Rule2022-27978
Exception for Interests Held by Foreign Pension Funds
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
December 29, 2022
Effective
December 29, 2022
Issuing agencies
Treasury DepartmentInternal Revenue Service
Abstract
This document contains final regulations regarding gain or loss of a qualified foreign pension fund attributable to certain interests in United States real property. The final regulations also include rules for certifying that a qualified foreign pension fund is not subject to withholding on certain dispositions of, and distributions with respect to, certain interests in United States real property. The final regulations affect certain holders of interests in United States real property and withholding agents that are required to withhold tax on dispositions of, and distributions with respect to, such property.
Full Text
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<title>Federal Register, Volume 87 Issue 249 (Thursday, December 29, 2022)</title>
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[Federal Register Volume 87, Number 249 (Thursday, December 29, 2022)]
[Rules and Regulations]
[Pages 80042-80067]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-27978]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9971]
RIN 1545-BN89
Exception for Interests Held by Foreign Pension Funds
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations regarding gain or
loss of a qualified foreign pension fund attributable to certain
interests in United States real property. The final regulations also
include rules for certifying that a qualified foreign pension fund is
not subject to withholding on certain dispositions of, and
distributions with respect to, certain interests in United States real
property. The final regulations affect certain holders of interests in
United States real property and withholding agents that are required to
withhold tax on dispositions of, and distributions with respect to,
such property.
DATES: Effective Date: These regulations are effective on December 29,
2022.
Applicability dates: For dates of applicability, see Sec. Sec.
1.897(l)-1(g), 1.1441-3(c)(4)(iii), 1.1445-2(e), 1.1445-5(h), 1.1445-
8(j), 1.1446-7.
FOR FURTHER INFORMATION CONTACT: Arielle M. Borsos or Milton Cahn at
(202) 317-6937 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
Section 897(l) was added to the Internal Revenue Code (the
``Code'') by section 323(a) of the Protecting Americans from Tax Hikes
Act of 2015, Public Law 114-113, div. Q (the ``PATH Act''), and amended
by section 101(q) of the Tax Technical Corrections Act of 2018, Pub. L.
115-141, div. U. In the preamble to the updated section 1445
regulations that were published in the Federal Register (81 FR 8398-01,
as corrected at 81 FR 24484-01) on February 19, 2016, the Department of
the Treasury (the ``Treasury Department'') and the IRS requested
comments regarding what regulations, if any, should be issued pursuant
to section 897(l)(3). The Treasury Department and the IRS considered
all of the comments received in response to this request and, on June
7, 2019, published proposed regulations under sections 897(l), 1441,
1445 and 1446 in the Federal Register (84 FR 26605) (the ``proposed
regulations''). The proposed regulations contained rules relating to
the qualification for the exemption under section 897(l), as well as
rules relating to withholding requirements under sections 1441, 1445
and 1446, for dispositions of United States real property interests
(``USRPIs'') by foreign pension funds and their subsidiaries and
distributions described in section 897(h).
This Treasury decision finalizes the proposed regulations, after
taking into account and addressing comments received by the Treasury
Department and the IRS with respect to the proposed regulations. Terms
used but not defined in this preamble have the meaning provided in the
final regulations.
Comments outside the scope of this rulemaking are generally not
addressed but may be considered in connection with future regulations.
All written comments received in response to the proposed regulations
are available at <a href="http://www.regulations.gov">www.regulations.gov</a> or upon request.
Summary of Comments and Explanation of Revisions
The final regulations retain the general approach and structure of
the proposed regulations, with certain revisions. This Summary of
Comments and Explanation of Revisions section discusses the revisions
as well as comments received in response to the solicitation of
comments in the proposed regulations.
I. Comments and Revisions Related to the Scope of the Exception
A. Qualified Controlled Entities
Under the proposed regulations, and consistent with section 897(l),
gain or loss of a qualified foreign pension fund (``QFPF'') or a
qualified controlled entity (``QCE'') (under the proposed regulations,
each generally a ``qualified holder'') from the disposition of a USRPI
is not subject to section 897(a). Prop. Sec. 1.897(l)-1(b)(1). The
proposed regulations defined a QCE as a trust or corporation organized
under the laws of a foreign country,\1\ all of the interests of which
are held directly by one or more QFPFs or indirectly through one or
more QCEs or partnerships. Prop. Sec. 1.897(l)-1(d)(9).
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\1\ For consistency with other guidance, the final regulations
adopt the term ``foreign jurisdiction'' instead of ``foreign
country.'' See Sec. 1.897(l)-1(e)(4). See also Part II.C. of this
Summary of Comments and Explanation of Revisions for a description
of how the final regulations treat subnational tax regimes.
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1. Ownership by Non-QFPFs
Several comments received in response to the proposed regulations
addressed the ownership requirement with respect to QCEs. The proposed
regulations did not permit ownership of a QCE by a person other than a
QFPF or another QCE, declining to adopt a comment received before the
publication of the proposed regulations requesting that de minimis
ownership of a QCE by other persons be disregarded under certain
circumstances, such as when de minimis ownership by managers or
directors is required by corporate law in certain jurisdictions. The
Treasury Department and the IRS determined that permitting a person
other than a QFPF or another QCE to own an interest in a QCE would
impermissibly expand the scope of the exception in section 897(l) by
allowing investors other than QFPFs to avoid tax under section 897(a).
However, under the proposed regulations, a QFPF could
[[Page 80043]]
invest in USRPIs with non-QFPFs through a partnership and still qualify
for the exemption under section 897(l).
Comments received in response to the proposed regulations similarly
requested that the final regulations allow a de minimis exception for
the ownership of a QCE by other persons. One comment reiterated that de
minimis ownership, including by managers or directors, may be required
by corporate law in certain jurisdictions and suggested that the final
regulations include a rule that would permit an entity to be treated as
a QCE if a small amount (for example, five percent) of the entity is
held by a non-QFPF. The comment also suggested that, in order to
prevent non-QFPF entities from inappropriately accessing the exemption
under section 897(l), a non-QFPF de minimis owner of a QCE could be
required to recognize gain or loss on any disposition of a USRPI held
through the QCE under section 897(a). The comment asserted that there
is no policy reason to differentiate between entities with QFPF and
non-QFPF owners/beneficiaries because the entity is a corporation or
trust rather than a partnership, and that permitting de minimis non-
QFPF ownership of a QCE would allow QFPFs flexibility with regard to
the form of entity chosen for investment purposes.
Another comment asserted that a de minimis exception should be
allowed because certain jurisdictions may require or otherwise allow
investment arrangements in which foreign pension funds pool investments
with non-QFPFs. The comment argued that such investment arrangements
should not be precluded from qualifying for the exception under section
897(l), especially if those arrangements are allowed or required by
local law and are consistent with generally accepted investment
practice. The comment suggested that the final regulations permit a
non-QFPF to have a de minimis level of ownership (for example, five
percent) in a QCE. If a de minimis exception were not adopted, the
comment suggested several alternatives to prevent minority investors
from tainting the QFPF status for the majority QFPF investors,
including that the final regulations allow QFPFs to qualify for the
exception under section 897(l) on their share of income or gains
distributed by an investment vehicle, provided the investment vehicle
is majority owned by QFPFs. The comment also suggested that the QCE
ownership requirement be modified to permit an eligible fund that is a
non-QFPF solely because it has a single qualified recipient with a
right to more than five percent of the assets or income of the eligible
fund to be an owner of a QCE. The comment requested that, in that
circumstance, the final regulations look through to the owners of the
non-QFPF and apply the prohibition on a single five-percent beneficiary
or participant by reference to the would-be QCE rather than the non-
QFPF.
An additional comment suggested that a QFPF should be able to claim
the section 897(l) exemption with respect to gains derived by an entity
in which the QFPF is an investor where the entity is not a partnership
and also is not a QCE because it is not wholly owned by QFPFs. The
comment noted that, in certain foreign government facilitated
arrangements involving a partnership formed under local law through
which multiple foreign government entities jointly invest, the
investment entity may be a per se corporation under Sec. 301.7701-
2(b)(6) that would not qualify as a QCE if not all of the government
investors were QFPFs. The comment asserted that, in such circumstance,
investors would be forced to include a non-government partner so that
the investment entity could be treated as a partnership for U.S.
federal tax purposes. To address this concern, the comment recommended
that the final regulations provide that, if an entity is treated as a
partnership under the law of the country in which the QFPF is formed,
the QFPF should be able to treat its distributive share of partnership
Foreign Investment in Real Property Tax Act (``FIRPTA'') gains as
exempt under section 897(l).
The Treasury Department and the IRS continue to believe that
allowing any exception with respect to the ownership of a QCE would
impermissibly expand the scope of the exception in section 897(l) by
allowing investors other than QFPFs to avoid tax under section 897.
Section 897(l)(1) expressly provides that an entity must be wholly
owned by a QFPF to constitute a QCE and qualify for the exception under
section 897(l). Accordingly, the final regulations do not provide a de
minimis exception to the ownership of a QCE. For the same reasons, the
final regulations do not adopt other suggested approaches that would
permit an entity to be a QCE despite limited non-QFPF ownership, such
as a tracing approach that would require non-QFPF owners of an entity
to be subject to section 897(a) and allow only QFPF owners to benefit
from the section 897(l) exemption, or a look-through approach that
would allow a non-QFPF that cannot qualify as a QFPF because it
violates the rule against having a single five-percent beneficiary or
participant to own an interest in a QCE.
The final regulations also do not adopt the recommendation to
permit a QFPF to benefit from the section 897(l) exemption with respect
to interests in an entity that is classified as a corporation for U.S.
federal tax purposes but that does not qualify as a QCE due to
ownership by non-QFPFs by treating the entity as a partnership in
accordance with its treatment under applicable foreign law. In addition
to expanding the definition of a QCE to permit ownership by non-QFPFs,
such a rule would contradict the classification of the entity for U.S.
federal tax purposes.
2. Investment Arrangements With QFPFs
The proposed regulations permitted multiple QFPFs to wholly own a
QCE, either directly or indirectly through one or more other QCEs, in
recognition that it is common for QFPFs to pool their investments.
One comment discussed the interaction between the requirement that
QCEs must be wholly owned by QFPFs and the various requirements that an
eligible fund must meet to maintain its status as a QFPF. The comment
stated that a QFPF that invests with other QFPFs in a QCE might fail to
qualify for the section 897(l) exemption solely because one of its co-
investors fails to qualify as a QFPF in any given year. The comment
noted that QFPFs would be required to negotiate complex protections to
shield against another co-investor from tainting the QCE's status. The
comment further noted that investing through a partnership (which would
allow the QFPF to invest with other non-QFPFs) may not be feasible
because a foreign jurisdiction may have regulatory restrictions
regarding the types of legal entities in which pension funds may invest
or the entity may be wholly owned by QFPFs that form part of a single
government (and thus may be a per se corporation under Sec. 301.7701-
2(b)(6)). The comment therefore recommended that the final regulations
provide a rule that a QCE that inadvertently fails to constitute a
qualified holder because one of its owners ceases to be treated as a
QFPF be permitted, for a limited time, to partially benefit from
section 897(l) to the extent that it continues to be owned by QFPFs.
The final regulations do not provide an exception to the
requirement that a QCE be wholly owned by a QFPF to insulate QFPF
investors from the risk of losing QCE status in investment arrangements
with other QFPFs. As with a de minimis exception to the
[[Page 80044]]
ownership of a QCE, the Treasury Department and the IRS believe that
any such rule would impermissibly expand the scope of the section
897(l) exception to allow investors other than QFPFs to avoid tax under
section 897. The Treasury Department and the IRS also believe that the
changes to the final regulations described in Parts II.A.2 and II.A.3
of this Summary of Comments and Explanation of Revisions will
appropriately alleviate concerns with respect to the risk that a QFPF
may inadvertently fail to satisfy the requirements to constitute a
QFPF.
3. Non-Economic Ownership
As referenced in the preamble to the proposed regulations, given
the absence of an express provision to the contrary, the definition of
an ``interest'' for purposes of determining whether an entity is a QCE
is determined in accordance with Sec. 1.897-1(d)(5), which provides
that an interest in an entity means an interest in such entity other
than an interest solely as a creditor. Section 1.897-1(d)(3) provides
that an interest in an entity other than solely as a creditor is: (A)
stock of a corporation; (B) an interest in a partnership as a partner
within the meaning of section 761(b) and the regulations thereunder;
(C) an interest in a trust or estate as a beneficiary within the
meaning of section 643(c) and the regulations thereunder or an
ownership interest in any portion of a trust as provided in sections
671 through 679 and the regulations thereunder; (D) an interest which
is, in whole or in part, a direct or indirect right to share in the
appreciation in value of an interest in an entity described in
subdivision (A), (B), or (C) of Sec. 1.897-1(d)(3)(i) or a direct or
indirect right to share in the appreciation in value of assets of, or
gross or net proceeds or profits derived by, the entity; or (E) a right
(whether or not presently exercisable) directly or indirectly to
acquire, by purchase, conversion, exchange, or in any other manner, an
interest described in subdivision (A), (B), (C), or (D) of Sec. 1.897-
1(d)(3)(i).
One comment requested that the final regulations clarify that non-
economic interests in an entity are not taken into account in
determining whether an entity is a QCE. The comment noted that such a
situation might arise when a foreign partnership that elects to be
treated as a corporation for U.S. federal income tax purposes has a
general partner that holds no economic interest in the entity. The
comment recommended that the final regulations provide that interests
in a QCE that do not entitle the holders to share in the income or
assets of the QCE should be ignored in determining whether the QCE is a
qualified holder, noting that such fully non-economic interests do not
present potential for abuse and that disregarding those interests would
be consistent with congressional intent to accommodate a variety of
foreign pension fund structures under section 897(l).
The Treasury Department and the IRS do not believe that additional
guidance is necessary regarding the ownership interests taken into
account in determining whether an entity constitutes a QCE. Thus, an
``interest'' for purposes of determining whether an entity is a QCE is
determined under Sec. 1.897-1(d)(3). Whether an interest in an entity
constitutes one of the interests listed under Sec. 1.897-1(d)(3) or is
instead disregarded is determined based on the facts, taking into
account general tax principles.
B. Qualified Holder Rule
The proposed regulations provided that a qualified holder does not
include any entity or governmental unit that, at any time during the
testing period, determined without regard to this limitation, was not a
QFPF, a part of a QFPF, or a QCE (the ``qualified holder rule''). See
Prop. Sec. 1.897(l)-1(d)(11)(ii). For this purpose, the proposed
regulations provided that the testing period is the shortest of (i) the
period beginning on the date that section 897(l) became effective
(December 18, 2015), and ending on the date of a disposition described
in section 897(a) or a distribution described in section 897(h); (ii)
the ten-year period ending on the date of the disposition or the
distribution; or (iii) the period during which the entity (or its
predecessor) was in existence. See Prop. Sec. 1.897(l)-1(d)(14). Under
the proposed regulations, the qualified holder rule does not apply to
an entity or governmental unit that did not own a USRPI as of the date
it became a QCE, a QFPF, or part of a QFPF. The preamble to the
proposed regulations explained that the qualified holder rule is
necessary to prevent the inappropriate avoidance of section 897(a)
through QFPFs indirectly acquiring USRPIs held by foreign corporations
that would not have otherwise qualified for the exception under section
897(l).
Comments recommended that the final regulations either modify the
qualified holder rule or implement one of several alternatives.
Comments agreed that the QFPF exception should not apply to exempt gain
that would otherwise have been subject to tax under section 897.
However, the comments argued that the qualified holder rule in the
proposed regulations was overbroad because it could apply to any
failure to qualify as a QFPF or QCE in the testing period, even if the
failure was unintentional or had no potential for abuse.
One comment requested that the final regulations provide a tolling
period if there is an inadvertent failure to qualify as a QFPF and that
failure is remedied in the following year. Another comment requested
that the final regulations provide an exception to the qualified holder
rule to exclude the situation in which a QFPF does not qualify solely
because it fails to meet the requirements in proposed Sec. 1.897(l)-
1(c)(2) (relating to the requirements an eligible fund must satisfy to
be treated as a QFPF). The comment further recommended allowing a mark-
to-market approach, whereby an election to recognize any net built-in
gain at the time a QFPF acquires a non-QFPF that owns a USRPI could be
made so that the non-QFPF could then be treated as a QCE with respect
to any future disposition of its USRPI (similar to Sec. 1.337(d)-7(a)
for the conversion of certain corporations to regulated investment
companies (``RIC'') or real estate investment trusts (``REIT'')). In
addition, the comment requested that the qualified holder rule be
limited to apply only to USRPIs held by non-QFPFs when such non-QFPFs
are acquired by a QFPF, resulting in a tracing approach that would
prevent section 897(l) from applying only to a disposition of those
specific USRPIs. The comment also recommended that the final
regulations shorten the maximum testing period from ten to five years,
which is consistent with the five-year maximum testing period for a RIC
or REIT to be a domestically controlled qualified investment entity
under section 897(h)(4).
As alternatives to the qualified holder rule, one comment requested
that the Treasury Department and the IRS either allow a mark-to-market
approach at the taxpayer's election (similar to that suggested by other
comments), under which the entity acquired by the QFPF would account
for the gain when the entity is acquired by the QFPF, or require
tracing the unrealized gain when the entity is acquired by a QFPF or
QCE so that section 897(a) can apply to the pre-acquisition gain upon a
subsequent sale or exchange.
Under the final regulations, the substance of the qualified holder
rule is the same as it was in the proposed regulations; however, for
greater clarity, the final regulations identify the qualified holder
rule as a separate
[[Page 80045]]
requirement to qualify for the section 897(l) exemption rather than as
part of the definitions. Sec. 1.897(l)-1(d). To be a qualified holder,
a QFPF or a QCE must satisfy one of two alternative tests at the time
of the disposition of the USRPI or the distribution described in
section 897(h). Sec. 1.897(l)-1(d)(1). Under the first test, a QFPF or
a QCE is a qualified holder if it owned no USRPIs as of the earliest
date during an uninterrupted period ending on the date of the
disposition or distribution during which it qualified as a QFPF or a
QCE. Sec. 1.897(l)-1(d)(2). Alternatively, if a QFPF or a QCE held
USRPIs as of the earliest date during the period described in the
preceding sentence, it can be a qualified holder only if it satisfies
the applicable testing period requirement, which is unchanged from the
proposed regulations. Sec. 1.897(l)-1(d)(3).
The final regulations also include two transition rules. First,
with respect to any period from December 18, 2015, to the date when the
requirements of section 1.897(l)-1(c)(2) or (e)(9) first apply to a
QFPF or QCE, as applicable (but in any event no later than December 29,
2022, in the case of section 1.897(l)-1(c)(2), and no later than June
6, 2019, in the case of section 1.897(l)-1(e)(9)), the QFPF or QCE is
deemed to satisfy the requirements of section 1.897(l)-1(c)(2) and
(e)(9), as applicable, for purposes of section 1.897(l)-1(d)(2) and (3)
if the QFPF or QCE satisfies the requirements of section 897(l)(2)
based on a reasonable interpretation of those requirements (including
determining any applicable valuations using a consistent method).
