Physical Property vs. Digital Infrastructure
You are being asked to sign a colocation contract for two racks in an Ashburn data center, and separately your operations team wants a small leased warehouse in New Jersey. Somebody has warned you that either one might create a U.S. taxable presence. One of those two contracts carries a well-mapped set of rules. The other sits in a genuinely unresolved area of the law, and no amount of confident writing changes that.
Three questions, routinely merged into one
"Does owning property in the United States make me taxable there" is really three questions with three different answers.
- Is it U.S. real property? If so, a self-contained regime applies under IRC §897 and IRC §1445 that operates whether or not you are engaged in any U.S. trade or business.
- Does the property constitute an office or other fixed place of business? That is a domestic question under IRC §864(c)(5) and Treas. Reg. §1.864-7, relevant to whether foreign-source income can be effectively connected and to the character of your U.S. activities generally.
- Does the property create a permanent establishment under a treaty? A separate question, answered under Article 5 of the applicable treaty, which can protect you even where the domestic answer is unfavorable.
Answer them in that order. Question one is decided by what the asset is. Questions two and three are decided by what you do with it.
Real property has its own regime
IRC §897(a) provides that gain or loss of a nonresident alien individual or 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 and the gain were effectively connected with it. The statute manufactures the connection. It does not ask whether one exists.
IRC §1445 is the collection mechanism, and it places the obligation on the buyer.
| Situation | Withholding | Authority |
|---|---|---|
| General rule on disposition of a USRPI | 15 percent of the amount realized | IRC §1445(a) |
| Buyer acquires for use as a residence, amount realized not more than $300,000, with the statutory residence-use condition met | None | IRC §1445(b)(5) |
| Buyer acquires for use as a residence, amount realized over $300,000 but not over $1,000,000 | 10 percent | IRC §1445(c)(4) |
| Foreign corporation distributing a USRPI | 21 percent of the gain | IRC §1445(e) |
Withholding is measured against the amount realized, not the gain, so a sale at a loss can still produce a large withholding obligation. The transferee reports and pays on Forms 8288 and 8288-A by the twentieth day after the date of transfer. A seller who expects the withholding to exceed the maximum tax liability may apply for a withholding certificate on Form 8288-B; the IRS states that it will normally act on a complete application within ninety days of receiving the information needed to make a determination.
Holding U.S. real property also raises an ongoing question separate from disposition. Rents received by a nonresident who is not engaged in a U.S. trade or business are FDAP income taxed at 30 percent of gross under IRC §871(a), with no deduction for mortgage interest, depreciation, taxes or management. IRC §871(d) for individuals and IRC §882(d) for foreign corporations permit an election to treat income from U.S. real property as effectively connected, which moves the income onto a net basis at graduated rates. The election has consequences and conditions of its own.
What counts as a real property interest
The definition is broader than a deed. Treas. Reg. §1.897-1(d)(2)(i) treats fee ownership, co-ownership, a leasehold interest, a time sharing interest, and a life estate, remainder or reversionary interest as interests in real property, along with any direct or indirect right to share in the appreciation or in the gross or net proceeds or profits generated by the property. An interest held solely as a creditor is excluded, but the regulation warns that a label of debt is not determinative where profit or appreciation participation is present.
Indirect ownership is also caught. Under IRC §897(c)(2), a domestic corporation is a United States real property holding corporation if the fair market value of its U.S. real property interests equals or exceeds 50 percent of the combined fair market value of its U.S. and foreign real property interests plus its other trade or business assets. Stock in such a corporation is itself a USRPI under IRC §897(c)(1), subject to the exception in IRC §897(c)(3) for regularly traded classes where the holder has not held more than 5 percent during the relevant period.
The practical point for an operating business is that a company can drift into USRPHC status without any real estate strategy, simply by owning a building while its other asset base is asset-light. The 50 percent test compares values, not intentions.
Leased space, warehouses and inventory
Leased operational space is the most settled part of the non-real-property analysis. Treas. Reg. §1.864-7 defines an office or other fixed place of business as a fixed facility, meaning a place, site, structure or other similar facility through which the trade or business is carried on, and it does not require continuous use. The regulation also states that merely using another person's office, including a related person's, does not create one where the activities there are relatively sporadic or infrequent.
A leased warehouse you operate, staff or control is on the wrong side of that line for a taxpayer hoping to avoid a fixed place of business. Third-party fulfillment under a services contract, where the provider controls the space and serves many customers, is a materially different fact, though inventory ownership and the terms of control still need to be examined rather than assumed. Lewenhaupt v. Commissioner, 20 T.C. 151 (1953), aff'd 221 F.2d 227 (9th Cir. 1955), remains the standing reminder that activity conducted through an agent can be attributed to the principal where it is continuous and substantial.
