rule, in section 1445, because the United States has no reliable way to collect from a departing seller. The tax is on the gain, the withholding is on the price, and the difference is the seller’s cash flow problem.
The definition reaches beyond land and buildings. It includes shares in certain corporations, and that is what brings European holding structures into the regime.
The shares problem
Under section 897(c)(2) a corporation is a United States real property holding corporation where the fair market value of its United States real property interests equals or exceeds 50 per cent of the fair market value of those interests, its real property outside the United States and its other trade or business assets, taken together. The test is a balance sheet test at fair value, applied over a testing period that runs for the shorter of the seller’s holding period or the five years ending on the date of disposition.
Two features cause trouble. The first is that the test looks back: a company that is not a real property holding corporation today may have been one in the preceding five years, and its shares remain a United States real property interest on that basis. Section 897(c)(1)(B) offers a way out on three cumulative conditions. The corporation must hold no such interest on the date of disposition; every interest it held during the testing period must either have been disposed of in a transaction in which the full amount of any gain was recognized or have ceased to be a United States real property interest through the application of that same provision to one or more other corporations; and neither it nor any predecessor may have been a regulated investment company or a real estate investment trust in that period. That second branch lets the exclusion cascade up once a lower tier is clean, without a further taxable disposal. Otherwise a disposal that defers gain leaves the shares inside the regime.
The second is that the denominator moves. A company that disposes of an operating business crosses the 50 per cent line without acquiring any property, so a ratio checked at acquisition is checked at the wrong moment.
Section 897(c)(3) spares stock of a regularly traded class except for a person who held more than 5 per cent of it during the testing period, which a privately held European structure cannot use.
Fifteen per cent of the price
Section 1445(a) requires the transferee to deduct and withhold a tax equal to 15 per cent of the amount realized on the disposition. The base is the amount realized, not the gain, so a property sold at a loss generates the same withholding and the seller finances it until the return is processed.
Two carve-outs cover residences and neither assists a commercial seller. Section 1445(b)(5) removes withholding where the property is acquired by one or more individual transferees for use as a residence and the amount realized does not exceed 300,000 dollars. Section 1445(c)(4) substitutes 10 per cent for 15 per cent where it is acquired as a residence, the amount realized does not exceed 1,000,000 dollars and the first carve-out does not apply.
Section 1445(e) extends the mechanism to distributions and dispositions by entities. A domestic corporation that is or has been a United States real property holding corporation must withhold 15 per cent of the amount realized by a foreign shareholder on a distribution in redemption or in liquidation, similar rules reach a distribution under section 301 that is not made out of earnings and profits, and the regulations may require a transferee acquiring a partnership interest or a beneficial interest in a trust or estate to withhold 15 per cent of the amount realized. Selling the vehicle rather than the asset does not step outside the regime.
The transferee, not the seller, is liable, so buyers withhold when in doubt and a seller wanting a different outcome must produce documentation the buyer can rely on. The instructions to Form 8288, in the revision current for 2026, require the transferee to file and transmit the tax withheld by the 20th day after the date of transfer, which leaves no room for a document still in draft.
The certificate, and the ninety days
The withholding certificate solves the cash flow problem. Form 8288-B, in the revision of December 2025, is the application. Either party may make it, it requires the United States taxpayer identification number of all parties, and it asks the applicant to state the ground for the certificate.
Three grounds appear on the form: the transferor is exempt or nonrecognition treatment applies; the transferor’s maximum tax liability is less than the tax required to be withheld; or the special installment sale rules permit reduced withholding. The second matters in a normal disposal: it reduces a charge on the price to something closer to the tax on the gain.
The regulations give the Internal Revenue Service until the ninetieth day after it receives everything needed for a determination. Where an application has been submitted on or before the date of transfer, the withholding is not required to be paid over until the 20th day after the day the Service mails the certificate or the notice of denial, and the transferor must notify the transferee in writing, on or before the day of the transfer, that a certificate has been applied for. A pending application does not stop the deduction; only a certificate issued before the transfer does.
The notice requirement defeats more applications than any substantive point. Ninety days, counted backwards from expected completion, lands the application before heads of terms are usually signed.
What the treaty does and does not do
The Convention between the Netherlands and the United States does not remove the charge. Article 14 lets the state where real property is situated tax a resident of the other state on gains from its disposition, and it defines real property to include shares or comparable corporate rights in a company resident there whose assets consist, directly or indirectly, for the greater part of such property. It says expressly that in the United States the term includes a United States real property interest as defined in the Internal Revenue Code.
The treaty agrees with the domestic rule rather than displacing it, and no European structure avoids the charge by interposing another company.
It helps elsewhere in the chain. Article 10, in the form substituted by the Protocol signed at Washington on 8 March 2004, caps source taxation of dividends at 5 per cent where the beneficial owner is a company holding directly at least 10 per cent of the voting power, and at 15 per cent otherwise. Both rates, like every treaty benefit, require clearing the limitation on benefits article. Its third paragraph removes the tax altogether for a direct holding of 80 per cent or more of the voting power held for the twelve months ending on the declaration date that also satisfies one of the limitation on benefits conditions.
The corporate seller and the branch tax
A foreign corporation holding American real property directly faces more than the tax on the gain. Section 884(a) imposes a branch profits tax of 30 per cent on the dividend equivalent amount. Paragraph 3 of Article 11 permits that additional tax but caps it at the rate specified in Article 10, paragraph 2, subparagraph a, which is 5 per cent, and the 2004 Protocol added a sentence to the same paragraph that switches the tax off for a company meeting any one of four stated conditions. Three of the four run through the limitation on benefits article, a narrow door for a privately held holding.
Article 11 carries one more point. Paragraph 5 provides that no additional tax may be imposed under that article with respect to income subject to tax under paragraph 1 of Article 14 derived from the disposition of shares or comparable corporate rights in a company. A gain on shares and a gain on the property itself are not in the same position.
Section 897(i) offers a narrow further option. A foreign corporation holding a United States real property interest, and entitled to nondiscriminatory treatment with respect to that interest under a treaty, may elect to be treated as a domestic corporation for the purposes of that section, section 1445 and section 6039C. All owners must consent, and the election may be revoked only with the consent of the Secretary.
One deadline is expensive when missed. Under 26 CFR 1.882-4 a foreign corporation must file its return within 18 months of the due date in order to claim deductions and credits, subject to a waiver where it shows that it acted reasonably and in good faith. A seller that files late can find that the base against which it is taxed has become the gross amount.
Sequencing a European disposal
The order of operations decides the outcome. Establish early whether what is being sold is property or shares, whether the company has been a United States real property holding corporation at any point in the preceding five years, and if it has, whether either branch of the cleansing rule is satisfied. It is answered from valuations, not from the accounts, and valuations take time to obtain.
Obtain taxpayer identification numbers for every party early. The application cannot be made without them. In one mandate an application was complete but for a single missing number, and the delay cost the seller a substantial holdback for most of a year.
Agree the mechanics in the sale agreement, not in the closing room: the obligation to withhold, the treatment of a certificate received after closing, the escrow pending the Service’s determination and who files Form 8288.
The Act does not punish structure. It punishes late starts. A European seller who begins the analysis when the asset is marketed usually pays the tax on the gain and little more. One who begins at signing will pay 15 per cent of the price and wait.
This article is informational and does not constitute tax or legal advice. The treatment of any structure depends on its facts and on the law of each jurisdiction involved. Each engagement is subject to scope and applicable regulation.