Second, in determining whether a QCE is a qualified holder, solely with
respect to the two tests in section 1.897(l)-1(d)(2) and (3), the final
regulations allow the QCE to disregard a de minimis interest owned by
any person that provides services to the QCE from December 18, 2015 to
February 27, 2023 (the ``transition period''). Sec. 1.897(l)-
1(d)(4)(ii). This second transition rule does not apply for purposes of
determining QCE status under section 1.897(l)-1(e)(9) at the time of
any disposition or distribution involving a USRPI. Thus, its
application is limited to cases in which a trust or corporation failed
to qualify as a QCE (and, therefore, as a qualified holder) during the
transition period solely because of a de minimis interest owned by any
person that provides services to the QCE (such as a manager or
director). In that case, the transition rule allows the trust or
corporation to eliminate the service provider's ownership within the
transition period and thereby avoid having to apply the tests for
qualified holder status under section 1.897(l)-1(d)(2) or (3) by
reference to the date that the service provider's interest is
eliminated. This may, for example, prevent the restarting of a ten-year
testing period on the date that the service provider's interest is
eliminated. Any disposition of USRPIs during the period when the trust
or corporation had the service provider as an interest holder still
would not qualify for the section 897(l) exemption.
The Treasury Department and the IRS agree that the application of
the qualified holder rule to an inadvertent failure to qualify as a
QFPF could produce inappropriate results, particularly in the case
where an eligible fund fails to meet the requirements in Sec.
1.897(l)-1(c)(2)(ii)(B)(2) because it unexpectedly projects that it
will provide less than 85 percent retirement and pension benefits.
Although the final regulations ultimately adopt the qualified holder
rule without the changes recommended by the comments, the final
regulations provide relief in the following ways:
<bullet> adding an alternative calculation to the requirements in
Sec. 1.897(l)-1(c)(2)(ii)(B)(2) and (3) based on the average of the
present values of the future benefits expected to be provided, as
determined in the 48 months preceding (and including) the most recent
valuation (the ``48-month alternative calculation,'' described further
in Part II.A.2 of this Summary of Comments and Explanation of
Revisions);
<bullet> adding a definition of retirement and pension benefits;
<bullet> clarifying the scope of ancillary benefits; and
<bullet> allowing an eligible fund to provide a de minimis amount
of non-ancillary benefits (described further in Part II.A.3 of this
Summary of Comments and Explanation of Revisions).
Together, these changes provide relief to eligible funds that would
otherwise unexpectedly fail to qualify as a QFPF in any given year and
alleviate the underlying concerns regarding the breadth of the
qualified holder rule.
In light of the changes described in the preceding paragraph, the
final regulations do not adopt the recommendation to allow a tolling
period to remedy the loss of QFPF status. For the same reasons, the
final regulations also do not adopt the recommendation to provide an
exception to the qualified holder rule for any failure to meet the
requirements in Sec. 1.897(l)-1(c)(2) or to have the qualified holder
rule apply only to USRPIs owned by non-QFPFs when such non-QFPFs are
acquired by a QFPF. The section 897(l) exception provides a substantial
benefit to investors, and it is appropriate to require an eligible fund
to meet the requirements in the final regulations for a ten-year
maximum testing period before obtaining tax-free treatment to ensure
the exception is not claimed inappropriately. Cf. section 877
(requiring taxpayer to be subject to potential additional U.S. taxation
for ten years after relinquishing U.S. citizenship); Sec. Sec. 1400Z-2
(allowing taxpayer to receive a step-up in basis of property equal to
its fair market value if held for ten years); 1.937-2(f) (requiring
individual to be bona fide resident of a territory for 10 years before
sale of property is sourced to territory and receives beneficial tax
rate). Accordingly, the final regulations also do not adopt a maximum
testing period that is shorter than ten years.
With respect to the suggested alternatives to the qualified holder
rule, the preamble to the proposed regulations explained that the mark-
to-market and tracing approaches both imposed greater compliance and
administrative costs relative to the testing-period approach without
providing any accompanying general economic benefit. Even if the
investor is given the option to elect a mark-to-market approach, it
would still present compliance and administrative barriers because fair
market valuations of real property are not readily available. The
tracing approach would similarly impose compliance and administrative
burdens, as such an approach would require obtaining a fair market
valuation of real property when an entity became a QCE, as well as
tracking the USRPIs that were acquired before the entity became a QCE
so that the pre-acquisition built-in gain could be recognized upon a
later disposition. Accordingly, the final regulations do not adopt the
mark-to-market or tracing alternatives.
C. Qualified Segregated Accounts
The proposed regulations provided that a qualified holder is exempt
from section 897(a) only with respect to gain or loss that is
attributable to one or more qualified segregated accounts maintained by
the qualified holder. Prop. Sec. 1.897(l)-1(b)(2). The proposed
regulations defined a qualified segregated account as an identifiable
pool of assets maintained for the sole purpose of funding qualified
benefits (that is, retirement, pension, or ancillary benefits) to
qualified recipients (generally, plan participants and beneficiaries).
See Prop. Sec. 1.897(l)-
[[Page 80046]]
1(d)(13)(i). The proposed regulations provided separate standards for
determining whether an identifiable pool of assets is maintained for
the sole purpose of funding qualified benefits depending on whether the
pool of assets is maintained by an eligible fund (including an eligible
fund that satisfies the requirements to be treated as a QFPF) or a QCE.
See Prop. Sec. 1.897(l)-1(d)(13)(ii); Prop. Sec. 1.897(l)-
1(d)(13)(iii).
Comments requested that the final regulations clarify the standards
that apply for determining whether an identifiable pool of assets is
maintained for the sole purpose of funding qualified benefits, and one
comment recommended removing the standards altogether. Specifically,
comments identified several situations in which qualified segregated
accounts are maintained for the sole purpose of funding qualified
benefits to qualified recipients, but where the funds could
nevertheless be disbursed for other purposes or to non-qualified
recipients. For example, one comment noted that an eligible fund could
rebate an overfunded amount by a foreign defined benefit pension fund
to an employer. Another comment noted that assets might not be
disbursed to qualified recipients or used to pay reasonable plan
expenses if a potential change in foreign law impacts how fund assets
can be used. One comment highlighted that assets might revert to
sponsoring employers if employees cease participating in the plan
before their benefits have vested. Another comment cited the
possibility that upon a dissolution of the eligible fund, assets could
revert to the employer after satisfying its obligations to qualified
recipients and creditors. In each such situation, the comments
recommended that the final regulations clarify that a pool of assets
would not fail to qualify as a qualified segregated account. One
comment further recommended that the final regulations eliminate the
requirement that all income and assets maintained in a qualified
segregated account of an eligible fund be used to fund the provision of
qualified benefits to qualified recipients because such a provision is
unnecessary to ensure that income and assets of an eligible fund do not
inure to inappropriate recipients.
The Treasury Department and the IRS agree that in certain
situations the reversion of funds to a governmental unit or an
employer, after satisfaction of liabilities to creditors and qualified
recipients, should not disqualify the account from being treated as
maintained for the sole purpose of funding qualified benefits to be
provided to qualified recipients. Accordingly, the final regulations
clarify that a qualified segregated account that is held by an eligible
fund is treated as maintained for the sole purpose of funding qualified
benefits to be provided to qualified recipients notwithstanding that
funds may revert (such as upon dissolution or the benefits failing to
vest) to the governmental unit or employer in accordance with
applicable foreign law so long as contributions to the plan are not
more than what is reasonably necessary to fund the qualified benefits
to be provided to qualified recipients. Sec. 1.897(l)-1(e)(13)(i).
This requirement ensures that a governmental unit or employer does not
qualify for benefits under section 897(l) to the extent it
inappropriately overfunds the plan.
One comment further recommended that the final regulations treat an
eligible fund's interest in a corporation as a qualified segregated
account. This recommendation was made to resolve the issue, described
in Part I.A.1 of this Summary of Comments and Explanation of Revisions,
that arises when multiple foreign government entities, some of which
are QFPFs and some of which are not, jointly invest in USRPIs through a
foreign partnership that is treated as a per se corporation for U.S.
federal tax purposes (pursuant to Sec. 301.7701-2(b)(6)), but cannot
qualify as a QCE because not all of the investors are QFPFs.
The final regulations do not adopt this recommendation for several
reasons. First, the suggestion contemplates a situation that is
contrary to the requirement in section 897(l)(1) that requires an
entity to be wholly owned by a QFPF in order to qualify for the
exception under section 897(l). Thus, the recommendation potentially
allows the exemption from taxation under section 897(a) to inure to
non-QFPFs. Second, the issue described in the comment ultimately arises
because of the rule under Sec. 301.7701-2(b)(6) rather than the final
regulations, and therefore a modification to the final regulations is
not the appropriate resolution. Third, the recommendation does not
ensure that the assets or income of the corporation are used only for
the purpose of providing benefits to qualified recipients, a key
purpose of the qualified segregated account rules.
II. Comments and Revisions Relating to Requirements Applicable to a
QFPF
A. Established To Provide Retirement And Pension Benefits
The proposed regulations allowed pension funds established by one
or more employers and government-sponsored public pension funds to be
considered QFPFs. Specifically, the proposed regulations provided that
an eligible fund must be established by either (i) the foreign country
in which it is created or organized to provide retirement or pension
benefits to participants or beneficiaries that are current or former
employees or persons designated by such employees as a result of
services rendered by such employees to their employers (``government-
established fund''), or (ii) one or more employers to provide
retirement or pension benefits to participants or beneficiaries that
are current or former employees or persons designated by such employees
in consideration for services rendered by such employees to such
employers (``employer fund''). Prop. Sec. 1.897(l)-1(c)(2)(ii)(A). The
language in proposed Sec. 1.897(l)-1(c)(2)(ii)(A) generally reflected
the statutory language in section 897(l)(2)(B).
1. Pension Funds Eligible for Section 897(l)(2)(B)
a. ``Established by'' Requirement
One comment requested that the final regulations clarify the
requirement that an eligible fund be ``established by'' a foreign
government in the case of a government-established fund. The comment
expressed concern that the ``established by'' requirement in the
proposed regulations could exclude the national pension systems of
certain countries under which accounts in the names of individual
participants are maintained by private entities. The comment explained
that some foreign countries have pension systems in which all employees
(or employees working in a certain sector of the economy) are required
by law to establish a pension account held and managed by a private
pension administrator. Although the arrangement is created by
government mandate and subject to government regulation, the private
pension administrators form the investment vehicles, select the
investment advisors, and receive, invest, and disburse the funds. The
extent of additional government involvement varies, but could include
the government being the conduit through which contributions by
employers and employees are funneled into the plans or benefits are
disbursed. The comment asserted that such an arrangement should be
treated as ``established by'' the foreign government for purposes of
qualifying as a government-established fund and that each private
pension administrator, the investment vehicles that it establishes,
[[Page 80047]]
and any government office that is within the flow of funds should be
treated as part of an ``arrangement'' that maintains qualified
segregated accounts. According to the comment, if participation in the
pension system is mandatory, a foreign government should meet the
``established by'' requirement for a government-established fund even
if the government does not actually receive contributions and disburse
benefits or hold or invest the funds. The comment recommended that the
final regulations clarify that an arrangement created pursuant to a
foreign government mandate, but in which private investment managers
hold and invest contributions, should be treated as ``established by''
the foreign government.
The Treasury Department and the IRS recognize that eligible funds
in foreign countries may be established and administered in numerous
ways. The Treasury Department and the IRS also continue to believe that
the purpose of section 897(l) is best served by permitting a broad
range of structures to be treated as a QFPF. Accordingly, the final
regulations clarify that an eligible fund may be established by, or at
the direction of, a foreign jurisdiction for purposes of qualifying as
a government-established fund. Sec. 1.897(l)-1(c)(2)(ii)(A)(1)(i). If
an eligible fund is established at the direction of a foreign
jurisdiction to provide benefits to the establishing entity's employees
in consideration for services rendered to the establishing entity, the
final regulations clarify that the fund will be considered an employer
fund only. Sec. 1.897(l)-1(c)(2)(ii)(A)(2). Finally, the final
regulations clarify that an eligible fund is treated as being
established by a foreign jurisdiction or an employer notwithstanding
that one or more persons that are not the foreign jurisdiction or
employer administers the eligible fund. Sec. 1.897(l)-
1(c)(2)(ii)(A)(3). Thus, an arrangement created pursuant to a foreign
government mandate in which private investment managers hold and invest
contributions is treated as ``established by'' the foreign government.
b. Employer Fund Established by Foreign Government
One comment indicated that, under the proposed regulations, it was
not clear that a QFPF could include pension arrangements established by
governmental units in their function as employers, while also noting
that such funds could potentially qualify as both a government-
established fund and an employer fund. The comment recommended
clarifying that an otherwise qualifying pension fund can be established
by government employers.
The final regulations clarify that an eligible fund can be
established by a governmental unit acting in its capacity as an
employer, and specify that such a fund constitutes an employer fund.
Sec. 1.897(l)-1(c)(2)(ii)(A).
2. Purpose of Eligible Fund
Proposed Sec. 1.897(l)-1(c)(2)(ii)(B) required that all of the
benefits that an eligible fund provides are qualified benefits to
qualified recipients (the ``100 percent threshold''), and that at least
85 percent of the present value of the qualified benefits that the
eligible fund reasonably expects to provide in the future are
retirement or pension benefits (the ``85 percent threshold''). For this
purpose, qualified benefits were defined as retirement, pension, or
ancillary benefits. Prop. Sec. 1.897(l)-1(d)(8). As discussed in the
preamble to the proposed regulations, the Treasury Department and the
IRS adopted the 85 percent threshold because it was more administrable
and provided more certainty to taxpayers than a subjective standard.
The preamble to the proposed regulations indicated that the calculation
of the 85 percent threshold would be made on an annual basis, but the
proposed regulations did not explicitly identify a period for making
this determination.
a. Comments Received
Several comments stated that a strict numerical threshold created a
cliff effect and caused uncertainty as to whether an eligible fund
would qualify as a QFPF on a consistent basis over several years.
Particular concern was expressed by one comment that an annual test may
cause disqualification as a QFPF for reasons not entirely within the
eligible fund's control, such as when the population of qualified
recipients changes. Other comments stated that the present value
calculation in the proposed regulations was vague, and one comment
stated that the proposed regulations did not clearly identify the
frequency with which the reasonable expectation of present value should
be calculated.
Based on these observations, several comments suggested that the
objective 85 percent threshold should be replaced with a subjective
test assessing the fund's purpose. These comments suggested that
instead of the 85 percent threshold, a fund's purpose should be
determined, considering all the facts and circumstances, by assessing
whether the fund was established to provide retirement and pension
benefits. Comments also suggested that the 85 percent threshold could
be used as a safe harbor; a fund that does not meet that requirement
would then have to show that it was established to provide retirement
and pension benefits given all the facts and circumstances. One comment
suggested another safe harbor whereby any fund that did not meet the 85
percent threshold could still qualify as a QFPF on a proportionate
basis by comparing the present value of the retirement and pension
benefits the fund reasonably expects to pay to the present value of all
benefits it reasonably expects to pay.
Several comments stated that if the 85 percent threshold were
retained, the final regulations should provide guidance on the
assumptions that may be made in making the present value calculation,
including the frequency of the calculation. One comment suggested that
forecasts of anticipated future benefits that are already prepared by
the eligible fund should be considered reasonable if they are based on
data that the fund prepares for general business purposes in accordance
with internal procedures. Another comment suggested that reasonable
actuarial standards applied in good faith could be a basis for this
calculation.
In addition, several comments requested that the final regulations
provide relief if a fund does not qualify as a QFPF in a particular
year. These comments suggested that a look-back rule allow eligible
funds to calculate compliance with the 85 percent threshold over a
multi-year period, such as three years, rather than on an annual basis.
One comment suggested other alternatives, such as providing a grace
period during which a fund could regain compliance as a QFPF without
losing its exempt status or the granting of proportionate eligibility
as a QFPF.
b. 85 Percent Threshold
The Treasury Department and the IRS continue to believe that the 85
percent threshold is more administrable and provides more certainty
than a subjective standard for determining whether an eligible fund is
established to provide retirement and pension benefits. The Treasury
Department and the IRS also continue to believe that this threshold
allows an appropriate margin for nonconforming benefits. Accordingly,
the final regulations retain the 100 percent threshold and 85 percent
threshold, and do not adopt a subjective standard. Sec. 1.897(l)-
1(c)(2)(ii)(B). However, several other comments suggesting further
clarity or relief with respect to the 85 percent threshold are
incorporated in the final regulations, as described in paragraphs
[[Page 80048]]
II.A.2.c. and II.A.2.d. of this Summary of Comments and Explanation of
Revisions.
c. Clarifications Regarding Present Valuation
The Treasury Department and the IRS believe that further guidance
with respect to determining the present value of benefits that an
eligible fund reasonably expects to provide is appropriate. To clarify
what this calculation is intended to value, the final regulations state
that the eligible fund must measure the present value of benefits to be
provided during the entire period during which the fund is expected to
be in existence. Sec. 1.897(l)-1(c)(2)(ii)(C)(1). Comments articulated
different, though potentially overlapping, benchmarks for determining
what valuation methods would be considered reasonable--for example,
making the determination based on data prepared for general business
purposes in accordance with internal procedures or based on actuarial
standards applied in good faith. As a result, the Treasury Department
and the IRS have decided to use a broad standard that would accommodate
all such suggestions by providing that an eligible fund may utilize any
reasonable method for determining present value. Id. Although the final
regulations are intended to provide flexibility as to the method used
for determining present value, the Commissioner may determine that the
present valuation requirement is not satisfied if the relevant facts
and circumstances indicate that the method used was unreasonable (for
example, it may be relevant that the method used results in a
percentage calculation of retirement and pension benefits that differs
materially from the actual percentage of the retirement and pension
benefits provided before the most recent present valuation date). See
also Sec. 1.897(l)-1(c)(3)(iii) for the requirement that an eligible
fund maintain records to show it meets the requirements of Sec.
1.897(l)-1(c)(2), which is discussed in Part III.B. of this Summary of
Comments and Explanation of Revisions.
The Treasury Department and the IRS believe that further guidance
is also appropriate with respect to the frequency with which the
valuation needs to be made. The final regulations state that such a
determination must be made on at least an annual basis. Sec. 1.897(l)-
1(c)(2)(ii)(C)(1). Thus, for example, if an eligible fund changes its
taxable year and has a short taxable year, the eligible fund may make
its present value determination for the short taxable year provided
that it makes another present value determination within one year.
Consistent with the above, the final regulations clarify that an
eligible fund must use its most recent present value determination (or
its most recent 48-month alternative calculation, described in Part II.
A.2.d. of this Summary of Comments and Explanation of Revisions) with
respect to dispositions of USRPIs or distributions described in section
897(h) that occur during the twelve months that succeed such present
value determination (or 48-month alternative calculation), or until a
new present value determination is made, whichever occurs first. Sec.
1.897(l)-1(c)(2)(ii)(C)(3).
d. 48-Month Average Alternative
Finally, the Treasury Department and the IRS agree that because
unanticipated events may cause a fund to fail the 85 percent threshold
in any one year, the fund should still qualify as a QFPF if it shows
that is has consistently qualified as such over an extended period. The
final regulations therefore adopt a 48-month alternative calculation
test as another means to satisfy the 85 percent threshold. Sec.
1.897(l)-1(c)(2)(ii)(C)(2). The 48-month alternative calculation test
is satisfied if the average of the present values of the retirement and
pension benefits the eligible fund reasonably expected to provide over
its life, as determined by the valuations performed over the 48 months
preceding (and including) the most recent present valuation, satisfies
the 85 percent threshold.\2\ The determination of such average is based
on the values (not percentages) of the qualified benefits the eligible
fund reasonably expected to provide. In addition, the 48-month
alternative calculation must be determined using a weighted average
whereby values are adjusted, if necessary, when the length of valuation
periods differs.\3\ If an eligible fund has been in existence for less
than 48 months, the 48-month alternative calculation is applied to the
period the eligible fund has been in existence. The 48-month
alternative calculation may be satisfied based on any reasonable
determination of the present valuation for any period that starts
before the date that the valuation requirements first apply to an
organization or arrangement and ends on or before December 29, 2022.
