Indirect Transfer Examples: FIRPTA, Withholding, and Treaties

An indirect transfer tax is a capital gains tax that a country imposes when a foreign investor sells shares in an offshore company whose value comes mainly from assets located in that country, even though the share sale itself happens entirely abroad. The rule closes what would otherwise be an obvious gap: without it, an investor could sell a factory, a mine, or an office tower by selling the offshore holding company that owns it, and no local tax would ever be triggered. Most major economies now tax these transactions, and the buyer is typically the one required to withhold the tax before paying the seller.

When a Foreign Share Sale Becomes Taxable

Most indirect transfer regimes use a two-part test, and both conditions usually need to be met.

The first is the asset value test. It asks whether the offshore company’s value comes primarily from assets in the taxing country. Both the OECD and UN model tax conventions put this threshold at more than 50%: if local assets represent more than half the company’s total value, the test is met.¹ The United States uses the same 50% line in its domestic rules.² Some countries add a minimum absolute value so small deals aren’t swept in. India, for example, only applies its rules when the Indian assets exceed ₹10 crore, roughly $1.2 million.³

The second test looks at the seller. Small shareholders with no meaningful control typically get carved out. Under U.S. rules, a foreign person who owns 5% or less of a class of stock regularly traded on an established securities market is not subject to these rules at all.² Other countries set their own thresholds, and not every regime requires both prongs.

“Local assets” for these purposes generally include real property, natural resource interests, intellectual property, and goodwill tied to local operations. Valuation is done at or near the date of transfer, and in complex cases the tax authority may require an independent appraisal from a certified professional.

A Worked Example

HoldCo, incorporated in a low-tax jurisdiction, owns 100% of OpCo in Country X. OpCo holds a $100 million commercial property plus $20 million in cash, giving it $120 million in local value. HoldCo separately holds $80 million in offshore securities and deposits. Its total global assets are $200 million.

Seller A owns all of HoldCo and sells it to Buyer B for $150 million, realizing a $50 million gain. The transaction closes entirely outside Country X between two non-residents.

Country X still taxes it. Local assets divided by total assets is $120 million over $200 million, or 60%, which clears the 50% threshold. Seller A is disposing of 100% of the shares, so any participation test is easily met. Country X taxes 60% of the gain, or $30 million, at its capital gains rate. Buyer B is usually required to withhold the tax before releasing the purchase price.

Multi-Tiered Structures and Look-Through

Real deals rarely involve just two entities. Parent companies often stack holding companies across several countries, and tax authorities respond with what is generally called the look-through principle: value is traced down through each layer to the underlying local asset.

If a parent sells MidCo, and MidCo owns SubCo, and SubCo owns OpCo which holds a factory in Country X, Country X asks what share of MidCo’s value ultimately rests on that factory. If it clears the threshold, Country X taxes the proportional gain even though the sale is several layers removed. When the intermediate holding companies own assets in more than one country, the seller can face parallel indirect transfer claims from several jurisdictions at once, each taxing its share of the same gain. Getting the valuation reports and transaction documentation right at the outset is what keeps that from turning into double taxation and penalties.

The U.S. Rule: FIRPTA

The United States enforces indirect transfer tax through the Foreign Investment in Real Property Tax Act, codified primarily in IRC Section 897. When a foreign person sells an interest in a “U.S. real property holding corporation,” the gain is treated as if the seller were doing business in the U.S., which makes it subject to U.S. income tax.²

A corporation qualifies when the fair market value of its U.S. real property interests equals or exceeds 50% of the combined fair market value of its U.S. real property, foreign real property, and other business assets.⁴ The classification then sticks for five years: even if the corporation later drops below 50%, any interest in it remains a U.S. real property interest for five years from the date it last qualified.²

FIRPTA also carves out small public-market investors. If a class of stock is regularly traded on an established securities market, a foreign person who held 5% or less during the relevant period is not treated as holding a U.S. real property interest at all.² For real estate investment trusts, the threshold is 10%. A foreign investor holding shares of a publicly traded U.S. real estate company through a brokerage account typically has no FIRPTA exposure.

India and China

India’s indirect transfer rules sit in Section 9(1)(i) of the Income Tax Act. They apply when a foreign entity’s shares derive at least 50% of their value from Indian assets and those Indian assets exceed ₹10 crore.³ India has introduced small shareholder exemptions since, though the specific participation thresholds have moved through successive Finance Acts.

