In short
Foreign investors that own US AI data centers face federal income tax under the Foreign Investment in Real Property Tax Act, or FIRPTA. FIRPTA treats a foreign person’s gain from selling a US real property interest as income connected to a US business, taxed at ordinary graduated rates. An AI data center is a US real property interest, and a company that owns its land and building is usually a US real property holding corporation, a USRPHC. That means selling stock in the company triggers FIRPTA and a 15% withholding on the amount realized. IRC § 897(a)(1), IRC § 1445(a)
Investors can avoid this tax by holding a small stake in a publicly traded REIT that owns AI data centers, or by owning a domestically controlled REIT. Qualified foreign pension funds are completely exempt from FIRPTA. Sovereign wealth funds have a limited exemption under Section 892, but they cannot use it for direct US real estate. Other regimes, the Base Erosion and Anti Abuse Tax (BEAT) and the interest deduction limit under Section 163(j), can hit the US operating company if it is foreign owned and highly leveraged. The One Big Beautiful Bill Act of 2025 (OBBBA) restored 100% bonus depreciation and EBITDA based interest deductions, which increase the tax benefits for US AI data center owners.
How FIRPTA captures AI data center investments
What is a US real property interest?
Under FIRPTA, a US real property interest (USRPI) is an interest in US land, buildings, improvements, or leaseholds, and any personal property associated with the use of real property. IRC § 897(c)(1)(A)(i), (c)(6)(A), (c)(6)(B). A USRPI also includes any interest, other than an interest solely as a creditor, in a domestic corporation unless the taxpayer establishes that the corporation was at no time a US real property holding corporation (USRPHC) during the shorter of the period after June 18, 1980, during which the taxpayer held the interest and the five year period ending on the date of disposition. IRC § 897(c)(1)(A)(ii). So if a corporation is a USRPHC, its stock is a USRPI, and selling that stock is treated like selling US real estate directly.
Why an AI data center operating company is often a USRPHC
A USRPHC is any corporation where the fair market value of its USRPI equals or exceeds 50% of the total value of its real estate worldwide plus any other assets used in its trade or business. IRC § 897(c)(2). An AI data center company that owns its land and building usually has a large real estate component. In the early years, before the company builds up large nonreal property intangible assets like customer contracts or software, the land and building can easily make up more than half of total asset value. The tax regulations allow valuing certain intangibles at book value rather than fair market value, which can keep their value low and make USRPHC classification even more likely. Valuation rule analysis
For example, NTT Global Data Centers operates a large AI data center in Illinois worth $1.389 billion. If NTT’s US subsidiary were a standalone corporation, it would probably be a USRPHC. A foreign investor selling its ownership in that company could trigger FIRPTA on the gain if the company is a USRPHC, even though the sale was of stock and not of the real estate itself. IRS USRPHC guidance, LinkedIn, VJ Occhino
FIRPTA withholding on sale and restructuring
When a foreign person sells a USRPI, the buyer must withhold 15% of the amount realized (the gross sale price) and remit it to the IRS within 20 days of closing, using Form 8288 and Form 8288-A. IRC § 1445(a), IRS reporting and paying. The IRS may issue a withholding certificate on Form 8288-B allowing a lower amount if the tax would be less. The IRS generally takes 90 days to act. IRS Withholding Certificate
For corporate restructurings, FIRPTA can override the rules that normally allow tax free contributions of property to a corporation. A foreign investor contributing US real property to a US corporation or partnership may face 15% withholding on the gross value transferred, even if no cash changes hands. So any transfer of an AI data center entity needs careful planning. Tax analysis
If a foreign corporation distributes a USRPI to its shareholders, the withholding rate is 21% of the gain recognized. A domestic USRPHC that redeems or liquidates foreign shareholders must withhold 15% of the property distributed. A domestic partnership selling USRPI at a gain withholds 37% of the effectively connected taxable income allocable to non corporate foreign partners and 21% for corporate foreign partners. FIRPTA definitions, Partnership withholding
| Transaction | Withholding rate | Basis |
|---|---|---|
| Foreign individual or corporation sells USRPI directly | 15% of amount realized | IRC § 1445(a) |
| Foreign corporation distributes USRPI to shareholders | 21% of gain recognized | IRC § 1445(e)(1) |
| Domestic corporation distributes USRPI to foreign shareholder in redemption or liquidation | 15% of fair market value | IRC § 1445(e)(3) |
| Domestic partnership sells USRPI at gain allocable to foreign partners | 37% (non-corporate) / 21% (corporate) of gain | § 1446 (not § 1445) |
Exceptions that protect foreign investors
The domestically controlled REIT exception
A REIT is a qualified investment entity. Under FIRPTA, an interest in a qualifying REIT is not a USRPI if the REIT is domestically controlled. Domestically controlled means that foreign persons held, directly or indirectly, less than 50% of the REIT’s stock during the testing period. IRC § 897(h)(4)(B), IRC § 897(h)(4)(D). Selling REIT stock then does not trigger FIRPTA.