---------------------------------------------------------------------------
\2\ The Commissioner may determine that the 48-month alternative
calculation is not satisfied if, as discussed in Part II.A.2.c of
this Summary of Comments and Explanation of Revisions, the relevant
facts and circumstances indicate that the method used to determine
present value was unreasonable.
\3\ The length of the valuation periods may differ if the
eligible fund performs valuations more than once a year.
---------------------------------------------------------------------------
While the comments and related changes to the final regulations
described above apply to the 85 percent threshold, similar rules have
also been added for consistency with respect to the new category of
non-ancillary benefits added to the final regulations and further
described in Part II.A.3.b of this Summary of Comments and Explanation
of Revisions.
3. Qualified Benefits
a. Retirement and Pension Benefits
The proposed regulations did not provide a definition of retirement
and pension benefits. Rather, in the preamble to the proposed
regulations, the Treasury Department and the IRS requested comments on
whether the regulations should define retirement and pension benefits
(for example, with reference to whether there are penalties for early
withdrawals).
Although one comment suggested that the term retirement and pension
benefits was clear and did not require a definition, most comments
requested that the final regulations provide a definition of retirement
and pension benefits. Comments recommended several sources that the
final regulations might refer to in defining retirement and pension
benefits, including the Employee Retirement Income Security Act of 1974
(``ERISA''), U.S. federal income tax law principles (for example,
Chapter 1, Subchapter D of the Code and corresponding Treasury
Regulations), and income tax treaties. One comment suggested that the
final regulations provide separate definitions of retirement and
pension benefits based in part on these sources of U.S. tax law. This
comment generally proposed defining retirement benefits as those
benefits that are paid after reaching a predetermined retirement age
that are provided in return for services rendered or contributions
made. The comment generally proposed defining pension benefits as those
benefits paid after the participant retires due to a proven disability
before having reached a predetermined retirement age or paid to
surviving beneficiaries if the participant dies before reaching the
predetermined retirement age and that are provided in return for
services rendered or contributions made.
In response to these comments and to provide greater clarity, the
final regulations provide a definition of retirement and pension
benefits. Furthermore, the final regulations adopt
[[Page 80049]]
a broad definition of retirement and pension benefits to ensure that a
wide variety of pension funds and foreign laws are accommodated. Thus,
the final regulations provide that retirement and pension benefits mean
benefits payable to qualified recipients after reaching retirement age
under the terms of the eligible fund, or after an event in which the
eligible fund recognizes that a qualified recipient is permanently
unable to work, and including any such distribution made to a surviving
beneficiary of the qualified recipient. Sec. 1.897(l)-1(e)(14). The
inclusion of payments of accrued benefits after a specified event that
results in a permanent disability (such that the qualified recipient is
unable to work) or survivor benefits in the definition of retirement
and pension benefits is intended to resolve concerns expressed in
comments regarding the potential overlap of such benefits with the
benefits listed in the definition of ancillary benefits in proposed
Sec. 1.897(l)-1(d)(1) (for example, the proposed definition of
ancillary benefits included death and disability benefits). To provide
additional clarity regarding the factors that would indicate whether a
benefit is a retirement and pension benefit, as well as the distinction
between retirement and pension benefits and ancillary benefits, the
final regulations also provide that retirement and pension benefits are
generally based on contributions and investment performance, as well as
factors such as years of service with an employer and compensation
received by the qualified recipient. Id. The final regulations do not
require retirement and pension benefits to be paid in a particular
manner (that is, an annuity versus a lump-sum).
b. Ancillary and Non-Ancillary Benefits
The proposed regulations defined ancillary benefits to mean
benefits payable upon the diagnosis of a terminal illness, death
benefits, disability benefits, medical benefits, unemployment benefits,
or similar benefits. Prop. Sec. 1.897(l)-1(d)(1).
As discussed in Part II.A.2 of this Summary of Comments and
Explanation of Revisions, numerous comments requested that the final
regulations provide clarifications and incorporate flexibility into the
definition of ancillary benefits in light of the cliff effect caused by
the use of the 100 percent and 85 percent thresholds to determine
whether an eligible fund qualifies as a QFPF. Comments highlighted that
the funds may be allowed, or required, to provide certain benefits to
its participants or beneficiaries that are not enumerated in the
definition of ancillary benefits, such as limited withdrawals to fund a
first home. Comments expressed concern that the provision of such a
benefit would disqualify the plan from the exemption under section
897(l) because such a benefit is not listed in the definition of
ancillary benefits, it is not certain whether such benefit is a
``similar benefit,'' and the numerical thresholds do not allow for the
provision of any benefits other than retirement and pension or
ancillary benefits. The comments argued that the provision of such
benefits should not disqualify the plan from the exemption under
section 897(l) because, generally, the provision of such benefits is
not the main purpose of the plan and represents only a small portion of
the benefits paid out by the plan.
Comments suggested clarifying the scope of the term ``similar
benefits'' in the definition of ancillary benefits and expanding the
definition of ancillary benefits to include any benefits that are
allowed or required to be paid under the laws of the foreign
jurisdiction in which the fund is created or organized. Comments also
argued that a broad category of ancillary or other benefits tied to the
benefits allowed under foreign law is needed to accommodate potential
changes to the type of benefits allowed under foreign pension regimes.
One comment recommended that such a rule also apply where pension plans
and non-qualifying plans providing for other types of benefits are
required by foreign law to be pooled into one fund or arrangement,
which might otherwise preclude an eligible entity from being a QFPF
even though it is predominantly a pension fund.
Several comments recommended that the final regulations allow for a
fund to provide a de minimis amount of benefits that are neither
retirement and pension benefits nor any of the benefits listed under
the definition of ancillary benefits in the proposed regulations. One
comment recommended permitting a de minimis percentage of the total
benefits provided by a fund (for example, up to five percent) to be any
benefits that are not retirement and pension benefits or specifically
listed in the definition of ancillary benefits, provided the benefits
are required or allowed to be paid under the laws of the foreign
jurisdiction where the fund is created or organized. Another comment,
citing the broad range of foreign pension arrangements and the lack of
clear guidance in certain jurisdictions regarding the potential
benefits that can be provided by pension arrangements, suggested a de
minimis amount (for example, three percent) of total benefits be
allowed for non-ordinary benefits that fall outside the scope of the
definition of ancillary benefits.
Several comments also noted that certain of the benefits enumerated
in the definition of ancillary benefits in the proposed regulations may
be more closely related to the payment of retirement and pension
benefits. For example, one comment noted that a participant or
beneficiary may be eligible to make withdrawals of their retirement and
pension benefits before reaching retirement age upon permanent
disability or diagnosis of a terminal illness. These and other types of
similar benefits, such as survivor benefits (that is, payments of the
beneficiary or participant's retirement and pension benefits to a
surviving designee upon the death of the beneficiary or participant),
are paid in recognition of past service or because the plan participant
is unable to continue working or care for their dependents. In such
cases, the benefit is effectively being paid as a retirement and
pension benefit, but such benefit could improperly be considered an
ancillary benefit under the definition in proposed Sec. 1.897(l)-
1(d)(1). Another comment similarly noted that ancillary benefits should
not refer to annuities payable to surviving beneficiaries or on early
retirement because of a disability and suggested that the definition of
ancillary benefits be modified to refer only to certain one-time
payments made in connection with disability, terminal illness, or
death. One comment noted that many benefits that otherwise might be
ancillary benefits, such as medical and disability benefits, are often
available principally to retirees. Thus, comments recommended that the
definition of ancillary benefits be clarified such that benefits that
are more appropriately characterized as retirement and pension benefits
are not inappropriately treated as ancillary benefits.
In response to the comments, the final regulations provide
additional clarity with respect to the types of benefits permitted to
be provided by a QFPF.
First, as discussed in Part II.A.3.a of this Summary of Comments
and Explanation of Revisions, the final regulations provide a
definition of retirement and pension benefits, which is intended to
clarify that certain benefits that may have potentially been
categorized as ancillary benefits under the proposed regulations are
retirement and pension benefits. This definition should assist in
distinguishing retirement and pension benefits from ancillary benefits
and, because more
[[Page 80050]]
benefits should be characterized as retirement and pension benefits,
should lessen the concern that the provision of ancillary benefits will
jeopardize qualification as a QFPF.
Second, the final regulations modify the definition of ancillary
benefits by providing a more detailed list of specific types of
benefits that meet the ancillary benefits definition. Sec. 1.897(l)-
1(e)(1). The revised definition clarifies that, in addition to benefits
payable upon the diagnosis of a terminal illness, medical benefits, or
unemployment benefits, ancillary benefits also include incidental death
benefits (for example, funeral expenses), short-term disability
benefits, life insurance benefits, and shutdown or layoff benefits. To
distinguish between unemployment, shutdown, or layoff benefits that
might also be considered retirement and pension benefits, the final
regulations state that those types of benefits will be considered
ancillary benefits only if they do not continue past retirement age and
do not affect the payment of accrued retirement and pension benefits.
Sec. 1.897(l)-1(e)(1)(i)(B). In addition, the final regulations
clarify what benefits are considered similar to the specifically
identified ancillary benefits by indicating that such similar benefits
should also be either health-related or unemployment benefits. Sec.
1.897(l)-1(e)(1)(i)(C). Lastly, for the avoidance of doubt, the final
regulations resolve any potential overlap between the definitions of
retirement and pension benefits and ancillary benefits by providing
that if any benefits fall within both definitions, they are only
considered to be retirement and pension benefits. Sec. 1.897(l)-
1(e)(1)(ii). The Treasury Department and the IRS intend for this rule
to have limited application given the definitions of retirement and
pension benefits and ancillary benefits provided in the final
regulations.
Third, the Treasury Department and the IRS have determined that it
is appropriate to permit a limited amount of benefits that are outside
the scope of retirement and pension benefits and ancillary benefits.
The final regulations therefore allow an eligible fund to provide a
limited amount of non-ancillary benefits, which the final regulations
define as any benefits provided by the eligible fund as permitted or
required under the laws of the foreign jurisdiction in which the fund
is established or operates that do not otherwise fall within the
definition of retirement and pension benefits or ancillary benefits.
Sec. 1.897(l)-1(e)(6). The final regulations provide that no more than
five percent of the present value of the qualified benefits the
eligible fund reasonably expects to provide to qualified recipients
during the entire period during which the eligible fund is expected to
be in existence can be non-ancillary benefits. Sec. 1.897(l)-
1(c)(2)(ii)(B)(3). This measurement of non-ancillary benefits is
determined under the same rules that apply to the present valuation of
retirement and pension benefits for purposes of the 85 percent
threshold, which are described in Part II.A.2 of this Summary of
Comments and Explanation of Revisions.
The final regulations incorporate the allowance for non-ancillary
benefits into the 100 percent threshold by revising the definition of
``qualified benefits'' in the proposed regulations. Specifically, non-
ancillary benefits and ancillary benefits, together with the new
definition of retirement and pension benefits, comprise the ``qualified
benefits'' that an eligible fund must provide to meet the 100 percent
threshold. Sec. 1.897(l)-1(e)(8).
c. Other Distributions and Early Withdrawals
The proposed regulations did not explicitly address how early
withdrawals from a QFPF should be treated for purposes of determining
the amount of retirement or other benefits paid by the QFPF.
Specifically, the proposed regulations did not discuss how to treat
withdrawals made from one retirement plan and rolled over into a
different retirement plan, early withdrawals that certain plans may
permit in accordance with country-specific laws, or loans made by an
eligible fund. One comment suggested that rollover distributions should
not be considered as benefits paid by a plan and thus should be
excluded when determining an eligible fund's eligibility as a QFPF. The
comment also recommended that in-service plan withdrawals or loans
should not be taken into account in calculating the benefits paid by an
eligible fund provided that in-service withdrawals before retirement
age are permissible under the plan terms or relevant law.
The Treasury Department and the IRS have considered these
recommendations and generally agree that the types of withdrawals
described above should not be taken into account when calculating the
100 percent threshold, the 85 percent threshold, or the limitation on
non-ancillary benefits. As a result, the final regulations add three
categories of distributions that are excluded when making these
determinations. Sec. 1.897(l)-1(c)(2)(ii)(D).
The first category is a loan to a qualified recipient pursuant to
terms set by the eligible fund. Because there is an expectation of
repayment, these types of loans should not be included when making
threshold benefit determinations. This category, however, excludes a
loan that a qualified recipient is not required to repay, in full or in
part, upon default (which would generally constitute the provision of a
non-ancillary benefit), unless such a default is subject to tax and
penalty in a foreign jurisdiction.
The second category is a distribution permitted under the laws of
the foreign jurisdiction in which the eligible fund is established or
operates and made before the participant or beneficiary reaches the
retirement age as determined under relevant foreign laws, but only if
the distribution is to a qualified holder or other retirement or
pension arrangement subject to similar distribution or tax rules under
the laws of the foreign jurisdiction. Such rollover distributions are
simply shifting funds between one eligible fund and another similar
fund (even if such fund does not qualify as a QFPF) and thus should
also be excluded when making the 100 percent and 85 percent threshold
determinations.
The third category is a withdrawal of funds before the participant
or beneficiary reaches retirement age to satisfy a financial need under
principles similar to the U.S. hardship distribution rules permitted
under the laws of the foreign jurisdiction in which the eligible fund
is established or operates, provided the distribution (or at least the
portion of the distribution exceeding basis) is subject to tax and
penalty in such foreign jurisdiction. Because the qualified recipient
bears some or all of the financial burden with regard to such hardship
withdrawals, they are excluded when making threshold benefit
determinations.
4. Qualified Recipient
Proposed Sec. 1.897(l)-1(c)(2)(ii)(B)(1) required that all the
benefits that an eligible fund provides be qualified benefits to
qualified recipients. With respect to a government-established fund,
proposed Sec. 1.897(l)-1(d)(12)(i)(A) defined a qualified recipient as
any person eligible to be treated as a participant or beneficiary of
such eligible fund and any person designated by such person to receive
qualified benefits. Thus, the determination of whether a person was a
qualified recipient of a government-established fund was made without
regard to an individual's status as a current or former employee. With
respect to an employer fund, proposed Sec. 1.897(l)-1(d)(12)(i)(B)
defined a qualified recipient as a current
[[Page 80051]]
or former employee or any person designated by such current or former
employee to receive qualified benefits.
Several comments stated that the proposed regulations were too
restrictive because they did not allow for the possible participation
of individuals in an employer fund if they were neither current nor
former employees, as allowed in some countries. The comments noted,
however, that individuals who have never been employees represent only
a minority of members in any fund. One comment suggested that the
definition of qualified recipient be expanded accordingly to include
any individual allowed to participate in an eligible fund under the
laws of the foreign jurisdiction in which the fund is created or
organized. Another comment requested that the definition of qualified
recipient include a de minimis threshold for members of an eligible
fund that are neither current nor former employees. For example, an
eligible fund could qualify for the section 897(l) exemption (assuming
all other requirements were met) if more than 70 percent of its members
were current or former employees measured annually. The comment also
recommended that spouses of eligible participants or beneficiaries
should be explicitly identified as qualified recipients as defined in
proposed Sec. 1.897(l)-1(d)(12).
Another comment stated that, as to government-established funds,
the term qualified recipient could potentially be read as encompassing
a broad group of participants in other types of government programs
beyond just pension funds. The comment requested that the final
regulations make explicit that a recipient (or person designating the
recipient) must both have been employed and be receiving benefits by
reason of his or her employment. Finally, one comment noted that the
proposed regulations appropriately treated a self-employed individual
as both an employer and an employee. Prop. Sec. 1.897(l)-
1(c)(2)(ii)(C). The comment requested that proposed Sec. 1.897(l)-
1(e), example 1, be altered to clarify that the retirement benefits
provided under the facts of the example were provided as a result of
citizens' services as employed or self-employed individuals.
The Treasury Department and the IRS agree that the proposed
regulations may unnecessarily restrict arrangements, permitted in
certain countries, that allow for the participation of individuals who
were never employees in an employer fund. Further, the Treasury
Department and the IRS understand that such individuals represent only
a minority of members in any fund. The Treasury Department and the IRS
believe that unlimited or significant participation by individuals who
were never employees or their designees would be inappropriate. The
final regulations therefore allow individuals who were never employees
to constitute up to five percent of participants in plans established
by employers (and therefore to be treated as qualified recipients).
Sec. 1.897(l)-1(e)(12)(i)(C). The final regulations also include
spouses of current or former employees in the definition of qualified
recipients. Sec. 1.897(l)-1(e)(12)(i)(B).
The Treasury Department and the IRS do not believe that further
changes are necessary to (1) make explicit that a qualified recipient
(or person designating the recipient) with respect to a government-
established fund must both have been employed and be receiving benefits
by reason of his or her employment, or (2) to modify proposed Sec.
1.897(l)-1(e), example 1, to state that the retirement and pension
benefits provided by the government-established fund were provided as a
result of citizens' services as employed or self-employed individuals.
As provided in the proposed regulations, a government-established fund
must be established to provide retirement or pension benefits to
participants or beneficiaries that are current or former employees or
persons designated by such employees as a result of services rendered
by such employees to their employers, but may include participants on a
basis broader than an employee relationship. The comments seeking to
narrow the scope of qualified recipients for government-established
funds are inconsistent with the request to broaden the definition of a
qualified recipient with respect to an employer fund to include (within
limits) individuals who were never employees. At the same time, the
Treasury Department and the IRS believe that an explicit connection
between the work of an employee and the qualified benefits provided by
an eligible fund is reflected in the final regulations through the
definition of a government-established fund, as well as the requirement
that all eligible funds must reasonably expect to provide 85 percent
retirement and pension benefits, which are defined in the final
regulations at Sec. 1.897(l)-1(e)(14). These requirements provide an
appropriate safeguard to ensure that government programs other than
retirement and pension programs do not form the basis for exemption
from tax under section 897(l). Finally, the Treasury Department and the
IRS believe that the rule reflected in Sec. 1.897(l)-1(c)(2)(ii)(E)(1)
(previously at proposed Sec. 1.897(l)-1(c)(2)(ii)(C)(1)), which
explicitly states that a self-employed individual is considered both an
employer and employee, makes adding a reference to self-employed
individuals in proposed Sec. 1.897(l)-1(e), example 1, unnecessary.
B. Regulation and Information Reporting
The proposed regulations provided that an eligible fund satisfies
the information reporting requirement in section 897(l)(2)(D) only if
the eligible fund annually provides to the relevant tax authorities in
the foreign country in which the fund is established or operates the
amount of qualified benefits provided to each qualified recipient by
the eligible fund (if any), or such information is otherwise available
to those authorities. Prop. Sec. 1.897(l)-1(c)(iv)(B). An eligible
fund is not treated as failing to satisfy such requirement if the
eligible fund is not required to provide information to the relevant
tax authorities in a year in which no qualified benefits are provided
to qualified recipients. Id. An eligible fund is also treated as
satisfying the information reporting requirement in section
897(l)(2)(D) only if the eligible fund is required to provide the
information required by proposed Sec. 1.897(l)-1(c)(iv)(B), or such
information is otherwise available, to one or more governmental units.
Prop. Sec. 1.897(l)-1(c)(iv)(C).
One comment highlighted that the rules in the proposed regulations
are inadvertently inconsistent when an eligible fund is required by
foreign law to provide information to a governmental unit (satisfying
proposed Sec. 1.897(l)-1(c)(iv)(C)), but does not actually provide
such information (not fulfilling proposed Sec. 1.897(l)-1(c)(iv)(B)),
and requested that the final regulations clarify how these provisions
are intended to work.