Under a treaty, Article 5(4) of the 2016 U.S. Model excludes from permanent establishment status facilities used solely for storage, display or delivery of goods, and other activities of a preparatory or auxiliary character. Whether warehousing that is integral to a distribution business qualifies as preparatory or auxiliary is exactly the kind of question that turns on the specific treaty text and the actual functions performed at the site.
Servers: where the position is unsettled
Here is the honest state of the law.
There is no Treasury regulation or published IRS ruling that squarely resolves whether unattended computing hardware owned or leased by a foreign enterprise, sitting in a U.S. data center with no personnel of the enterprise present, is an office or other fixed place of business under Treas. Reg. §1.864-7, or a permanent establishment under U.S. treaties. The regulation's language, "a place, site, structure, or other similar facility," was written long before the fact pattern existed.
The most developed thinking is in the OECD Commentary on Article 5 of the OECD Model, which distinguishes a website, which is intangible and generally cannot be a permanent establishment on its own, from the server on which it is hosted, which is equipment with a physical location that can be fixed. Under that Commentary, a server can constitute a permanent establishment where it is at the enterprise's disposal, is at a fixed location for a sufficient period, and the functions carried on through it are not merely preparatory or auxiliary. That analysis has been influential, but OECD Commentary is not U.S. law, U.S. treaties do not address servers expressly, and the weight U.S. authorities would give it in a particular case is not settled.
What follows from that, practically. The variables most likely to matter are whether specific identified hardware is dedicated to you rather than shared, whether you have the right to control and access it, how long it sits in place, and whether the functions performed there are core revenue-producing functions or ancillary ones such as caching or backup. A single edge node caching static assets and a fleet of dedicated machines running the entire product are not the same fact, and the position of each should be recorded as reasoned rather than resolved. Where a treaty is available and the position depends on it, IRC §6114 requires disclosure on Form 8833, with an IRC §6712 penalty of $1,000, or $10,000 for a C corporation, for failure to disclose.
Cloud capacity is a weaker case
Purchased cloud capacity is further from a fixed place of business than owned hardware, for a reason that is now supported by regulation. Treas. Reg. §1.861-19, finalized in T.D. 10022 and published January 14, 2025, classifies cloud transactions as the provision of services, defining a cloud transaction as one providing on-demand network access to computer hardware, digital content or similar resources. The final rule declined to adopt the lease-versus-service distinction that the 2019 proposed regulations had contemplated.
If what you buy is a service, you generally are not the person with hardware at your disposal; the provider is. That characterization was adopted for classification and sourcing purposes rather than to answer the fixed-place-of-business question, so it is support rather than a holding. It does mean the argument that ordinary cloud consumption creates a U.S. fixed place of business is a harder one to make than the equivalent argument about a dedicated colocation cage.
When the property sits inside an entity
Interests in entities carry the underlying property's character in ways that surprise people at exit. A sale of stock in a United States real property holding corporation is a disposition of a USRPI. A transfer of an interest in a partnership holding U.S. real property can engage IRC §1445(e)(5) and Treas. Reg. §1.1445-11T alongside the separate 10 percent withholding on the amount realized under IRC §1446(f). Coordination rules exist so that a transferee is not subjected to duplicative withholding on the same amount, and a domestic partnership that has complied with the IRC §1446 requirements with respect to gain from disposing of a U.S. real property interest is treated as satisfying the FIRPTA withholding requirement on that gain. Which provision governs a specific transfer depends on the entity type, the assets and who is transferring what, and it should be worked out before a closing date is set rather than at the settlement table.
Building the asset schedule
Build a single schedule of every U.S.-situs asset with four columns: what it is, the contract that governs it, whether the arrangement gives you identified property at your disposal or a service, and which of the three questions above it implicates. Real property goes into the FIRPTA analysis regardless of anything else. Leased operational space goes into the fixed-place-of-business analysis with the lease and usage records attached. Servers and cloud capacity go into a documented open-position file, with the contract terms that would drive the answer identified now.
Where a position rests on a treaty, plan the Form 8833 disclosure in the same exercise. That asset schedule is a standard input to the firm's diagnostic. Related material sits on the IRS exposure analysis pillar. This article is general information about published law, including areas where the law is unresolved, and is not advice on any particular holding.