The IRS issued final regulations in 2024 that detailed how to count foreign ownership through layers of corporations. Under those rules, a domestic C corporation that is more than 50% foreign controlled is a look through entity, meaning its foreign owners are counted toward the 50% threshold. TD 9992 explanation. In October 2025, however, the IRS proposed reversing that look through rule, so that all domestic C corporations are treated as US persons regardless of foreign ownership. If finalized, this would make it much easier for a REIT with foreign owned domestic C corporation shareholders to qualify as domestically controlled. REG-109742-25. Existing structures get a ten year transition period under the 2024 final rules. Foreign investors can restructure to hold US AI data centers through a domestically controlled REIT and avoid FIRPTA on exit.
Publicly traded REIT exception
A foreign person owning 10% or less of a class of publicly traded REIT stock is not treated as owning a USRPI. This threshold was increased from 5% by the 2015 PATH Act. IRC § 897(k)(1), Tax analysis. A passive investor buying shares in Digital Realty (NYSE, DLR) or Equinix (NASDAQ, EQIX), both large AI data center REITs, can sell those shares without FIRPTA as long as the stake is 10% or below. Additionally, REIT capital gain distributions to such small investors are treated as ordinary dividends, not FIRPTA gain, and are subject to the same treaty reduced withholding rates that apply to dividends. Tax alert. This is a straightforward way for foreign investors to access US AI data center income while avoiding FIRPTA entirely.
Qualified foreign pension funds (QFPFs)
Qualified foreign pension funds and their wholly owned subsidiaries are completely exempt from FIRPTA. They are not treated as nonresident aliens or foreign corporations for purposes of Section 897. IRC § 897(l). A QFPF can directly own US real property, including an AI data center, and sell it without FIRPTA. The only tax exposure for a QFPF is the regular withholding on dividends, which is 30% or reduced by treaty. Some treaties, with the UK, Germany, Netherlands, Japan, Canada, and Spain, reduce the dividend withholding to 0% for qualifying pension funds. Law firm analysis, Tax alert, NAREIT Withholding Chart, NAREIT Withholding Chart, Law firm analysis. A Dutch pension fund can hold US AI data center REIT shares, receive dividends tax free, and exit without FIRPTA, achieving an effective zero US tax rate.
Sovereign wealth funds and Section 892
The baseline exemption and its limits
Foreign governments, including sovereign wealth funds, are generally exempt from US federal income tax on investment income from US stocks and bonds. IRC § 892(a)(1), Treas. Reg. § 1.892-2T. But the exemption does not cover income from commercial activity or gains from selling a direct US real property interest, meaning an AI data center owned directly never qualifies. IRC § 892(a)(2)(A), Treas. Reg. § 1.892-3T(a), TD 10042
New regulations and the minority interest exception
The IRS issued final regulations in December 2025 that dropped the rule that any foreign corporation that is a USRPHC is automatically treated as engaged in commercial activity. Now a sovereign wealth fund can hold US real estate through a foreign corporation without losing the Section 892 exemption for the corporation’s other investment income, provided the corporation is not a controlled commercial entity. The regulations include a minority interest exception, namely, a government controlled entity can own a domestic USRPHC that only holds minority stakes in other USRPHCs, including REITs, without causing either entity to become a controlled commercial entity. TD 10042, RSM US analysis
This means a sovereign wealth fund can invest through a structure where it holds a minority stake in a US REIT that owns AI data centers. It must keep ownership below 50% to avoid controlled commercial entity status and below 10% of a publicly traded REIT to avoid FIRPTA on share sales. For example, GIC, Singapore’s sovereign wealth fund, partnered with Equinix on equity financing for a hyperscale campus and is a cornerstone investor in NTT DC REIT. Equinix press release, Reuters
Other tax regimes that hit foreign owned US operations
BEAT and the proposed Super BEAT
The Base Erosion and Anti Abuse Tax (BEAT) applies to US corporations that are part of a large multinational group. To be subject, the corporation must have average annual gross receipts of at least $500 million and a base erosion percentage (deductible payments to foreign affiliates versus total deductions) of 3% or more. IRC § 59A. REITs and regulated investment companies are exempt. The BEAT rate is 10.5% starting in 2026 under the OBBBA. Bloomberg Tax. A foreign owned US AI data center operating company that pays interest or royalties to its foreign parent could face this additional tax.