Proposed Sec. 1.897(l)-1(c)(iv)(B) and proposed Sec. 1.897(l)-
1(c)(iv)(C) were not intended to function as two separate conditions
that were required to be met. Rather, the provisions were intended to
provide flexibility to eligible funds that provided the relevant
information to tax authorities or other governmental units. To clarify
this intent, the final regulations combine the two separate provisions
into a single provision (Sec. 1.897(l)-1(c)(iv)(A)). Thus, the
information reporting requirement in section 897(l)(2)(D) is satisfied
if a fund annually provides information about the amount of qualified
benefits provided to qualified recipients to the relevant tax
authorities or other relevant governmental units, or such information
[[Page 80052]]
is otherwise available to the relevant tax authorities or other
relevant governmental units. Sec. 1.897(l)-1(c)(iv)(A). A fund will
not fail to satisfy such requirement if it is not required to provide
information to the relevant tax authorities or other relevant
governmental units in a year in which no qualified benefits are
provided to qualified recipients. Id.
C. Subnational Tax Regime
For purposes of the requirement that a QFPF be subject to
preferential tax treatment, the proposed regulations provided that, for
purposes of section 897(l)(2)(E), references to a foreign country do
not include references to a state, province, or political subdivision
of a foreign country. The preamble to the proposed regulations
explained that subnational taxes generally constitute a minor component
of an entity's overall tax burden in a foreign jurisdiction and
therefore should not satisfy the requirement of section 897(l)(2)(E)
when such preference had only a minimal impact on reducing the fund's
overall tax burden.
Upon further consideration, the Treasury Department and the IRS
have determined that, to the extent the subnational tax law is covered
under an income tax treaty with the United States, it should constitute
a sufficient component of the foreign jurisdiction's taxation regime to
be able to satisfy the requirement of section 897(l)(2)(E).
Accordingly, the final regulations maintain the approach that
subnational taxes generally do not satisfy the requirement of section
897(l)(2)(E), but provide that those taxes can satisfy the requirement
of section 897(l)(2)(E) if they are covered taxes under an income tax
treaty between that foreign jurisdiction and the United States. See
Sec. 1.897(l)-1(c)(2)(v)(E).
III. Other Comments and Revisions
A. Withholding Rules
1. Withholding on Foreign Partnerships
Comments requested that the final regulations allow QFPFs that hold
interests in USRPIs through foreign partnerships, which are not
qualified holders under proposed Sec. 1.897(l)-1(d)(11) because they
cannot be QCEs, to avoid withholding by providing a certification of
non-foreign status (including on a Form W-8EXP). The comments
highlighted the difference in withholding when a QFPF invests through a
foreign partnership, which would result in withholding (even if the
foreign partnership was wholly owned by QFPFs), as opposed to through a
foreign corporation that constitutes a QCE or a domestic partnership,
neither of which would result in withholding under section 1445. One
comment recommended that, for purposes of withholding under section
1445, the final regulations should implement rules similar to the
regulations that implement the withholding regime under section
1446(f), which includes a form of look-through rule. Another comment
recommended that the final regulations provide that a foreign
partnership that is wholly owned by QFPFs either be treated as a QCE,
and therefore a qualified holder, or otherwise be excluded from the
definition of a foreign person under section 1445 such that a foreign
partnership could certify its non-foreign status to a transferee.
The Treasury Department and the IRS agree that a foreign
partnership that is held entirely by qualified holders should not be
subject to withholding under section 1445 because the ultimate owners
should qualify in full for the exemption under section 897(l).
Accordingly, the final regulations provide that a qualified holder
(under Sec. 1.897(l)-1(d)) and a foreign partnership all of the
interests of which are held by qualified holders, including through one
or more partnerships, may certify its status as a withholding qualified
holder that is not treated as a foreign person for purposes of
withholding under section 1445 (and section 1446, as relevant). Sec.
1.1445-1(g)(11). To the extent any non-qualified holders hold interests
in a foreign partnership, such foreign partnership does not qualify as
a withholding qualified holder. However, qualified holders who hold
interests in USRPIs through a foreign partnership that is not a
withholding qualified holder would still be eligible for the section
897(l) exemption on their distributive share of FIRPTA gains. Under the
existing regulations in Sec. 1.1445-3, a transferor may, in
appropriate cases, reduce withholding by obtaining a withholding
certificate from the IRS.
2. Documentation Requirements
The proposed regulations permitted a qualified holder to certify
that it is exempt from withholding under section 1445 by providing a
certification of non-foreign status. The proposed regulations also
stated that the IRS intended to revise Form W-8EXP, ``Certificate of
Foreign Government or Other Foreign Organization for United States Tax
Withholding or Reporting,'' to permit qualified holders to be exempt
from withholding under section 1445 by establishing their status under
section 897(l). Prop. Sec. Sec. 1.1445-2(b)(2), 1.1445-2(b)(v),
1.1445-5(b)(3)(ii), and 1.1445-8(e).
Under the final regulations, a withholding qualified holder may
submit a certification of non-foreign status to establish withholding
qualified holder status for purposes of section 1445(a) pursuant to
Sec. 1.1445-2(b)(2)(i), with certain modifications. Specifically, the
requirements under Sec. 1.1445-2(b)(2)(i) are modified to require the
transferor to state that it is not treated as a foreign person because
it is a withholding qualified holder, and to permit the transferor to
provide its foreign taxpayer identification number if it does not have
a U.S. taxpayer identification number. The final regulations also
clarify that a Form W-8EXP is a type of certification of non-foreign
status within the meaning of Sec. 1.1445-2(b)(2)(i). Accordingly, the
Form W-8EXP is subject to the general rules pertaining to
certifications of non-foreign status, such as the period for retaining
the certification in Sec. 1.1445-2(b)(3) and the rules pertaining to
liability of agents in Sec. 1.1445-4. Because the final regulations
require a transferor to represent its status as a withholding qualified
holder on the certification of non-foreign status, the final
regulations do not permit a transferor to submit a Form W-9, ``Request
for Taxpayer Identification Number and Certification,'' to establish
its status as a withholding qualified holder. See Sec. 1.1445-
2(b)(2)(vi). Before the release of revised Form W-8EXP, a certification
of non-foreign status described in Sec. 1.1445-2(b)(2)(i) (but not a
Form W-9) should be used by a transferor to establish its status as a
withholding qualified holder for purposes of section 1445. Once
revised, a withholding qualified holder may certify its non-foreign
status with either a certification of non-foreign status described in
Sec. 1.1445-2(b)(2)(i) (but not a Form W-9) or a Form W-8EXP.
The final regulations provide similar rules for certifications of
non-foreign status that establish withholding qualified holder status
for purposes of section 1445(e) withholding. See Sec. Sec. 1.1445-
5(b)(3)(ii) and 1.1445-8(e).
3. Coordination With 1441 and 1442
The proposed regulations provided that distributions made by a
United States real property holding company (``USRPHC'') or qualified
investment entity (``QIE'') to a qualified holder are not subject to
the coordination rules under Sec. 1.1441-3(c)(4) and are instead
subject only to the requirements of section 1441. Prop. Sec. 1.1441-
3(c)(4)(iii). Because a qualified holder is treated as a foreign person
for purposes of section
[[Page 80053]]
1441, but not for purposes of 1445, the proposed rule was intended to
subject a distribution to a qualified holder exclusively to the rules
in section 1441 to determine if withholding applies.
The Treasury Department and the IRS have determined that, for
greater clarity, certain changes should be made to proposed Sec.
1.1441-3(c)(4) to reach the result intended by the proposed
regulations. Rather than provide that the coordination rules under
Sec. 1.1441-3(c)(4) do not apply to qualified holders, the final
regulations amend the coordination rules to provide that withholding
qualified holders are not subject to section 1445 on distributions from
USRPHCs that are not treated as dividends (for example, a distribution
that is treated as gain from the sale or exchange of property under
section 301(c)(3)) and on distributions from REITs or other QIEs that
are capital gain dividends that are treated as gain attributable to the
sale or exchange of USRPIs. Sec. 1.1441-3(c)(4)(i)(B)(2), Sec.
1.1441-3(c)(4)(i)(C). Dividends from USRPHCs and dividends from REITs
or other QIEs that are not capital gain dividends continue to be
subject to withholding under section 1441. Sec. 1.1441-3(c)(4)(i)(A),
Sec. 1.1441-3(c)(4)(i)(C). Section 1.1441-3(c)(4)(i) is also clarified
to provide that a USRPHC (other than a REIT or other QIE) satisfies its
obligations under sections 1441 and 1445 by following either Sec.
1.1441-3(c)(4)(i)(A) or Sec. 1.1441-3(c)(4)(i)(B), but a USRPHC that
is a REIT or other QIE must follow the coordination provision in Sec.
1.1441-3(c)(4)(i)(C). The final regulations also clarify that, to the
extent a capital gain dividend from a REIT or other QIE is excluded
from withholding under section 1445 because it is made with respect to
stock that is regularly traded on an established securities market in
the United States to an individual or corporation that did not own more
than 5 percent of the stock (see the second sentence of section
897(h)(1)), withholding will apply under section 1441. See sections
852(b)(3)(E) and 857(b)(3)(E); Sec. 1.1441-3(c)(4)(i)(C).
B. Additional Requests Regarding Qualification Under Section 897(l) and
Recordkeeping
Comments recommended that the Treasury Department and the IRS allow
foreign entities that believe they are QFPFs or QCEs to apply for
letter rulings on their qualifications under section 897(l). While the
comment acknowledged the need for administrable standards, it noted
that, in light of the wide range of possible arrangements under foreign
law, certain funds that a ``reasonable observer'' would consider a QFPF
could be excluded. Another comment recommended that the Treasury
Department and the IRS adopt a ``white list'' regime (similar to the
United Kingdom's Qualifying Recognized Overseas Pension Scheme) whereby
pension plan regimes regulated in a list of countries could
automatically be treated as QFPFs or be subject to a reduced set of
qualifying requirements.
The final regulations do not adopt either of these recommendations.
The Treasury Department and the IRS do not believe that a private
letter ruling program specific to QFPF qualification or a ``white
list'' regime is necessary, as the final regulations provide flexible
standards such that a wide variety of funds can constitute eligible
funds.
Another comment requested that the final regulations provide that,
to the extent life insurance companies or other investment companies
hold and invest assets of one or more QFPFs, those life insurance
companies or investment companies themselves should qualify as QFPFs.
To qualify as a QFPF, an eligible fund must satisfy all of the
requirements in Sec. 1.897(l)-1(c)(2), and the final regulations do
not adopt any special rule for life insurance companies or investment
companies, including whether such assets are held as part of an
arrangement comprising a QFPF.
In addition, the final regulations require an eligible fund to
maintain records consistent with section 6001 to show that it is
eligible for the exemption under section 897(l) and which the
Commissioner may request upon examination. The recordkeeping
requirement is consistent with general recordkeeping requirements for
U.S. taxpayers and is appropriate in light of the flexible standards
provided in the final regulations.
C. Clarification With Respect to the Applicability of the Section
897(l) Regulations
These regulations reflect the particular policies and objectives
underlying section 897(l) (as opposed to other areas of tax law that
relate to pension funds). To clarify this, Sec. 1.897(l)-1(a) provides
that the definitions and requirements in Sec. 1.897(l)-1 apply only
for purposes of the regulations themselves, including applicable cross-
references from other sections, and that no inference is to be drawn
with respect to the definitions and requirements in Sec. 1.897(l)-1,
including with respect to the meaning of a pension fund, for any other
purpose.
IV. Applicability Dates
The final regulations apply with respect to dispositions of USRPIs
and distributions described in section 897(h) occurring on or after
December 29, 2022. However, in accordance with the applicability date
incorporated in Sec. 1.897(l)-1(g)(2), the rule in Sec. 1.897(l)-
1(b)(1), the qualified holder rule in Sec. 1.897(l)-1(d) (previously
proposed Sec. 1.897(l)-1(d)(11)), as well as the definitions of
governmental unit (Sec. 1.897(l)-1(e)(5)) and QCE (Sec. 1.897(l)-
1(e)(9)) apply with respect to dispositions of USRPIs and distributions
described in section 897(h) occurring on or after June 6, 2019, the
date the proposed regulations were filed with the Federal Register. See
section 7805(b)(1)(B). An eligible fund may choose to apply the final
regulations with respect to dispositions and distributions occurring on
or after December 18, 2015, and before the applicability date of the
final regulations, if the eligible fund, and all persons bearing a
relationship to the eligible fund described in section 267(b) or
707(b), consistently apply the rules in the final regulations in their
entirety for all relevant years. An eligible fund that chooses to apply
the final regulations before their applicability date must apply the
principles of Sec. 1.897(l)-1(d)(4)(i) to any valuation requirements
with respect to dates preceding December 18, 2015.
Special Analyses
I. Regulatory Planning and Review--Economic Analysis
These regulations are not subject to review under section 6(b) of
Executive Order 12866 pursuant to the Memorandum of Agreement (April
11, 2018) between the Treasury Department and the Office of Management
and Budget regarding review of tax regulations.
II. Paperwork Reduction Act
In accordance with the Paperwork Reduction Act, 44 U.S.C. 3501 et
seq. (``PRA''), information collection requirements contained in these
final regulations are in Sec. Sec. 1.1441-3, 1.1445-2, 1.1445-5,
1.1445-8, and 1.1446-1. These collections of information retain the
collections of information in the proposed regulations, with a
refinement to Sec. 1.1441-3(c)(4) to clarify that the portions of
distributions made by a USRPHC or QIE to a withholding qualified holder
(as defined in Sec. 1.1445-1(g)(11)) that are attributable to the
disposition of USRPIs are not subject to section 1445 and that the
portions of distributions made by a USRPHC or QIE
[[Page 80054]]
to a withholding qualified holder that are not attributable to the
disposition of a USRPI are subject to section 1441. No written comments
regarding the information collection requirements were received in
response to the solicitation of comments in the proposed regulations.
A. Information Collections Contained in Sec. 1.1441-3(c)(4)(iii)
The final regulations provide that dividends from a USRPHC and
dividends from REITs and other QIEs that are not capital gain dividends
to a withholding qualified holder are subject only to the requirements
of section 1441. Sec. 1.1441-3(c)(4)(i), Sec. 1.1441-
3(c)(4)(i)(B)(2), Sec. 1.1441-3(c)(4)(i)(C). The final regulations
further provide that withholding qualified holders are not subject to
section 1445 on distributions from USRPHCs that are not treated as
dividends (for example, a distribution that is treated as gain from the
sale or exchange of property under section 301(c)(3)) and on
distributions from REITs or QIEs that are capital gain dividends that
are treated as gain attributable to the sale or exchange of USRPIs.
Sec. 1.1441-3(c)(4)(i)(B)(2), Sec. 1.1441-3(c)(4)(i)(C).
A USRPHC or QIE making a distribution to a qualified holder would
be required to report the distribution on Form 1042-S, ``Foreign
Person's U.S. Source Income Subject to Withholding,'' and file Form
1042, ``Annual Withholding Tax Return for U.S. Source Income of Foreign
Persons.'' For purposes of reporting the portion of the distributions
that are exempt from section 1445 withholding, the IRS revised Form
1042-S to include an exemption code designating payments that are
exempt under section 897(l). No revisions are being made to Form 1042
in connection with payments that are exempt under section 897(l).
For purposes of the PRA, the reporting burden associated with Sec.
1.1441-3(c)(4) will be reflected in the PRA submissions for Form 1042
(OMB control numbers 1545-0123 for business filers and 1545-0096 for
all other Form 1042 filers) and Form 1042-S (OMB control number 1545-
0096).
B. Information Collections in Sec. Sec. 1.1445-2, 1.1445-5, 1.1445-8,
and 1.1446-1
Sections 1.1445-2, 1.1445-5, 1.1445-8, and 1.1446-1 would require a
qualified holder wishing to claim an exemption under section 897(l) to
provide a withholding agent with either a Form W-8EXP or a certificate
of non-foreign status containing similar information to the Form W-
8EXP. The IRS plans to revise Form W-8EXP for use by qualified holders.
For purposes of the PRA, the reporting burden associated with
Sec. Sec. 1.1445-2, 1.1445-5, 1.1445-8, and 1.1446-1, will be
reflected in the PRA submission for Form W-8EXP (OMB control number
1545-1621).
The reporting burdens associated with the information collections
in the final regulations are included in the aggregate burden estimates
for OMB control numbers 1545-0096 (which represents a total estimated
burden time for all forms and schedules of 6.46 million hours) and
1545-1621 (which represents a total estimated burden time, including
all other related forms and schedules for other filers, of 30.5 million
hours). The overall burden estimates for the OMB control numbers are
aggregate amounts that relate to the entire package of forms associated
with the applicable OMB control number and will in the future include,
but not isolate, the estimated burden of the tax forms that will be or
have been revised as a result of the information collections in the
final regulations. These numbers are therefore unrelated to the future
calculations needed to assess the burden imposed by the final
regulations. These burdens have been reported for other regulations
related to the taxation of cross-border income, and the Treasury
Department and the IRS urge readers to recognize that these numbers are
duplicates and to guard against overcounting the burden that
international tax provisions impose.
An agency may not conduct or sponsor and a person is not required
to respond to a collection of information unless it displays a valid
OMB control number.
III. Regulatory Flexibility Act
Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it
is hereby certified that this rulemaking will not have a significant
economic impact on a substantial number of small entities within the
meaning of section 601(6) of the Regulatory Flexibility Act. This
certification is based on the fact that the final regulations affect
foreign pension funds, including sovereign funds, which are entities
that are created or organized outside of the United States, with no
place of business in the United States, and which operate primarily
outside of the United States. Accordingly, the entities affected by the
final regulations are not considered small entities, and a regulatory
flexibility analysis under the Regulatory Flexibility Act is not
required.
IV. Section 7805(f)
Pursuant to section 7805(f) of the Code, the proposed regulations
(REG-109826-17) preceding these final regulations were submitted to the
Chief Counsel for Advocacy of the Small Business Administration for
comment on the impact on small businesses and no comments were
received.
V. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 requires
that agencies assess anticipated costs and benefits and take certain
other actions before issuing a final rule that includes any Federal
mandate that may result in expenditures in any one year by a state,
local, or tribal government, in the aggregate, or by the private
sector, of $100 million in 1995 dollars, updated annually for
inflation. The final regulations do not include any Federal mandate
that may result in expenditures by state, local, or tribal governments,
or by the private sector in excess of that threshold.
VI. Executive Order 13132: Federalism
Executive Order 13132 (entitled ``Federalism'') prohibits an agency
from publishing any rule that has federalism implications if the rule
either imposes substantial, direct compliance costs on state and local
governments, and is not required by statute, or preempts state law,
unless the agency meets the consultation and funding requirements of
section 6 of the Executive order. The final regulations do not have
federalism implications, do not impose substantial direct compliance
costs on state and local governments, and do not preempt state law
within the meaning of the Executive order.
Statement of Availability of IRS Documents
IRS Revenue Procedures, Revenue Rulings, Notices, and other
guidance cited in this document are published in the Internal Revenue
Bulletin or Cumulative Bulletin and are available from the
Superintendent of Documents, U.S. Government Publishing Office,
Washington, DC 20402, or by visiting the IRS website at <a href="http://www.irs.gov">www.irs.gov</a>.
Drafting Information
The principal authors of these final regulations are Arielle Borsos
and Milton Cahn, Office of Associate Chief Counsel (International).
However, other personnel from the Treasury Department and the IRS
participated in their development.
