Foreign corporations are one of the common holding structures used by non U.S. people to invest in U.S. real estate. Often times, however, the U.S. federal, state, and local tax returns that need to be filed are overlooked.
In general, under the Internal Revenue Code (“IRC”), foreign corporations are required to file federal income tax returns if the entity has effectively connected income (“ECI”). If the entity does not have ECI, generally the entity does not need to file a federal income tax return. It is important to note that federal, state, and local rules are not always aligned. For example, in New York, prior to the 2015 tax filing season, a foreign corporation’s (one organized outside of New York) mere ownership of property in New York State gave rise to a Form CT-3, General Business Corporation Franchise Tax Return filing obligation for the foreign corporation.
New York State tax rules changed in 2015. Now, New York State’s tax rules are more similar to the IRC; if a corporation formed outside of the United States does not have ECI for federal tax purposes, Form CT-3, General Business Corporation Franchise Tax Return is not required.
It is important to note that in the year of that a corporation formed outside of the United States sells its U.S. property federal, state, and local taxes and reporting may apply.