The OBBBA also proposed a new Section 899, the Super BEAT. It would target US corporations more than 50% owned by persons from certain discriminatory foreign countries, removing the $500 million revenue threshold and the 3% base erosion test, increasing the BEAT rate to 12.5%, and eliminating several exceptions. It would also increase withholding rates on dividends and FIRPTA proceeds for those investors by up to 20 percentage points above the statutory rate. Section 899 passed the House in May 2025 but was removed from the final OBBBA in the Senate following the June 28, 2025 G7 agreement on global minimum tax, so it was not enacted. It could resurface in future legislation, so foreign investors should keep watching it. Law firm analysis
Section 163(j) interest deduction limit
The tax code limits a business’s deduction for interest expense to 30% of adjusted taxable income (ATI). IRC § 163(j)(1). For tax years after 2024, the OBBBA permanently restored the ATI calculation to be based on EBITDA, adding back depreciation, amortization, and depletion. This significantly expands the interest deduction for capital heavy AI data center owners. BDO USA analysis
A real property trade or business can elect out of the Section 163(j) limitation entirely. The election is irrevocable and requires using the alternative depreciation system, which provides slower depreciation and forfeits bonus depreciation. IRC § 163(j)(7)(B). An AI data center operation that includes development, rental, or management likely qualifies as a real property trade or business, but the trade off is complex. Electing out gives full interest deductibility, but gives up the immediate write offs from bonus depreciation. The OBBBA’s EBITDA based ATI may make the election less necessary for many owners.
Bonus depreciation and tax credits
The OBBBA restored 100% bonus depreciation for qualified property placed in service after January 19, 2025. This lets an AI data center owner immediately deduct the cost of servers, HVAC, electrical systems, and other equipment, reducing taxable income in the year of investment. BDO USA analysis. But the OBBBA also introduced new foreign entity of concern (FEOC) rules. They can deny clean energy credits like the investment tax credit under Section 48E if components come from certain countries. A foreign owned AI data center that uses renewable energy may need to check its supply chain.
Practical structuring tools
Using REITs as a blocker
Many foreign investors form a US REIT to hold AI data centers. The REIT structure can avoid FIRPTA on the stock sale if it is domestically controlled or publicly traded with small stakes. The REIT pays out 90% of its taxable income as dividends, subject to 30% withholding, reduced by treaty. The REIT itself is generally exempt from corporate tax. Example, NTT’s US AI data centers are held through a Singapore listed REIT, NTT DC REIT, allowing foreign investors to buy shares and receive dividends without FIRPTA on the disposition of the underlying US real estate. IRS FIRPTA withholding FAQ, NTT DC REIT Prospectus
Treaty elimination of dividend withholding
A foreign investor can structure its ownership through an entity in a treaty country that eliminates withholding on dividends paid to qualifying pension funds. A Dutch pension fund can own a US AI data center REIT and receive dividends free of US withholding. Combined with the QFPF exemption from FIRPTA, this yields a zero US tax result on both income and capital gains. NAREIT Withholding Chart
The Section 897(i) election
A foreign corporation that holds US real property may elect under Section 897(i) to be treated as a domestic corporation solely for FIRPTA purposes. To qualify, the corporation must be entitled to nondiscrimination under any treaty obligation of the United States. IRC § 897(i). The effect is that the corporation itself is not subject to FIRPTA withholding when it sells US real estate, and its gain is taxed at the 21% corporate rate as effectively connected income. Its stock, however, becomes a USRPI. This can be useful for a foreign AI data center operator that plans to hold US properties long term and wants to sell them without a 15% gross withholding. The election is irrevocable and requires treaty protection. I would consider it for a treaty country parent that has multiple US AI data center assets.
Key takeaways
- A foreign investor selling stock in a US AI data center company is likely selling a USRPI, triggering FIRPTA tax and 15% withholding.