[[Page 80055]]
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended by adding an
entry in numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
* * * * *
Section 1.897(l)-1 also issued under 26 U.S.C. 897(l).
* * * * *
0
Par. 2. Section 1.897(l)-1 is added to read as follows:
Sec. 1.897(l)-1 Exception for interests held by foreign pension
funds.
(a) Scope and overview. This section provides rules regarding the
exception from section 897 for qualified holders. The definitions and
requirements in this section apply only for purposes of this section
(including as applicable by cross-reference from other sections), and
no inference is to be drawn with respect to the definitions and
requirements in this section, including with respect to the meaning of
a pension fund, for any other purpose. Paragraph (b) of this section
provides the general rule excepting qualified holders from section 897.
Paragraph (c) of this section provides the requirements that an
eligible fund must satisfy to be treated as a qualified foreign pension
fund. Paragraph (d) of this section provides the requirements that a
qualified foreign pension fund or a qualified controlled entity must
satisfy to be treated as a qualified holder. Paragraph (e) of this
section provides definitions. Paragraph (f) of this section provides
examples illustrating the application of the rules of this section.
Paragraph (g) of this section provides applicability dates. For rules
applicable to a qualified foreign pension fund or qualified controlled
entity claiming an exemption from withholding under chapter 3, see
generally Sec. Sec. 1.1441-3, 1.1445-2, 1.1445-5, 1.1445-8, 1.1446-1,
and 1.1446-2.
(b) Exception from section 897--(1) In general. Gain or loss of a
qualified holder from the disposition of a United States real property
interest, including gain from a distribution described in section
897(h), is not subject to section 897(a).
(2) Limitation. Paragraph (b)(1) of this section applies solely
with respect to gain or loss that is attributable to one or more
qualified segregated accounts maintained by a qualified holder.
(c) Qualified foreign pension fund requirements--(1) In general. An
eligible fund is a qualified foreign pension fund if it satisfies the
requirements of this paragraph (c). Paragraph (c)(2) of this section
provides rules regarding the application of the requirements of section
897(l)(2) to an eligible fund. Paragraph (c)(3) of this section
provides rules on the application of the requirements in paragraph
(c)(2) of this section, including rules regarding the application of
those requirements to an eligible fund that is an organization or
arrangement and rules regarding recordkeeping.
(2) Applicable requirements--(i) Created or organized. An eligible
fund must be created, organized, or established under the laws of a
foreign jurisdiction. For purposes of this paragraph (c)(2)(i), a
governmental unit is treated as created or organized in the foreign
jurisdiction with respect to which it is, or is a part of, the foreign
government.
(ii) Establishment of eligible fund--(A) General requirement--(1)
Purpose of and parties establishing eligible fund. An eligible fund
must be established --
(i) By, or at the direction of, the foreign jurisdiction in which
it is created or organized to provide retirement and pension benefits
to participants or beneficiaries that are current or former employees
or persons designated by such employees as a result of services
rendered by such employees to their employers; or
(ii) By one or more employers (including a governmental unit in its
capacity as an employer) to provide retirement and pension benefits to
participants or beneficiaries that are current or former employees or
persons designated by such employees in consideration for services
rendered by such employees to such employers.
(2) Identification of type of eligible fund. An eligible fund that
is described in both paragraphs (c)(2)(ii)(A)(1)(i) and (ii) of this
section shall be treated solely as described in the latter paragraph.
(3) Role of parties other than the foreign jurisdiction or
employer. For purposes of paragraph (c)(2)(ii)(A)(1) of this section,
the determination of whether an eligible fund is established by, or at
the direction of, a foreign jurisdiction or established by an employer
is made without regard to whether one or more persons that are not the
foreign jurisdiction or employer administer or otherwise provide
services with regard to the eligible fund (including holding assets in
a qualified segregated account as part of or on behalf of the eligible
fund).
(B) Established to provide retirement or pension benefits. An
eligible fund is established to provide retirement or pension benefits
for purposes of the general requirement in paragraph (c)(2)(ii)(A) of
this section if--
(1) All of the benefits that an eligible fund provides are
qualified benefits provided to qualified recipients;
(2) At least 85 percent of the present value of the qualified
benefits that the eligible fund reasonably expects to provide to
qualified recipients in the future are retirement and pension benefits;
and
(3) No more than five percent of the present value of the qualified
benefits the eligible fund reasonably expects to provide to qualified
recipients in the future are non-ancillary benefits.
(C) Present valuation.--(1) In general. For purposes of satisfying
the requirements in paragraphs (c)(2)(ii)(B)(2) and (3) of this
section, an eligible fund must determine, on at least an annual basis,
the present value of the qualified benefits that the eligible fund
reasonably expects to provide to qualified recipients during the entire
period during which the eligible fund is expected to be in existence.
An eligible fund may utilize any reasonable method for performing the
present valuation.
(2) 48-month average alternative calculation. An eligible fund that
does not satisfy the requirements of paragraph (c)(2)(ii)(B)(2) or (3)
of this section based on the present value determination under
paragraph (c)(2)(ii)(C)(1) of this section may satisfy the requirements
of paragraph (c)(2)(ii)(B)(2) or (3) of this section based on the
alternative calculation in this paragraph (c)(2)(ii)(C)(2). The
alternative calculation in this paragraph is satisfied if the average
of the present values of the future qualified benefits that the
eligible fund reasonably expected to provide, as determined during the
48-month period preceding (and including) the most recent present
valuation determination, satisfies the requirements of paragraph
(c)(2)(ii)(B)(2) or (3) of this section, respectively. The
determination of such average must be based on the valuations described
in paragraph (c)(2)(ii)(C)(1) of this section that were carried out
during the 48-month period preceding (and including) the most recent
present value determination, and must use the values (not percentages)
of the qualified benefits the eligible fund reasonably expected to
provide. The determination described in this paragraph must be
calculated using a weighted average
[[Page 80056]]
whereby values are adjusted if the relevant valuations are applicable
for different periods (as described in paragraph (c)(2)(ii)(C)(3) of
this section) because an eligible fund performs valulations more
frequently than on an annual basis. If an eligible fund has been in
existence for less than 48 months, this paragraph (c)(2)(ii)(C)(2) is
applied to the period that the eligible fund has been in existence. The
alternative calculation in this paragraph (c)(2)(ii)(C)(2) may be
satisfied based on any reasonable determination of the present
valuation described in paragraph (c)(2)(ii)(C)(1) of this section for
any period that starts before the date that the requirements of
paragraph (c)(2)(ii)(C) of this section first apply to an organization
or arrangement and ends on or before December 29, 2022.
(3) Application of present valuation. An eligible fund must use the
present value determination made as of the most recent valuation under
paragraph (c)(2)(ii)(C)(1) of this section or the alternative
calculation provided in paragraph (c)(2)(ii)(C)(2) of this section (to
the extent the eligible fund did not satisfy the requirements of
paragraphs (c)(2)(ii)(B)(2) and (3) of this section in the most recent
valuation) for purposes of meeting the requirements in paragraphs
(c)(2)(ii)(B)(2) and (3) of this section with respect to dispositions
of United States real property interests or distributions described in
section 897(h) occurring in the twelve months succeeding the most
recent valuation, or until a new present value determination is made,
whichever occurs first.
(D) Certain distributions from eligible funds. The following
distributions are not taken into account for purposes of determining
whether an eligible fund satisfies the requirements of paragraph
(c)(2)(ii)(B) of this section--
(1) A loan to a qualified recipient pursuant to terms set by the
eligible fund (other than a loan with respect to which a qualified
recipient defaults and is not required to repay in whole or part,
unless the default is subject to tax and penalty in such foreign
jurisdiction);
(2) A distribution (as permitted by the laws of the foreign
jurisdiction in which the eligible fund is established or operates)
made before the participant or beneficiary reaches the retirement age
(as determined under the relevant foreign laws), provided that the
distribution is to a designee that is a qualified holder or to another
arrangement subject to similar distribution or tax rules under the laws
of the foreign jurisdiction; and
(3) A withdrawal of funds before the participant or beneficiary
reaches the retirement age (as determined under the relevant foreign
laws) to satisfy a financial need (under principles similar to the U.S.
hardship distribution rules, see Sec. 1.401(k)-1(d)(3)) as permitted
under the laws of the foreign jurisdiction in which the eligible fund
is established or operates, provided the distribution (or at least the
portion of the distribution exceeding basis) is subject to tax and
penalty in such foreign jurisdiction.
(E) Certain employers and employees. For purposes of this section,
the following rules apply--
(1) A self-employed individual is treated as both an employer and
an employee;
(2) Employees of an individual, trust, corporation, or partnership
that is a member of an employer group are treated as employees of each
member of the employer group that includes the individual, trust,
corporation, or partnership; and
(3) An eligible fund established by a trade union, professional
association, or similar group, either alone or in combination with the
employer or group of employers, is treated as established by any
employer that funds, in whole or in part, the eligible fund.
(iii) Single participant or beneficiary--(A) In general. An
eligible fund may not have a single qualified recipient that has a
right to more than five percent of the assets or income of the eligible
fund.
(B) Constructive ownership. For purposes of paragraph
(c)(2)(iii)(A) of this section, an individual is considered to have a
right to the assets or income of an eligible fund to which any person
who bears a relationship to the individual described in section 267(b)
or 707(b) has a right.
(iv) Regulation and information reporting--(A) In general. The
eligible fund must be subject to government regulation and annually
provide to the relevant tax authorities (or other relevant governmental
units) in the foreign jurisdiction in which the eligible fund is
established or operates information about the amount of qualified
benefits (if any) provided to each qualified recipient by the eligible
fund, or such information must otherwise be available to the relevant
tax authorities (or other relevant governmental units). An eligible
fund is not treated as failing to satisfy the requirement of this
paragraph (c)(2)(iv)(A) as a result of the eligible fund not being
required to provide information to the relevant tax authorities (or
other relevant governmental units) in a year in which no qualified
benefits are provided to qualified recipients.
(B) Treatment of certain eligible funds established by foreign
jurisdictions. An eligible fund that is described in paragraph
(c)(2)(ii)(A)(1)(i) of this section is deemed to satisfy the
requirements of paragraph (c)(2)(iv)(A) of this section.
(v) Tax treatment--(A) In general. The tax laws of the foreign
jurisdiction in which the eligible fund is established or operates must
provide that, due to the status of the eligible fund as a retirement or
pension fund, either--
(1) Contributions to the eligible fund that would otherwise be
subject to tax under such laws are deductible or excluded from the
gross income of the eligible fund or taxed at a reduced rate; or
(2) Taxation of any investment income of the eligible fund is
deferred or excluded from the gross income of the eligible fund or such
income is taxed at a reduced rate.
(B) Income subject to preferential tax treatment. An eligible fund
is treated as satisfying the requirement of paragraph (c)(2)(v)(A) of
this section in a taxable year if, under the tax laws of the foreign
jurisdiction in which the eligible fund is established or operates--
(1) At least 85 percent of the contributions to the eligible fund
are subject to the tax treatment described in paragraph (c)(2)(v)(A)(1)
of this section, or
(2) At least 85 percent of the investment income of the eligible
fund is subject to the tax treatment described in paragraph
(c)(2)(v)(A)(2) of this section.
(C) Income not subject to tax. An eligible fund is treated as
satisfying the requirement of paragraph (c)(2)(v)(A) of this section if
the eligible fund is exempt from the income tax of the foreign
jurisdiction in which it is established or operates or the foreign
jurisdiction in which it is established or operates has no income tax.
(D) Other preferential tax regimes. An eligible fund that does not
receive the tax treatment described in either paragraph (c)(2)(v)(A)(1)
or (2) of this section is nonetheless treated as satisfying the
requirement of paragraph (c)(2)(v)(A) of this section if the eligible
fund establishes that each of the conditions described in paragraphs
(c)(2)(v)(D)(1) and (2) of this section is satisfied:
(1) Under the tax laws of the foreign jurisdiction in which the
eligible fund is established or operates, the eligible fund is subject
to a preferential tax regime due to its status as a retirement or
pension fund; and
(2) The preferential tax regime described in paragraph
(c)(2)(v)(D)(1) of
[[Page 80057]]
this section has a substantially similar effect as the tax treatment
described in paragraphs (c)(2)(v)(A)(1) or (2) of this section.
(E) Tax law of subnational jurisdictions. Solely for purposes of
this paragraph (c)(2)(v), a reference to the tax law of a foreign
jurisdiction includes the tax law of a political subdivision or other
local authority of a foreign jurisdiction, provided that income taxes
imposed under the subnational tax law are treated as covered taxes
under an income tax treaty between that foreign jurisdiction and the
United States.
(3) Operating rules--(i) Rules on the application of the
requirements in paragraph (c)(2) of this section--(A) Organizations or
arrangements. An organization or arrangement is treated as a single
entity for purposes of determining whether the requirements of
paragraph (c)(2) of this section are satisfied, except that each person
or governmental unit that is part of or party to an organization or
arrangement must satisfy the requirement of paragraph (c)(2)(i) of this
section.
(B) Relevant income, assets, and functions. The determination of
whether an eligible fund satisfies the requirements of paragraph (c)(2)
of this section is made solely with respect to the assets and income of
the eligible fund held in one or more qualified segregated accounts,
the qualified benefits funded by the qualified segregated accounts, the
information reporting and regulation related to the qualified
segregated accounts, and the qualified recipients whose benefits are
funded by the qualified segregated accounts. For this purpose, all
assets held by an eligible fund in qualified segregated accounts
(within the meaning of paragraph (e)(13)(ii) of this section) are
treated as a single qualified segregated account.
(ii) Aggregate approach to partnerships. For purposes of this
section, assets held by a partnership shall be treated as held
proportionately by its partners, and activities conducted by a
partnership shall be treated as conducted by its partners.
(iii) Recordkeeping. An eligible fund that claims the exemption
under section 897(l) must have records sufficient to establish that it
satisfies the requirements of paragraph (c)(2) of this section. See
section 6001 and Sec. 1.6001-1, requiring records to be maintained.
(d) Qualified holder requirements--(1) In general. With respect to
a disposition described in section 897(a) or a distribution described
in section 897(h), a qualified foreign pension fund (including a part
of a qualified foreign pension fund) or a qualified controlled entity
is a qualified holder only if it satisfies the requirement of paragraph
(d)(2) or (3) of this section.
(2) Qualified holders that did not hold U.S. real property
interests. The requirement of this paragraph (d)(2) is satisfied if the
qualified foreign pension fund or qualified controlled entity owned no
United States real property interests as of the earliest date during an
uninterrupted period, ending on the date of the disposition or
distribution, in which the qualified foreign pension fund or qualified
controlled entity satisfied the requirements of paragraph (c)(2) of
this section or paragraph (e)(9) of this section, as applicable.
(3) Qualified holders that satisfy the testing period--(i) In
general. The requirement of this paragraph (d)(3) is satisfied if the
qualified foreign pension fund or qualified controlled entity
continuously satisfies the requirements of paragraph (c)(2) of this
section or paragraph (e)(9) of this section, as applicable, for the
duration of the testing period.
(ii) Testing Period. The term testing period means whichever of the
following periods is the shortest:
(A) The period beginning on December 18, 2015, and ending on the
date of the disposition or the distribution;
(B) The ten-year period ending on the date of the disposition or
the distribution; and,
(C) The period beginning on the date the entity (or its
predecessor) was created or organized and ending on the date of the
disposition or the distribution.
(4) Transition Rules--(i) Qualified foreign pension fund or
qualified controlled entity requirements. With respect to any period
from December 18, 2015, to the date when the requirements of paragraph
(c)(2) or (e)(9) of this section first apply to a qualified foreign
pension fund or qualified controlled entity under paragraph (g) of this
section, as applicable (but in any event no later than December 29,
2022, in the case of paragraph (c)(2) of this section, and no later
than June 6, 2019, in the case of paragraph (e)(9) of this section),
the qualified foreign pension fund or qualified controlled entity is
deemed to satisfy the requirements of paragraphs (c)(2) and (e)(9) of
this section, as applicable, for purposes of paragraphs (d)(2) and (3)
of this section if the qualified foreign pension fund or qualified
controlled entity satisfies the requirements of section 897(l)(2) based
on a reasonable interpretation of those requirements (including
determining any applicable valuations using a consistent method).
(ii) Ownership of qualified controlled entity by service providers.
Solely for purposes of paragraphs (d)(2) and (3) of this section, the
determination of whether a corporation or trust is a qualified
controlled entity will not include stock or interests held directly or
indirectly by any person that provides services to such corporation or
trust, provided that such stock or interests are, in the aggregate, no
more than five percent (by vote or value) of the stock or interests of
such corporation or trust. This paragraph (d)(4)(ii) applies to
interests held from December 18, 2015 until February 27, 2023.
(e) Definitions. The following definitions apply for purposes of
this section.
(1) Ancillary benefits--(i) In general. The term ancillary benefits
means--
(A) Benefits payable upon the diagnosis of a terminal illness,
incidental death benefits (for example, funeral expenses), short-term
disability benefits, life insurance benefits, and medical benefits;
(B) Unemployment, shutdown, or layoff benefits that do not continue
past retirement age and do not affect the payment of accrued retirement
and pension benefits; and
(C) Other health-related or unemployment benefits that are similar
to the benefits described in paragraphs (e)(1)(i) and (ii) of this
section.
(ii) Overlap with retirement and pension benefits. Ancillary
benefits do not include any benefits that could also be defined as
retirement and pension benefits within the meaning of paragraph (e)(14)
of this section.
(2) Eligible fund. The term eligible fund means a trust,
corporation, or other organization or arrangement that maintains one or
more qualified segregated accounts.
(3) Employer group. The term employer group means all individuals,
trusts, partnerships, and corporations with a relationship to each
other specified in section 267(b) or section 707(b).
(4) Foreign jurisdiction. The term foreign jurisdiction means a
jurisdiction other than the United States, including a country, a
state, province, or political subdivision of a foreign country, and a
territory of the United States.
(5) Governmental unit. The term governmental unit means any foreign
government or part thereof, including any person, body, group of
persons, organization, agency, bureau, fund, or instrumentality,
however designated, of a foreign government.
(6) Non-ancillary benefits. The term non-ancillary benefits means
benefits
[[Page 80058]]
that are neither ancillary benefits (within the meaning of paragraph
(e)(1) of this section) nor retirement and pension benefits (within the
meaning of paragraph (e)(14) of this section), and are provided by the
eligible fund as permitted or required under the laws of the foreign
jurisdiction in which the eligible fund is established or operates.
(7) Organization or arrangement. The term organization or
arrangement means one or more trusts, corporations, governmental units,
or employers.
(8) Qualified benefits. The term qualified benefits means
retirement and pension benefits, ancillary benefits and non-ancillary
benefits. However, the portions of qualified benefits consisting of
ancillary benefits and non-ancillary benefits provided by a qualified
foreign pension fund are limited as provided in paragraph (c)(2)(ii)(B)
of this section.
(9) Qualified controlled entity. The term qualified controlled
entity means a trust or corporation created or organized under the laws
of a foreign jurisdiction all of the interests of which are held by one
or more qualified foreign pension funds directly or indirectly through
one or more qualified controlled entities.
(10) Qualified foreign pension fund. The term qualified foreign
pension fund means an eligible fund that satisfies the requirements of
paragraph (c) of this section.
(11) Qualified holder. The term qualified holder means a qualified
foreign pension fund or qualified controlled entity that satisfies the
requirements of paragraph (d) of this section.