China works differently. Under SAT Bulletin 7 (2015), the tax authority tests whether the offshore transaction has a “reasonable commercial purpose” beyond tax avoidance, weighing factors like the share of value from Chinese assets, the economic substance of the offshore entities, and whether the foreign tax on the deal is lower than what China would collect on a direct sale. The buyer serves as withholding agent, and penalties for failure to report range from 50% to 300% of the unpaid tax. Those penalties can be reduced if the buyer voluntarily reports within 30 days of signing the purchase agreement.

Withholding and Buyer Liability

The universal enforcement tool for indirect transfer tax is mandatory withholding by the buyer. The seller is a foreign entity with no local presence, so shifting collection onto the buyer, who has an immediate financial link to the local asset, is how the taxing country actually gets paid.

In the U.S., the buyer must withhold 15% of the gross sale price on any disposition of a U.S. real property interest by a foreign person.⁵ Because the 15% applies to the gross amount rather than the net gain, it routinely exceeds the seller’s actual tax liability. The seller then files a U.S. return to report the transaction and claim any refund.⁶

A buyer who fails to withhold is liable for the full amount of the unpaid tax, plus interest and penalties.⁷ As of the first quarter of 2026, the IRS charges 7% annual interest on underpayments, or 9% for large corporate underpayments.⁸ In some countries the local operating entity can be held jointly liable, meaning the asset just acquired carries the tax debt with it. Chasing the money back from a foreign seller after closing is far harder than withholding it in the first place, which is why tax due diligence on the seller’s foreign status has to happen before the funds move.

Tax Treaties and Double Taxation

Indirect transfer rules create an obvious risk that the same gain gets taxed twice: once by the country where the asset sits and again by the seller’s home country. Bilateral tax treaties are the main defense.

The OECD Model Tax Convention, which shapes most bilateral treaties, includes a provision at Article 13, paragraph 4 allowing the source country to tax gains on shares that derive more than 50% of their value from local immovable property at any time during the 365 days before the sale.¹ The UN Model Convention contains a similar rule.⁹ Only about 35% of existing bilateral treaties actually include this provision, so many older treaties give the seller’s home country exclusive taxing rights on share sales and can shield the transaction from source-country tax entirely.

Where both countries do have taxing rights, the seller’s home country usually provides relief through a foreign tax credit for the tax paid to the source country. The specifics turn on the treaty text and each country’s domestic law. Confirming whether a treaty applies, and which version of Article 13 it contains, can be the difference between paying tax once and paying it twice.

Documentation and Deadlines

Once a transaction qualifies as an indirect transfer, the compliance paperwork is heavy. Forms and deadlines vary by country, but the taxing authority always wants full visibility into a deal that happened outside its borders.

The standard documentation package typically includes:

A copy of the share purchase agreement showing price, parties, and closing date.
An independent valuation report establishing the fair market value of both the local assets and the total global assets of the transferred entity, prepared by a qualified professional.
Audited or certified financial statements for the offshore holding company, used to verify the asset ratios.
Evidence that the buyer withheld and remitted the required tax.

Foreign-language documents generally require certified translation. Some countries require notification within 30 days of the transaction; others allow up to 90 days. Missing the deadline can trigger standalone penalties even when the underlying tax has been paid in full.

The seller should also file a local tax return in the source country to declare the gain and claim credit for whatever the buyer withheld. Without that return, any over-withholding stays with the government. When multiple jurisdictions are involved, coordinating filings across different deadlines, languages, and valuation standards is the most operationally demanding part of the process.

1
OECD. Model Tax Convention on Income and on Capital
2
Office of the Law Revision Counsel. 26 U.S. Code 897 – Disposition of Investment in United States Real Property
3
Income Tax Department of India. Income Deemed to Accrue or Arise in India
4
eCFR. 26 CFR 1.897-2 – United States Real Property Holding Corporations
5
Office of the Law Revision Counsel. 26 USC 1445 – Withholding of Tax on Dispositions of United States Real Property Interests
6
Internal Revenue Service. FIRPTA Withholding
7
eCFR. 26 CFR 1.1446(f)-5 – Liability for Failure to Withhold
8
Internal Revenue Service. Interest Rates Remain the Same for the First Quarter of 2026
9
United Nations. United Nations Model Double Taxation Convention