Generally, shares held in a US Real Property Holding Company (USRPHC) are treated as US Real Property Interests (USRPI). However, an exception applies if the shares are publicly traded in the case of a person that holds 5% or less of the publicly traded shares (the Publicly Traded Exception). Previously, there had not been any guidance on how to apply the exception in the case of shares held by a partnership. However, on 19 May the IRS released generic legal advice memorandum (GLAM 2023-003) concluding that the 5% threshold for the Publicly Traded Exception applies at the partnership level. This issue has particular relevance for private equity investors, which often hold interests in US corporations through partnerships.
Given the IRS’s conclusion in the GLAM that the 5% threshold applies at the partnership level, if a partnership owns more than 5% of a class of regularly traded stock, each foreign partner, regardless of their proportionate interest in the publicly traded company, would be required to report gain on the sale of the regularly traded stock by the partnership as income that is effectively connected with a US trade or business (ECI).