(12) Qualified recipient--(i) In general. The term qualified
recipient means--
(A) With respect to an eligible fund described in paragraph
(c)(2)(ii)(A)(1)(i) of this section, any person eligible to be treated
as a participant or beneficiary of such eligible fund and any person
designated by such participant or beneficiary to receive qualified
benefits, and
(B) With respect to an eligible fund described in paragraph
(c)(2)(ii)(A)(1)(ii) of this section, a current or former employee, a
spouse of a current or former employee, and any person designated by
such participants or beneficiaries to receive qualified benefits.
(C) To the extent not already described in paragraph (e)(12)(i)(B)
of this section, with respect to an eligible fund described in
paragraph (c)(2)(ii)(A)(1)(ii) of this section, any person eligible to
be treated as a participant or beneficiary of such fund and any person
designated by such participant or beneficiary to receive qualified
benefits, so long as such recipients do not exceed five percent of the
eligible fund's total qualified recipients or have a right to more than
five percent of the assets or income of the eligible fund. An eligible
fund must make a determination for purposes of this paragraph
(e)(12)(i)(C) on at least an annual basis and may utilize any
reasonable method in doing so. An eligible fund must use its most
recent determination under this paragraph with respect to dispositions
of United States real property interests or distributions described in
section 897(h) occurring in the twelve months succeeding such
determination, or until a new determination is made, whichever occurs
first.
(ii) Special rule regarding automatic designation. For purposes of
paragraph (e)(12)(i) of this section, a person is treated as
designating another person to receive qualified benefits if the other
person is, by reason of such person's relationship or other status with
respect to the first person, entitled to receive benefits pursuant to
the terms applicable to the eligible fund or pursuant to the laws of
the foreign jurisdiction in which the eligible fund is created or
organized, whether or not the first person expressly designated such
person as a beneficiary.
(13) Qualified segregated account--(i) In general. The term
qualified segregated account means an identifiable pool of assets
maintained by an eligible fund or a qualified controlled entity for the
sole purpose of funding and providing qualified benefits to qualified
recipients.
(ii) Assets held by eligible funds. For purposes of paragraph
(e)(13)(i) of this section, an identifiable pool of assets of an
eligible fund is treated as maintained for the sole purpose of funding
qualified benefits to qualified recipients, and hence as a qualified
segregated account, only if the terms applicable to the eligible fund
or the laws of the foreign jurisdiction in which the eligible fund is
established or operates require that all the assets in the pool, and
all the income earned with respect to such assets, be used exclusively
to fund the provision of qualified benefits to qualified recipients or
to satisfy necessary reasonable expenses of the eligible fund, and that
such assets or income may not inure to the benefit of a person other
than a qualified recipient. For purposes of this paragraph (e)(13)(ii),
the fact that assets or income may inure to the benefit of a
governmental unit by operation of escheat or similar laws, or may
revert (such as upon plan termination or dissolution (after all
obligations to qualified recipients and creditors have been satisfied)
or the qualified recipients' benefits failing to vest) to the
governmental unit or employer in accordance with applicable foreign law
is ignored, so long as contributions to the plan are not more than
reasonably necessary to fund the qualified benefits to be provided to
qualified recipients.
(iii) Assets held by qualified controlled entities. For purposes of
paragraph (e)(13)(i) of this section, the assets of a qualified
controlled entity are treated as an identifiable pool of assets
maintained for the sole purpose of funding qualified benefits to
qualified recipients only if both of the following requirements are
satisfied:
(A) All of the net earnings of the qualified controlled entity are
credited to its own account or to the qualified segregated account of a
qualified foreign pension fund or another qualified controlled entity,
with no portion of the net earnings of the qualified controlled entity
inuring to the benefit of a person other than a qualified recipient;
and
(B) Upon dissolution, all of the assets of the qualified controlled
entity, after satisfaction of liabilities to persons having interests
in the entity solely as creditors, vest in a qualified segregated
account of a qualified foreign pension fund or another qualified
controlled entity.
(14) Retirement and pension benefits. The term retirement and
pension benefits means distributions to qualified recipients that are
made after the qualified recipient reaches retirement age as determined
under or in accordance with the laws in the foreign jurisdiction in
which the eligible fund is established or operates (including a benefit
paid to a qualified recipient who retires on or after a stated early
retirement age), or after a specified event that results in a qualified
recipient being permanently unable to work, and includes any such
distribution made to a surviving beneficiary of the qualifying
recipient. Retirement and pension benefits may be based on one or more
of the following factors: contributions, investment performance, years
of service with an employer, or compensation received by the qualified
recipient.
(f) Examples. This paragraph (f) provides examples that illustrate
the rules of this section. The examples do not illustrate the
application of the applicable withholding rules, including sections
1445 and 1446 and the regulations thereunder. It is assumed that no
person is entitled to more than five percent of any eligible fund's
assets or income, taking into account the constructive ownership rules
in
[[Page 80059]]
paragraph (c)(2)(iii)(B) of this section, and that the eligible fund
owns no United States real property interests other than as described.
(1) Example 1: No legal entity--(i) Facts. On January 1, 2023,
Country A establishes Retirement Plan for the sole purpose of providing
retirement and pension benefits to citizens of Country A aged 65 or
older. Retirement Plan is composed of Asset Pool and Agency. Asset Pool
is a group of accounts maintained on the balance sheet of the
government of Country A. Pursuant to the laws of Country A, income and
gain earned by Asset Pool is used solely to support the provision of
retirement and pension benefits by Retirement Plan. Agency is a Country
A agency that administers the provision of benefits by Retirement Plan
and manages Asset Pool's investments. Under the laws of Country A,
investment income earned by Retirement Plan is not subject to Country
A's income tax. At the end of each calendar year, Retirement Plan
performs a present valuation of the retirement and pension benefits it
reasonably expects to provide in the future, and all of the benefits
that Retirement Plan reasonably expects to provide are retirement and
pension benefits. On January 1, 2024, Agency purchases Property, which
is an interest in real property located in the United States owned by
Asset Pool. On June 1, 2026, Agency sells Property, realizing $100x of
gain with respect to Property that would be subject to tax under
section 897(a) unless paragraph (b) of this section applies with
respect to the gain.
(ii) Analysis. (A) Retirement Plan, which is composed of Asset Pool
and Agency, includes one or more governmental units described in
paragraph (e)(5) of this section. Accordingly, Retirement Plan is an
organization or arrangement described in paragraph (e)(7) of this
section. Furthermore, Retirement Plan maintains a qualified segregated
account in the form of Asset Pool, an identifiable pool of assets
maintained for the sole purpose of funding retirement and pension
benefits to beneficiaries of the Retirement Fund (qualified recipients
as defined in paragraph (e)(12)(i)(A) of this section). Therefore,
Retirement Plan is an eligible fund within the meaning of paragraph
(e)(2) of this section.
(B) Paragraph (c)(3)(i) of this section applies for purposes of
determining whether Retirement Plan is an eligible fund that satisfies
the requirements of paragraph (c)(2) of this section and would
therefore be treated as a qualified foreign pension fund. Accordingly,
the activities of Asset Pool and Agency are integrated and treated as
undertaken by a single entity to determine whether the requirements of
paragraph (c)(2) of this section are met. However, Asset Pool and
Agency must independently satisfy the requirement of paragraph
(c)(2)(i) of this section.
(C) Retirement Plan is composed of Asset Pool and Agency, each of
which is a governmental unit and treated as created or organized under
the laws of Country A for purposes of paragraph (c)(2)(i) of this
section. Accordingly, Retirement Plan satisfies the requirement of
paragraph (c)(2)(i) of this section.
(D) Retirement Plan is established by Country A as an eligible fund
described in paragraph (c)(2)(ii)(A)(1)(i) of this section to provide
retirement and pension benefits, which are qualified benefits described
in paragraph (e)(8) of this section, to citizens of Country A, who are
qualified recipients described in paragraph (e)(12)(i)(A) of this
section because they are eligible to be participants or beneficiaries
of Retirement Plan. Accordingly, all of the benefits that Retirement
Plan provides are qualified benefits provided to qualified recipients.
In addition, Retirement Plan satisfies the requirements of the present
valuation test as described in paragraphs (c)(2)(ii)(B) and (C) of this
section. Accordingly, Retirement Plan satisfies the requirement of
paragraph (c)(2)(ii) of this section.
(E) Retirement Plan provides retirement and pension benefits to
citizens of Country A aged 65 or older, with no citizen entitled to
more than five percent of Retirement Fund's assets or to more than five
percent of the income of the eligible fund. Accordingly, Retirement
Plan satisfies the requirement of paragraph (c)(2)(iii) of this
section.
(F) Retirement Plan is composed solely of governmental units within
the meaning of paragraph (e)(5) of this section. Accordingly, under
paragraph (c)(2)(iv)(B) of this section, Retirement Plan is treated as
satisfying the requirements of paragraph (c)(2)(iv)(A) of this section.
(G) Investment income earned by Retirement Plan is not subject to
income tax in Country A. Accordingly, Retirement Plan satisfies the
requirement of paragraph (c)(2)(v) of this section.
(H) Because Retirement Plan satisfies the requirements of paragraph
(c)(2) of this section, Retirement Plan is a qualified foreign pension
fund. Because Retirement Plan held no United States real property
interests as of January 1, 2023, the earliest date during an
uninterrupted period ending on June 1, 2026, the date of the
disposition, in which it satisfied the requirements of paragraph (c)(2)
of this section, Retirement Plan is a qualified holder under paragraph
(d)(2) of this section. Retirement Plan's gain with respect to Property
is attributable solely to Asset Pool, a qualified segregated account
maintained by Retirement Plan. Accordingly, under paragraph (b) of this
section, the $100x gain realized by Retirement Plan attributable to the
disposition of Property is not subject to section 897(a).
(2) Example 2: Fund established by an employer--(i) Facts.
Employer, a corporation organized in Country B, establishes Fund to
provide retirement and pension benefits to current and former employees
of Employer and S1, a Country B corporation that is wholly owned by
Employer. On January 1, 2023, Fund is established as a trust under the
laws of Country B, and Employer retains discretion to invest assets and
to administer benefits on Fund's behalf. Fund receives contributions
from Employer and S1 and contributions from employees of Employer and
S1 who are beneficiaries of Fund. All contributions to Fund and all of
Fund's earnings are separately accounted for on Fund's books and
records and are required by Fund's organizational documents to
exclusively fund the provision of benefits to Fund's beneficiaries,
except as necessary to satisfy reasonable expenses of Fund. Fund
currently has over 100 beneficiaries, a number that is reasonably
expected to grow as Employer expands. Fund will pay benefits to
employees upon retirement based on years of service and employee
contributions, but, if a beneficiary dies before retirement, Fund will
pay an incidental death benefit in addition to payment of any accrued
retirement and pension benefits to the beneficiary's designee (or
deemed designee under local laws if the beneficiary fails to identify a
designee). Fund annually performs a present valuation of the benefits
it reasonably expects to provide to Fund's beneficiaries, and the
valuation concludes that more than 85 percent of the present value of
the total benefits it reasonably expects to pay to its beneficiaries in
the future are retirement and pension benefits. In addition, it is
reasonably expected that the incidental death benefits paid by Fund
will account for less than fifteen percent of the present value of the
total benefits that Fund expects to provide in the future, and Fund
does not reasonably expect to pay any other types
[[Page 80060]]
of benefits to its beneficiaries in the future. Fund annually provides
to the tax authorities of Country B the amount of benefits distributed
to each participant (or designee). Country B's tax authorities
prescribe rules and regulations governing Fund's operations. Under the
laws of Country B, Fund is not taxed on its investment income. On
January 1, 2024, Fund purchases Property, which is an interest in real
property located in the United States. On June 1, 2026, Fund sells
Property, realizing $100x of gain with respect to Property that would
be subject to tax under section 897(a) unless paragraph (b) of this
section applies with respect to the gain.
(ii) Analysis. (A) Fund is a trust that maintains an identifiable
pool of assets for the sole purpose of funding retirement and pension
benefits and ancillary benefits to current and former employees of the
employer group (within the meaning of paragraph (e)(3) of this section)
that includes Employer and S1 (current and former employees of Employer
and S1 constitute qualified recipients, as defined in paragraph
(e)(12)(i)(B) of this section). All assets held by Fund and all income
earned by Fund are used to provide such benefits. Therefore, Fund is a
trust that maintains a qualified segregated account within the meaning
of paragraph (e)(13) of this section. Accordingly, Fund is an eligible
fund within the meaning of paragraph (e)(2) of this section.
(B) Because Fund is created or organized under the laws of Country
B, Fund satisfies the requirement of paragraph (c)(2)(i) of this
section.
(C) The only benefits that Fund provides are retirement and pension
benefits described in paragraph (e)(14) of this section and ancillary
benefits (that is, the incidental death benefits) described in
paragraph (e)(1) of this section, both of which constitute qualified
benefits described in paragraph (e)(8) of this section, to qualified
recipients, described in paragraph (e)(12)(i)(B) of this section.
Furthermore, Fund satisfies the requirements of the present valuation
test as described in paragraphs (c)(2)(ii)(B) and (C) of this section.
Accordingly, Fund is established by Employer to provide retirement and
pension benefits to qualified recipients in consideration for services
rendered by such qualified recipients to Employer and S1, and Fund
satisfies the requirement of paragraph (c)(2)(ii) of this section.
(D) No single qualified recipient has a right to more than five
percent of the assets or income of the eligible fund. Accordingly, Fund
satisfies the requirement of paragraph (c)(2)(iii) of this section.
(E) Fund is regulated and annually provides to the relevant tax
authorities in the foreign jurisdiction in which it is established or
operates the amount of qualified benefits provided to each qualified
recipient by the eligible fund. Accordingly, Fund satisfies the
requirements of paragraph (c)(2)(iv) of this section.
(F) Fund is not subject to income tax on its investment income.
Accordingly, Fund satisfies the requirement of paragraph (c)(2)(v) of
this section.
(G) Because Fund meets the requirements of paragraph (c)(2) of this
section, Fund is treated as a qualified foreign pension fund.
Furthermore, because Fund held no United States real property interests
as of January 1, 2023, the earliest date during an uninterrupted period
ending on June 1, 2026, the date of the disposition, in which it
satisfied the requirements of paragraph (c)(2) of this section, Fund is
a qualified holder under paragraph (d)(2) of this section. All of
Fund's assets are held in a qualified segregated account within the
meaning of paragraph (e)(13) of this section. Accordingly, under
paragraph (b) of this section, the $100x gain attributable to the
disposition of Property is not subject to section 897(a).
(3) Example 3: Fund established by an employer at the direction of
a foreign jurisdiction--(i) Facts. The facts are the same as in
paragraph (f)(2) of this section (Example 2), except that Fund was
established by Employer at the direction of Country B and, in addition
to being established to provide retirement and pension benefits to
current and former employees of Employer and S1, Fund was also
established to provide retirement and pension benefits to other
employees. All employees that are beneficiaries provide contributions
to Fund. Fund makes a determination on at least an annual basis using a
reasonable method to measure the number of participants in the Fund who
are not current and former employees of Employer and S1. Each time such
a determination is made, Fund finds that such employees constitute less
than five percent of Fund's total qualified recipients and do not have
a right to more than five percent of the assets or income of Fund.
(ii) Analysis. Fund satisfies the requirements of paragraph
(c)(2)(ii)(A)(1)(i) of this section because it was established by, or
at the direction of, Country B to provide retirement and pension
benefits to participants or beneficiaries that are current or former
employees or persons designated by such employees as a result of
services rendered by such employees to their employers. Fund also
satisfies the requirements of paragraph (c)(2)(ii)(A)(1)(ii) of this
section because it was established by Employer to provide retirement
and pension benefits to participants or beneficiaries that are current
or former employees or persons designated by such employees in
consideration for services rendered by such employees to Employer and
S1. Because it satisfies the requirements of both such provisions,
under paragraph (c)(2)(ii)(A)(2) of this section, Fund will be treated
solely as an eligible fund under paragraph (c)(2)(ii)(A)(1)(ii) of this
section. As a result, Fund must meet the reporting requirements
described in paragraph (c)(2)(iv)(A) of this section and must apply the
definition of qualified recipient described in paragraphs (e)(12)(i)(B)
and (C) of this section. Because Fund makes a determination on at least
an annual basis using a reasonable method to measure the number of
participants in the Fund who are not current and former employees of
Employer and S1, finding that such employees constitute less than five
percent of Fund's total qualified recipients and do not have a right to
more than five percent of the assets or income of Fund, the requirement
of paragraph (c)(2)(ii)(B)(1) of this section, requiring that all of
the benefits that an eligible fund provides are provided to qualified
recipients, is considered satisfied. Because Fund meets the
requirements of paragraph (c)(2) of this section, Fund is treated as a
qualified foreign pension fund under paragraph (b) of this section.
Accordingly, the $100x gain attributable to the disposition of Property
is not subject to section 897(a).
(4) Example 4: Employer controlled organization or arrangement--(i)
Facts. The facts are the same as in paragraph (f)(2) of this section
(Example 2), except that S2, a Country B corporation that is wholly
owned by Employer, performs all tax compliance functions for Employer,
S1, and S2, including information reporting with respect to Fund
participants.
(ii) Analysis. For purposes of the requirements of paragraph (c)(2)
of this section, Fund and S2 are an organization or arrangement that is
treated as a single entity under paragraph (c)(3)(i)(A) of this section
and an eligible fund under paragraph (e)(2) of this section with
respect to the qualified segregated account held by Fund. Because the
eligible fund composed of Fund and S2 satisfies the requirements of
paragraph (c)(2) of this section (including the rule under
[[Page 80061]]
paragraph (c)(3)(i)(A) of this section that each entity satisfy the
foreign organization requirement of paragraph (c)(2)(i) of this
section) with respect to the qualified benefits provided to the
qualified recipients out of the eligible fund's qualified segregated
account (determined in accordance with paragraph (c)(3)(i)(B) of this
section), the eligible fund that is composed of Fund and S2 constitutes
a qualified foreign pension fund. Furthermore, the requirements for
qualified holder status are satisfied, as described in paragraph (f)(2)
of this section. Thus, under paragraph (b) of this section, the $100x
gain attributable to the disposition of Property is not subject to
section 897(a).
(5) Example 5: Third-party assumption of pension liabilities--(i)
Facts. The facts are the same as in paragraph (f)(2) of this section
(Example 2), except that Fund does not purchase Property on January 1,
2024. In addition, Fund anticipates $100x of qualified benefits will be
paid each year beginning on January 1, 2028. Fund enters into an
agreement with Guarantor, a privately held Country B corporation, which
provides that Fund will, on January 30, 2023, cede a portion of its
assets to Guarantor in exchange for annual payments of $100x beginning
on January 1, 2028 and continuing until one or more previously
identified participants (and their designees) ceases to be eligible to
receive benefits. Guarantor has discretion to invest the ceded assets
as it chooses, subject to certain agreed upon investment restrictions.
Pursuant to its agreement with Fund, Guarantor must maintain Segregated
Pool, a pool of assets securing its obligations under its agreement
with Fund. The value of Segregated Pool must exceed a specified amount
(determined based on an agreed upon formula) until Guarantor's payment
obligations are completed, and any remaining assets in Segregated Pool
(that is, assets exceeding the required payments to Fund) are retained
by Guarantor. Guarantor bears all investment risk with respect to
Segregated Pool. Accordingly, Guarantor is required to make annual
payments of $100x to Fund regardless of the performance of Segregated
Pool. On January 1, 2024, Guarantor purchases stock in Company A, a
United States real property holding company that is a United States
real property interest, and holds the Company A stock in Segregated
Pool. On June 1, 2027, Guarantor sells the stock in Company A,
realizing a gain of $100x.