- AI data center operating companies that own land and buildings are frequently USRPHCs, especially in early years.
- Investing through a publicly traded REIT and staying under 10% ownership eliminates FIRPTA on the stock sale and on capital gain distributions.
- A domestically controlled REIT (foreign ownership below 50%) also avoids FIRPTA, and proposed regulations may make it easier to achieve that status.
- Qualified foreign pension funds are completely exempt from FIRPTA and can combine treaty elimination of dividend withholding for zero US tax.
- Sovereign wealth funds cannot exempt direct US real property gains under Section 892, but new regulations allow more flexibility for minority stakes in REITs.
- BEAT applies to large foreign owned US operating companies that make deductible payments to affiliates. A proposed Super BEAT (Section 899) would have expanded it aggressively, but it was dropped from the final OBBBA after the June 2025 G7 agreement.
- The OBBBA’s restoration of 100% bonus depreciation and EBITDA based interest deduction limits gives US AI data center owners significant tax benefits, but also introduces FEOC restrictions on energy credits.
- Structuring through a US REIT, using treaty holding companies, and making a Section 897(i) election are key planning tools.
Frequently asked questions
Q:What is FIRPTA and why does it matter for my AI data center investment?
A:
FIRPTA is a US tax law that treats a foreign person’s gain from selling US real estate as US business income, taxed at ordinary rates. Since AI data centers are US real estate, selling the company that owns the center triggers this tax.
Q:Do I have to file a US tax return if my AI data center investment is only dividends?
A:
If you receive only FDAP income like REIT dividends and the withholding agent properly withholds the tax, you generally do not need to file a US return. The Tax Adviser
Q:What is the withholding rate on a sale of an AI data center by a foreign person?
A:
The buyer must withhold 15% of the gross sale price and remit it to the IRS within 20 days. You may apply for a reduced withholding certificate if the actual tax would be lower.
Q:Can I avoid FIRPTA by holding my investment through a REIT?
A:
Yes. If you own 10% or less of a publicly traded REIT, your stock is not a USRPI and you face no FIRPTA on sale. If you hold a privately placed REIT that is domestically controlled (foreign ownership under 50%), the stock is also not a USRPI.
Q:Are sovereign wealth funds exempt from US tax on AI data center investments?
A:
Not for direct US real estate. Section 892 exempts investment income from US stocks and bonds, but it does not cover gains from selling US real property. Sovereign wealth funds can invest through minority stakes in REITs to avoid FIRPTA.
Q:What is the BEAT and when does it apply?
A:
The BEAT is a minimum tax on large US corporations that erode the US tax base by paying deductible amounts to foreign affiliates. It applies if the corporation has average gross receipts of $500 million and a base erosion percentage of at least 3%. REITs are exempt.
Q:How does the OBBBA affect my US AI data center company?
A:
The OBBBA restored 100% bonus depreciation, so you can immediately deduct the cost of many assets placed in service after January 19, 2025. It also restored EBITDA based interest deduction limits, making it easier to deduct interest. Both reduce taxable income.
Q:What is the Section 897(i) election and should I make it?
A:
A foreign corporation that owns US real property can elect to be treated as domestic for FIRPTA purposes. This stops FIRPTA withholding on the corporation’s own sales, but its stock becomes a USRPI. The election is irrevocable and requires a tax treaty nondiscrimination clause. It may be useful for a long term holding company with many US properties.
Q:What are the risks of the proposed Super BEAT under Section 899?
A:
Section 899 would have removed the revenue and base erosion thresholds for US companies more than 50% owned from certain countries, raised the BEAT rate to 12.5%, and increased withholding rates. It passed the House in May 2025 but was removed from the final OBBBA after the June 2025 G7 agreement, so it did not become law. It could return in future legislation.
Q:Do US state taxes add complexity for foreign AI data center owners?
A:
Yes. Several states, including California, Massachusetts, and New York, have decoupled from federal bonus depreciation, so you may need to keep separate depreciation schedules for state tax returns. Bloomberg Tax analysis
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Junde Liu, JD, LL.M. (Taxation) candidate at UF Law. Originally published on Compute Law Blog. This article is general information and does not constitute legal advice. Reading it does not create an attorney client relationship. The reader should not act on the basis of any content here without first consulting a licensed attorney in the relevant state. Last reviewed for accuracy May 23, 2026.