(ii) Analysis. The Segregated Pool is not a qualified segregated
account, because it is not maintained for the sole purpose of funding
qualified benefits to qualified recipients, and because income
attributable to assets in the Segregated Pool (including the Company A
stock) may inure to Guarantor, which is not a qualified recipient.
Accordingly, Fund and Guarantor do not qualify as an organization or
arrangement that is an eligible fund with respect to the Company A
stock. Therefore, Guarantor is not exempt under paragraph (b) of this
section with respect to the $100x of gain realized in connection with
the sale of its shares in Company A.
(6) Example 6: Asset manager--(i) Facts. The facts are the same as
in paragraph (f)(5) of this section (Example 5) except that instead of
ceding legal ownership of a portion of its assets to Guarantor, Fund
transfers the assets into Trust with respect to which Fund is the sole
beneficiary on January 30, 2023, and Trust purchases stock in Company A
on January 1, 2024. Guarantor has exclusive management authority over
the Trust assets and is entitled to a reasonable fixed management fee
which it withdraws annually from Trust's assets. On June 1, 2027, Trust
sells the stock in Company A, realizing a gain of $100x.
(ii) Analysis. For purposes of testing the requirements of
paragraph (c)(2) of this section, Fund and Trust are an organization or
arrangement that is treated as a single entity under paragraph
(c)(3)(i)(A) of this section and an eligible fund under paragraph
(e)(2) of this section. Assets held by Trust are held in a qualified
segregated account, and those assets are the assets that are relevant
for purposes of determining whether the eligible fund composed of Fund
and Trust meets the requirements of paragraph (c)(2) of this section.
The eligible fund that is composed of Fund and Trust is treated as
established by Employer notwithstanding that Guarantor provides
management services. See paragraph (c)(2)(ii)(A)(3) of this section.
Paragraph (e)(13)(ii) of this section provides that the assets held by
an eligible fund in a qualified segregated account may be used to
satisfy reasonable expenses of the eligible fund, such that the
reasonable fixed management fee paid to Guarantor does not cause the
assets held in Trust to fail to be treated as held in a qualified
segregated account. All of the other requirements for qualified foreign
pension fund status are satisfied by the eligible fund that is composed
of Fund and Trust, as described in paragraph (f)(2) of this section.
The eligible fund that is composed of Fund and Trust is a qualified
holder under paragraph (d)(2) of this section because it held no United
States real property interests on January 1, 2023, the earliest date
during an uninterrupted period ending on June 1, 2027, the date of the
disposition of Company A stock, in which it satisfied the requirements
of paragraph (c)(2) of this section. The eligible fund that is composed
of Fund and Trust is therefore exempt under paragraph (b) of this
section with respect to the $100x of gain realized in connection with
the sale by Trust of the shares in Company A.
(7) Example 7: Partnership--(i) Facts. The facts are the same as in
paragraph (f)(5) of this section (Example 5) except that instead of
ceding legal ownership of the assets to Guarantor, Fund contributes the
assets to a partnership (PRS) formed with Guarantor and PRS purchases
stock in Company A on January 30, 2023. Guarantor receives a profits
interest in the partnership that is reasonable in light of Guarantor's
management activity. Guarantor has no direct or indirect ownership in
PRS assets, and the partnership agreement provides that upon
dissolution, PRS assets would be distributed to Fund. Guarantor serves
as the general partner of PRS and has discretionary authority to buy
and sell PRS assets without approval from Fund. On June 1, 2027, PRS
sells the stock in Company A, realizing a gain of $100x.
(ii) Analysis. All of Fund's assets, including the assets held by
PRS that are treated as held proportionately by Fund under paragraph
(c)(3)(ii) of this section, are held in a qualified segregated account
within the meaning of paragraph (e)(13) of this section. See paragraph
(f)(2)(ii)(A) of this section (Example 2). The eligible fund that is
composed of Fund is treated as established by Employer notwithstanding
that Guarantor provides management services to PRS. See paragraphs
(c)(2)(ii)(A)(3) and (c)(3)(ii) of this section. All of the other
requirements for qualified foreign pension fund status are satisfied by
Fund as described in paragraphs (f)(2)(ii)(B) through (F) of this
section, and Fund is a qualified holder as described in paragraph
(f)(2)(ii)(G) of this section. Accordingly, Fund is exempt under
paragraph (b) of this section with respect to its allocable share of
the $100x of gain realized in connection with the sale by PRS of the
shares in Company A. Guarantor is not exempt under paragraph (b) of
this section with respect to its allocable share of the $100x of gain
realized in connection with the sale by PRS of the shares in Company A
because Guarantor is neither part of the organization or arrangement
that forms Fund nor a qualified holder under paragraph (d) of
[[Page 80062]]
this section that maintains qualified segregated accounts.
(8) Example 8: Not a qualified holder--(i) Facts. Fund is a
qualified foreign pension fund organized in Country C that meets the
requirements of paragraph (c)(2) of this section. Fund owns all the
outstanding stock of OpCo, a manufacturing corporation organized in
Country C, in a qualified segregated account maintained by Fund. OpCo
was originally formed by a person other than Fund on January 1, 2023.
Fund purchased all of the stock of OpCo on November 1, 2023 for the
purpose of conducting the manufacturing business and utilizing the
business profits to fund pension liabilities. During the period from
January 1, 2023, through October 31, 2023, OpCo was not a qualified
foreign pension fund, a part of a qualified foreign pension fund, or a
qualified controlled entity. On January 30, 2023, OpCo purchased
Property A, a United States real property interest, from a third party.
For all periods after Fund acquired OpCo, OpCo must either retain or
distribute to Fund all of its net earnings, and upon dissolution, must
distribute all of its assets to its stockholder (that is, Fund) after
satisfaction of liabilities to its creditors. On June 1, 2024, OpCo
realizes $100x of gain on the disposition of Property A.
(ii) Analysis. (A) A qualified controlled entity described in
paragraph (e)(9) of this section includes any corporation organized
under the laws of a foreign jurisdiction all the interests of which are
owned by one or more qualified foreign pension funds directly or
indirectly through one or more qualified controlled entities. Fund is a
qualified foreign pension fund that wholly owns OpCo. Accordingly, OpCo
is a qualified controlled entity for the period when it is owned by
Fund beginning on November 1, 2023.
(B) Under paragraph (d)(1) of this section, a qualified controlled
entity is a qualified holder only if either, under paragraph (d)(2) of
this section, the qualified controlled entity owned no United States
real property interests as of the earliest date during an uninterrupted
period ending on the date of the disposition or distribution in which
the qualified controlled entity satisfied the requirements of paragraph
(e)(9) of this section, or, under paragraph (d)(3) of this section, the
qualified controlled entity satisfies the requirements of paragraph
(e)(9) of this section throughout the entire testing period. Because
OpCo owned a United States real property interest as of November 1,
2023, the earliest date during an uninterrupted period ending on the
date of the disposition during which it satisfied the requirements of
paragraph (e)(9) of this section, OpCo cannot satisfy the requirements
of paragraph (d)(2) of this section and must instead satisfy the
requirements of paragraph (d)(3) of this section to be a qualified
holder. Under paragraph (d)(3) of this section, a qualified holder does
not include any entity that was not a qualified foreign pension fund, a
part of a qualified foreign pension fund, or a qualified controlled
entity at any time during the testing period. The testing period with
respect to OpCo is the period from January 1, 2023 (the date of OpCo's
formation), to June 1, 2024 (the date of the disposition). Because OpCo
was not a qualified foreign pension fund, a part of a qualified foreign
pension fund, or a qualified controlled entity from January 1, 2023, to
October 31, 2023, OpCo was not a qualified foreign pension fund, a part
of a qualified foreign pension fund, or a qualified controlled entity
at all times during the testing period. Accordingly, OpCo is not a
qualified holder with respect to the disposition of Property A, and the
$100x of gain recognized by OpCo is not exempt from tax under section
897(l), regardless of the amount of unrealized gain in Property A as of
November 1, 2023.
(9) Example 9: 48-month alternative test--(i) Facts. Fund is a
qualified foreign pension fund organized in Country C that, except as
otherwise noted, meets the requirements of paragraph (c)(2) of this
section. Fund owns all the outstanding stock of OpCo, a manufacturing
corporation organized in Country C and formed by Fund on January 1,
2023, in a qualified segregated account maintained by Fund. On January
30, 2023, OpCo purchased Property A, a United States real property
interest, from a third party. OpCo either retains or distributes to
Fund all of its net earnings, and upon dissolution, must distribute all
of its assets to its stockholder (that is, Fund) after satisfaction of
liabilities to its creditors. On June 1, 2027, OpCo realizes $100x of
gain on the disposition of Property A. Fund reasonably expected to
provide $90x of retirement and pension benefits and $100x of qualified
benefits for the valuations that it performed pursuant to paragraph
(c)(2)(ii)(C)(1) of this section on December 31, 2023, December 31,
2024, and December 31, 2025. Fund reasonably expected to provide $160x
of retirement and pension benefits and $200x of qualified benefits for
the valuation that it performed pursuant to paragraph (c)(2)(ii)(C)(1)
of this section on December 31, 2026.
(ii) Analysis. In each of the years ending on December 31, 2023,
December 31, 2024, and December 31, 2025, the valuation performed
pursuant to paragraph (c)(2)(ii)(C)(1) of this section demonstrates
that that the requirements of paragraph (c)(2)(ii)(B)(2) of this
section have been met because $90x of retirement and pension benefits
constitutes 90 percent of the total $100x of qualified benefits. For
the year ending on December 31, 2026, the valuation performed pursuant
to paragraph (c)(2)(ii)(C)(1) of this section does not demonstrate that
that the requirements of paragraph (c)(2)(ii)(B)(2) of this section
have been met because $160x of retirement and pension benefits
constitutes only 80 percent of the total $200x of qualified benefits.
Thus, Fund does not meet the requirements of paragraph (c)(2)(ii)(C)(1)
of this section for the year ending on December 31, 2026. However,
under the 48-month alternative calculation in paragraph
(c)(2)(ii)(C)(2) of this section, Fund satisfies the requirement that
it reasonably expects to provide 85 percent retirement and pension
benefits to qualified recipients as of December 31, 2026. This is
because when averaging the values (not percentages) of the qualified
benefits and retirement and pension benefits that Fund reasonably
expected to provide from the valuations performed over the preceding 48
months (including the most recent valuation), Fund divides the total
retirement and pension benefits of $430x ($90x + $90x + $90x + $160x)
by the total qualified benefits that it reasonably expected to provide
of $500x ($100x + $100x + $100x + $200x) for an average of 86 percent.
Under paragraph (c)(2)(ii)(C)(3) of this section, Fund may rely on
either the most recent present valuation described in paragraph
(c)(2)(ii)(C)(1) of this section or the alternative calculation in
paragraph (c)(2)(ii)(C)(2) of this section, both of which are
determined as of December 31, 2026. Because Fund satisfies the
requirements of paragraph (c)(2)(ii)(B)(2) of this section under the
test in paragraph (c)(2)(ii)(C)(2) of this section, even though it does
not do so under the test in paragraph (c)(2)(ii)(C)(1) of this section,
Fund is a qualified foreign pension fund with respect to the
disposition on June 1, 2027. Because OpCo is held by a qualified
foreign pension fund as of the date of the disposition, OpCo is a
qualified controlled entity within the meaning of paragraph (e)(9) of
this section. Accordingly, the $100x of gain realized by OpCo is exempt
from tax under section 897(l).
[[Page 80063]]
(10) Example 10: 48-month alternative test with multiple valuations
in the same year--(i) Facts. The facts are the same as in paragraph
(f)(9) of this section (Example 9), except that in the year ending
December 31, 2023, Fund carried out two valuations pursuant to
paragraph (c)(2)(ii)(C)(1) of this section, one on June 30, 2023 and
the second on December 31, 2023. For each valuation, Fund reasonably
expected to provide $90x of retirement and pension benefits and $100x
of qualified benefits. In addition, in the year ending on December 31,
2026, pursuant to a valuation carried out under paragraph
(c)(2)(ii)(C)(1) of this section, Fund reasonably expected to provide
$150x retirement and pension benefits and $200x of qualified benefits.
(ii) Analysis. In each of the years ending on December 31, 2023,
December 31, 2024, and December 31, 2025 (including the two valuations
performed in 2023), the valuation performed pursuant to paragraph
(c)(2)(ii)(C)(1) of this section demonstrates that the requirements of
paragraph (c)(2)(ii)(B)(2) of this section have been met because $90x
of retirement and pension benefits constitutes 90 percent of the total
$100x of qualified benefits. For the year ending on December 31, 2026,
the valuation performed pursuant to paragraph (c)(2)(ii)(C)(1) of this
section does not demonstrate that the requirements of paragraph
(c)(2)(ii)(B)(2) of this section have been met because $150x of
retirement and pension benefits constitutes 75 percent of the total
$200x of qualified benefits. Thus, Fund does not meet the requirements
of paragraph (c)(2)(ii)(C)(1) of this section for the year ending on
December 31, 2026. Under the 48-month alternative calculation in
paragraph (c)(2)(ii)(C)(2) of this section, Fund also does not satisfy
the requirement that it reasonably expects to provide 85 percent
retirement and pension benefits to qualified recipients as of December
31, 2026. This is because when averaging the values (not percentages)
of the qualified benefits and retirement and pension benefits that Fund
reasonably expected to provide from the valuations performed over the
preceding 48 months (including the most recent valuation), Fund must
use a weighted average whereby values are adjusted when the length of
valuation periods differs. In this case, each of the two valuations in
2023 must be divided by two for a total weighted average for each
valuation of $45x retirement and pension benefits and $50x of qualified
benefits. When Fund then divides the total retirement and pension
benefits that it reasonably expected to provide of $420x ($45x + $45x +
$90x + $90x + $150x) by the total qualified benefits that it reasonably
expected to provide of $500x ($50x + $50x + $100x + $100x + $200x), the
average is 84 percent. Because Fund does not satisfy the requirements
of paragraph (c)(2)(ii)(B)(2) of this section under the test in
paragraph (c)(2)(ii)(C)(2) of this section or the test in paragraph
(c)(2)(ii)(C)(1) of this section, Fund is not a qualified foreign
pension fund with respect to the disposition on June 1, 2027. Because
OpCo is not held by a qualified foreign pension fund as of the date of
the disposition, OpCo is not a qualified controlled entity within the
meaning of paragraph (e)(9) of this section. Accordingly, the $100x of
gain realized by OpCo is not exempt from tax under section 897(l).
(11) Example 11: Qualified foreign pension fund as qualified
holder--(i) Facts. The facts are the same as in paragraph (f)(10) of
this section (Example 10), except that OpCo does not dispose of
Property A on June 1, 2027 and Fund reasonably expects to provide 85
percent of retirement and pension benefits to qualified recipients in
the future in each of the annual present valuations it performs as of
December 31, 2027 through December 31, 2033. Fund also satisfies the
other requirements of paragraph (c)(2) of this section during this
period. On April 1, 2029, Fund purchases Property B, a United States
real property interest, and holds it in a qualified segregated account.
On June 1, 2034, Fund realizes $100x of gain on the disposition of
Property B and OpCo realizes $100x of gain on the disposition of
Property A. At least 85 percent and no more than five percent of the
actual value of the aggregate benefits provided by Fund before December
31, 2033, the most recent present value determination, were retirement
and pension benefits and non-ancillary benefits, respectively.
(ii) Analysis. (A) Because Fund reasonably expected to provide 85
percent of retirement and pension benefits to qualified recipients as
of the valuation performed on December 31, 2033, and it met the other
requirements of paragraph (c)(2) of this section, Fund is a qualified
foreign pension fund under paragraph (c)(2)(ii)(C)(3) of this section
for the twelve months succeeding the most recent valuation, which
includes June 1, 2034, the date of the disposition of Property A and
Property B.
(B) Fund is a qualified holder under paragraph (d)(2) of this
section because Fund did not own any United States real property
interests as of December 31, 2027, the earliest date during the
uninterrupted period ending on the date of the disposition, June 1,
2034, during which it satisfied the requirements of paragraph (c)(2) of
this section and therefore qualified as a qualified foreign pension
fund. Fund is eligible for the exemption under section 897(l) with
respect to the disposition of Property B because it held Property B in
a qualified segregated account. Thus, the $100x of gain realized by
Fund on the disposition of Property B is exempt from tax under section
897(l).
(C) Because OpCo owned Property A, a United States real property
interest, as of December 31, 2027, the earliest date during an
uninterrupted period ending on the date of the disposition, June 1,
2034, during which it was a qualified controlled entity, OpCo cannot
satisfy the requirements of paragraph (d)(2) of this section and must
instead satisfy the requirements of paragraph (d)(3) of this section to
be a qualified holder. The testing period with respect to OpCo,
determined under paragraph (d)(3)(ii) of this section, ends on June 1,
2034 (the date of the disposition) and begins on June 1, 2024 (the date
that is ten years before the disposition date). Because Fund failed to
qualify as a qualified foreign pension fund as of December 31, 2026,
OpCo was not continuously owned by a qualified foreign pension fund for
the duration of the testing period, and thus did not qualify as a
qualified foreign pension fund, part of a qualified foreign pension
fund, or a qualified controlled entity for the duration of the testing
period. As a result, OpCo is not a qualified holder under paragraph
(d)(3) of this section. Accordingly, the $100x of gain recognized by
OpCo on the disposition of Property A is not exempt from tax under
section 897(l).
(12) Example 12: Qualified controlled entity as qualified holder--
(i) Facts. Fund is a qualified foreign pension fund organized in
Country C that meets the requirements of paragraph (c)(2) of this
section as of December 31, 2022 and December 31, 2023. Fund purchases
an interest in Company A, a United States real property holding
company, on June 1, 2024. As of December 31, 2024, Fund fails to
satisfy the present valuation requirement of paragraph (c)(2)(ii)(B)(2)
of this section and does not satisfy the alternative calculation under
paragraph (c)(2)(ii)(C)(2) of this section. From December 31, 2025,
through December 31, 2030, Fund satisfies the present valuation
requirement of paragraph (c)(2)(ii)(B)(2) of this section and meets all
other requirements in paragraph (c)(2) of this section to be treated as
a qualified foreign pension fund. On June
[[Page 80064]]
1, 2026, Fund purchases all of the stock of Company B, a Country C
corporation that owns no United States real property interests and is
not a qualified foreign pension fund, a part of a qualified foreign
pension fund, or a qualified controlled entity. On January 1, 2027,
Company B purchases Property D, a United States real property interest.
Company B retains or distributes to Fund all of its net earnings, and
upon dissolution, must distribute all of its assets to its stockholders
(that is, Fund) after satisfaction of liabilities to its creditors. On
June 1, 2031, Fund realizes $100x of gain on the disposition of stock
in Company A, and Company B realizes $100x of gain on the disposition
of Property D.
(ii) Analysis. (A) Fund owned Company A, a United States real
property holding company, as of December 31, 2025, the earliest date
during an uninterrupted period ending on the date of the disposition,
June 1, 2031, during which Fund satisfied the requirements of paragraph
(c)(2) of this section. Accordingly, to be a qualified holder, Fund
must satisfy the requirements of paragraph (d)(3) of this section. The
testing period with respect to Fund, determined under paragraph (d)(3)
of this section, ends on June 1, 2031 (the date of disposition) and
begins on June 1, 2021 (the date that is ten years before the
disposition date). Fund is not a qualified holder because it failed to
satisfy the requirements of paragraph (c)(2) of this section as of
December 31, 2024 and, thus, has not satisfied the requirements of
paragraph (c)(2) of this section continuously for the duration of the
testing period. Accordingly, the $100x of gain realized by Fund on the
disposition of the stock of Company A is not exempt from tax under
section 897(l).
(B) Although Fund is not a qualified holder as of June 1, 2031, the
date of Company B's disposition of Property D, Fund is still a
qualified foreign pension fund because it satisfies the requirements of
paragraph (c)(2) of this section. Company B is therefore a qualified
controlled entity within the meaning of paragraph (e)(9) of this
section as of June 1, 2031, because it is wholly owned by Fund, a
qualified foreign pension fund. Notwithstanding that Fund is not a
qualified holder under either paragraph (d)(2) or (3) of this section,
Company B is a qualified holder under paragraph (d)(2) of this section
because Company B did not own a United States real property interest as
of June 1, 2026, the earliest date during an uninterrupted period
ending on June 1, 2031 (the date of the disposition) during which
Company B was a qualified controlled entity. Lastly, all of Company B's
assets constitute a qualified segregated account. Accordingly, the
$100x of gain realized by Company B on the disposition of Property D is
exempt from tax under section 897(l).
(g) Applicability date--(1) In general. Except as otherwise
provided in paragraph (g)(2) of this section, this section applies to
dispositions of United States real property interests and distributions
described in section 897(h) occurring on or after December 29, 2022.
(2) Certain provisions. Paragraphs (b)(1), (d), (e)(5) and (e)(9)
of this section apply with respect to dispositions of United States
real property interests and distributions described in section 897(h)
occurring on or after June 6, 2019.
(3) Early application. An eligible fund may choose to apply this
section with respect to dispositions and distributions occurring on or
after December 18, 2015, and before December 29, 2022, provided that
the eligible fund, and all persons bearing a relationship to the
eligible fund described in section 267(b) or 707(b), consistently apply
the rules in this section for all relevant years. An eligible fund that
chooses to apply this section pursuant to this paragraph (g)(3) must
apply the principles of paragraph (d)(4)(i) of this section to any
valuation requirements with respect to dates preceding December 18,
2015.
0
Par. 3. Section 1.1441-3 is amended by revising paragraphs (c)(4)(i)
introductory text, (c)(4)(i)(B)(2), and (c)(4)(i)(C) and adding
paragraph (c)(4)(iii) to read as follows:
Sec. 1.1441-3 Determination of amounts to be withheld.
* * * * *
(c) * * *
(4) * * *
(i) In general. A distribution from a U.S. Real Property Holding
Corporation (USRPHC) (or from a corporation that was a USRPHC at any
time during the five-year period ending on the date of distribution)
with respect to stock that is a U.S. real property interest under
section 897(c) or from a Real Estate Investment Trust (REIT) or other
entity that is a qualified investment entity (QIE) under section
897(h)(4) with respect to its stock is subject to the withholding
provisions under section 1441 (or section 1442 or 1443) and section
1445. A USRPHC (other than a REIT or other entity that is a QIE) making
a distribution shall be treated as satisfying its withholding
obligations under both sections if it withholds in accordance with one
of the procedures described in either paragraph (c)(4)(i)(A) or (B) of
this section. A USRPHC must apply the same withholding procedure to all
the distributions made during the taxable year. However, the USRPHC may
change the applicable withholding procedure from year to year. For
rules regarding distributions by REITs and other entities that are
QIEs, see paragraph (c)(4)(i)(C) of this section. To the extent
withholding under sections 1441, 1442, or 1443 applies under this
paragraph (c)(4)(i) to any portion of a distribution that is a
withholdable payment, see paragraph (a)(2) of this section for rules
coordinating withholding under chapter 4.
* * * * *
(B) * * *
(2) Withhold under section 1445(e)(3) and Sec. 1.1445-5(e) on the
remainder of the distribution (except for any portion paid to a
withholding qualified holder (as defined in Sec. 1.1445-1(g)(11)) or
on such smaller portion based on a withholding certificate obtained in
accordance with Sec. 1.1445-5(e)(3)(iv).
(C) Coordination with REIT/QIE withholding. In the case of a
distribution from a REIT or other entity that is a QIE, withholding is
required as described in paragraph (c)(4)(i)(C)(1) and (2) of this
section.
(1) Withholding is required under section 1441 (or 1442 or 1443)
on--
(i) The portion of the distribution that is not designated (for
REITs) or reported (for regulated investment companies that are QIEs)
as a capital gain dividend, a return of basis, or a distribution in
excess of a shareholder's adjusted basis in the stock of the REIT or
QIE that is treated as a capital gain under section 301(c)(3); and
(ii) Any portion of a capital gain dividend from a REIT or other
entity that is a QIE that is not treated as gain attributable to the
sale or exchange of a U.S. real property interest pursuant to the
second sentence of section 897(h)(1)).
(2) Withholding is required under section 1445 with respect to--
(i) A distribution in excess of a shareholder's adjusted basis in
the stock of the REIT or QIE is, unless the interest in the REIT or QIE
is not a U.S. real property interest (for example, an interest in a
domestically controlled REIT or QIE under section 897(h)(2)) or the
distribution is paid to a withholding qualified holder (as defined in
Sec. 1.1445-1(g)(11)); and
(ii) Any portion of a capital gain dividend that is attributable to
the sale or exchange of a U.S. real property interest under section
897(h)(1), unless it is paid to a withholding qualified holder (as
defined in Sec. 1.1445-1(g)(11)). See Sec. 1.1445-8.
* * * * *
[[Page 80065]]
(iii) Applicability date. Paragraphs (c)(4)(i), (c)(4)(i)(B)(2),
and (c)(4)(i)(C) of this section apply to distributions made by a
USRPHC or a QIE occurring on or after December 29, 2022. For
distributions made by a USRPHC or a QIE occurring before December 29,
2022, see Sec. 1.1441-3(c)(4)(i), (c)(4)(i)(B)(2), and (c)(4)(i)(C),
as contained in 26 CFR part 1, revised as of April 1, 2021.
* * * * *
0
Par. 4. Section 1.1445-1 is amended by adding paragraph (g)(11) to read
as follows:
Sec. 1.1445-1 Withholding on dispositions of U.S. real property
interests by foreign persons: In general.
* * * * *
(g) * * *
(11) Withholding qualified holder. A withholding qualified holder
means a qualified holder (under Sec. 1.897(l)-1(d)), and a foreign
partnership all of the interests of which are held by qualified holders
(under Sec. 1.897(l)-1(d)), including through one or more
partnerships.
* * * * *
0
Par. 5. Section 1.1445-2 is amended by:
0
1. Revising paragraph (b)(2)(i);
0
2. Adding paragraph (b)(2)(vi); and
0
3. Adding two sentences at the end of paragraph (e).
The revisions and addition read as follows:
Sec. 1.1445-2 Situations in which withholding is not required under
section 1445(a).
* * * * *
(b) * * *
(2) * * *
(i) In general. The rules in this paragraph (b)(2)(i) apply for
purposes of the transferor's certification of non-foreign status
(including a certification of non-foreign status provided by a
withholding qualified holder (as defined in Sec. 1.1445-1(g)(11)).
(A) A transferee of a U.S. real property interest is not required
to withhold under section 1445(a) if, before or at the time of the
transfer, the transferor furnishes to the transferee a certification
that is signed under penalties of perjury and--
(1) States that the transferor is not a foreign person; and
(2) Sets forth the transferor's name, identifying number and home
address (in the case of an individual) or office address (in the case
of an entity).
(B) For purposes of paragraph (b)(2)(i)(A) of this section, a
foreign person is a nonresident alien individual, foreign corporation,
foreign partnership, foreign trust, or foreign estate, except that a
withholding qualified holder (as defined in Sec. 1.1445-1(g)(11)) is
not a foreign person. Additionally, a foreign corporation that has made
a valid election under section 897(i) is generally not treated as a
foreign person for purposes of section 1445. In this regard, see Sec.
1.1445-7. Pursuant to Sec. 1.897-1(p), an individual's identifying
number is the individual's Social Security number and any other
person's identifying number is its U.S. employer identification number
(EIN), or, if the transferor is a withholding qualified holder (as
defined in Sec. 1.1445-1(g)(11)) that does not have a U.S. taxpayer
identification number, a foreign tax identification number issued by
its jurisdiction of residence. A certification pursuant to this
paragraph (b) must be verified as true and signed under penalties of
perjury by a responsible officer in the case of a corporation, by a
general partner in the case of a partnership, and by a trustee,
executor, or equivalent fiduciary in the case of a trust or estate. No
particular form is needed for a certification pursuant to this
paragraph (b), nor is any particular language required, so long as the
document meets the requirements of this paragraph (b)(2)(i), except
that, with respect to a certification submitted by a withholding
qualified holder (as defined in Sec. 1.1445-1(g)(11)), the transferor
must state on the certification that it is treated as a non-foreign
person because it is a withholding qualified holder and must further
specify whether it qualifies as a withholding qualified holder because
it is a qualified holder under Sec. 1.897(l)-1(d) or a foreign
partnership that satisfies the requirements of Sec. 1.1445-1(g)(11).
Samples of acceptable certifications are provided in paragraph
(b)(2)(iv) of this section.
* * * * *
(vi) Form W-8EXP. A certification of non-foreign status may be made
by a withholding qualified holder (as defined under Sec. 1.1445-
1(g)(11)) as provided in paragraph (b)(2)(i) of this section to certify
its qualified holder status. A certification of non-foreign status
under paragraph (b)(2)(i) of this section also includes a certification
made on a Form W-8EXP (or its successor) that states that the
transferor is treated as a non-foreign person because it is a
withholding qualified holder and must further specify whether it
qualifies as a withholding qualified holder because it is a qualified
holder under Sec. 1.897(l)-1(d) or a foreign partnership that
satisfies the requirements of Sec. 1.1445-1(g)(11). The certification
must also meet all of the other requirements for a valid Form W-8EXP
(or its successor) as provided on the form and the instructions to the
form. A qualified holder may not provide a certification of non-foreign
status on a Form W-9 (or its successor) as permitted in paragraph
(b)(2)(v) of this section.
* * * * *
(e) * * * Paragraphs (b)(2)(i) and (b)(2)(vi) of this section,
apply with respect to dispositions of U.S. real property interests and
distributions described in section 897(h) occurring on or after
December 29, 2022. For dispositions of U.S. real property interests and
distributions described in section 897(h) occurring before December 29,
2022, see Sec. 1.1445-2(b)(2)(i) and (b)(2)(vi), as contained in 26
CFR part 1, revised as of April 1, 2021.
0
Par. 6. Section 1.1445-5 is amended by revising paragraphs
(b)(3)(ii)(A), (B), and (D) and adding two sentences at the end of
paragraph (h) to read as follows:
Sec. 1.1445-5 Special rules concerning distributions and other
transactions by corporations, partnerships, trusts, and estates.
* * * * *
(b) * * *
(3) * * *
(ii) * * *
(A) In general. For purposes of this section, an entity or
fiduciary may treat any holder of an interest in the entity as a U.S.
person if that interest-holder furnishes to the entity or fiduciary a
certification stating that the interest-holder is not a foreign person,
in accordance with the provisions of paragraph (b)(3)(ii)(B) of this
section. In general, a foreign person is a nonresident alien
individual, foreign corporation, foreign partnership, foreign trust, or
foreign estate, except that a withholding qualified holder (as defined
in Sec. 1.1445-1(g)(11)) is not a foreign person for purposes of this
section.
(B) Procedural rules. The rules in this paragraph (b)(3)(ii)(B)
apply for purposes of the interest-holder's certification of non-
foreign status (including a certification of non-foreign status
provided by a withholding qualified holder (as defined in Sec. 1.1445-
1(g)(11)).
(1) An interest-holder's certification of non-foreign status must
be signed under penalties of perjury and must state--
(i) That the interest-holder is not a foreign person; and
(ii) The interest-holder's name, identifying number, home address
(in the case of an individual), or office address (in the case of an
entity), and place of incorporation (in the case of a corporation).
[[Page 80066]]
(2) For purposes of paragraph (b)(3)(ii)(B)(1) of this section, an
individual's identifying number is the individual's Social Security
number and any other person's identifying number is its U.S. employer
identification number (see Sec. 1.897-1(p)), or, if the interest-
holder is a withholding qualified holder (as defined in Sec. 1.1445-
1(g)(11)) that does not have a U.S. taxpayer identification number, a
foreign tax identification number issued by its jurisdiction of
residence. The certification must be signed by a responsible officer in
the case of a corporation, by a general partner in the case of a
partnership, and by a trustee, executor, or equivalent fiduciary in the
case of a trust or estate. No particular form is needed for a
certification pursuant to this paragraph (b)(3)(ii), nor is any
particular language required, so long as the document meets the
requirements of this paragraph, except that, with respect to
certification submitted by a withholding qualified holder (as defined
in Sec. 1.1445-1(g)(11)), the transferor must state on the
certification that it is treated as a non-foreign person because it is
a withholding qualified holder and must further specify whether it
qualifies as a withholding qualified holder because it is a qualified
holder under Sec. 1.897(l)-1(d) or a foreign partnership that
satisfies the requirements of Sec. 1.1445-1(g)(11). Samples of
acceptable certifications are provided in paragraph (b)(3)(ii)(E) of
this section.
(3) An entity may rely upon a certification pursuant to this
paragraph (b)(3)(ii)(B) for a period of two calendar years following
the close of the calendar year in which the certification was given. If
an interest holder becomes a foreign person (or no longer is treated as
a withholding qualified holder (as defined in Sec. 1.1445-1(g)(11))
and therefore is no longer treated as a non-foreign person for purposes
of withholding under section 1445 within the period described in the
preceding sentence, the interest-holder must notify the entity before
any further dispositions or distributions and upon receipt of such
notice (or any other notification of the foreign status of the
interest-holder) the entity may no longer rely upon the prior
certification. An entity that obtains and relies upon a certification
must retain that certification with its books and records for a period
of three calendar years following the close of the last calendar year
in which the entity relied upon the certification.
* * * * *
(D) Form W-8EXP. A certification of non-foreign status can be made
by a withholding qualified holder (as defined in Sec. 1.1445-1(g)(11))
as provided in this paragraph (b)(3)(ii) to certify its qualified
holder status. A certification of non-foreign status under this
paragraph (b)(3)(ii) also includes a certification made on a Form W-
8EXP that states that the interest-holder is treated as a non-foreign
person because it is a withholding qualified holder and must further
specify whether it qualifies as a withholding qualified holder because
it is a qualified holder under Sec. 1.897(l)-1(d) or a foreign
partnership that satisfies the requirements of Sec. 1.1445-1(g)(11).
The certification must also meet all of the other requirements for a
valid Form W-8EXP as provided on the form and the instructions to the
form. A qualified holder may not provide a certification of non-foreign
status on a Form W-9, as described in paragraph (b)(3)(iv) of this
section.
* * * * *
(h) * * * Paragraph (b)(3)(ii)(A) of this section applies with
respect to dispositions of U.S. real property interests and
distributions described in section 897(h) occurring on or after
December 29, 2022. For dispositions of U.S. real property interests and
distributions described in section 897(h) occurring before December 29,
2022, see Sec. 1.1445-5(b)(3)(ii)(A), as contained in 26 CFR part 1,
revised as of April 1, 2021.
0
Par. 7. Section 1.1445-8 is amended by revising paragraph (e) and
adding two sentences after the first sentence in paragraph (j) to read
as follows:
Sec. 1.1445-8 Special rules regarding publicly traded partnerships,
publicly traded trusts and real estate investment trusts (REITs).
* * * * *
(e) Determination of non-foreign status by withholding agent. A
withholding agent may rely on a certification of non-foreign status
pursuant to Sec. 1.1445-5(b)(3)(ii) to determine whether an interest
holder is not a foreign person. Reliance on these documents will excuse
the withholding agent from liability imposed under section 1445(e)(1)
in the absence of actual knowledge that the interest holder is a
foreign person. A withholding agent may also employ other means to
determine the status of an interest holder, but, if the agent relies on
such other means and the interest holder proves, in fact, to be a
foreign person (or, is not a withholding qualified holder (as defined
in Sec. 1.1445-1(g)(11)) and therefore is not treated as a non-foreign
person for purposes of withholding under section 1445), then the
withholding agent is subject to any liability imposed pursuant to
section 1445 and the regulations thereunder for failure to withhold.
See also Sec. 1.1445-5(b)(3)(ii)(B)(3) for the period during which a
withholding agent may rely on a certification of non-foreign status
submitted by a withholding qualified holder (as defined in Sec.
1.1445-1(g)(11)), which applies under this paragraph (e).
* * * * *
(j) * * * Paragraph (e) of this section applies with respect to
distributions made on or after December 29, 2022. For distributions
made before December 29, 2022, see Sec. 1.1445-8(e) as contained in 26
CFR part 1, as revised April 1, 2021. * * *
0
Par. 8. Section 1.1446-1 is amended by revising the second sentence of
paragraph (c)(2)(ii)(G) and by revising paragraph (c)(2)(ii)(H) to read
as follows:
Sec. 1.1446-1 Withholding tax on foreign partners' share of
effectively connected taxable income.
* * * * *
(c) * * *
(2) * * *
(ii) * * *
(G) * * * However, except as set forth in Sec. 1.1446-2(b)(4)(iii)
(regarding withholding qualified holders (as defined in Sec. 1.1445-
1(g)(11)) and Sec. 1.1446-3(c)(3) (regarding certain tax-exempt
organizations described in section 501(c)), the submission of Form W-
8EXP (or successor) will have no effect on whether there is a 1446 tax
due with respect to such partner's allocable share of partnership ECTI.
* * *
(H) Foreign corporations, certain foreign trusts, and foreign
estates. Consistent with the rules of this paragraph (c)(2) and
paragraph (c)(3) of this section, a foreign corporation, a foreign
trust (other than a foreign grantor trust described in paragraph
(c)(2)(ii)(E) of this section), or a foreign estate may generally
submit any appropriate Form W-8 (for example, Form W-8BEN-E or Form W-
8IMY) to the partnership to establish its foreign status for purposes
of section 1446. In addition, a foreign entity may also submit a
certification of non-foreign status (including a Form W-8EXP) described
in Sec. 1.1445-5(b)(3)(ii) for purposes of documenting itself as a
withholding qualified holder (as defined in Sec. 1.1445-1(g)(11)).
* * * * *
0
Par. 9. Section 1.1446-2 is amended by adding paragraph (b)(4)(iii) to
read as follows:
[[Page 80067]]
Sec. 1.1446-2 Determining a partnership's effectively connected
taxable income allocable to foreign partners under section 704.
* * * * *
(b) * * *
(4) * * *
(iii) Special rule for qualified holders. With respect to a foreign
partner that is a withholding qualified holder (as defined in Sec.
1.1445-1(g)(11)), the foreign partner's allocable share of partnership
ECTI does not include gain or loss that is not taken into account under
Sec. 1.897(l)-1(b) and that is not otherwise treated as effectively
connected with a trade or business in the United States. The
partnership must have received from the partner a valid certificate of
non-foreign status (including a Form W-8EXP) described in Sec. 1.1445-
2(b)(2)(i) or Sec. 1.1445-5(b)(3)(ii). See Sec. 1.1446-1(c)(2)(ii)(G)
and (H) regarding documentation of withholding qualified holders.
* * * * *
0
Par. 10. Section 1.1446-7 is amended by adding two sentences at the end
to read as follows
Sec. 1.1446-7 Applicability dates.
* * * Sections 1.1446-1(c)(2)(ii)(G) and (H) and 1.1446-
2(b)(4)(iii) apply with respect to dispositions of U.S. real property
interests and distributions described in section 897(h) occurring on or
after December 29, 2022. For dispositions of U.S. real property
interests and distributions described in section 897(h) occurring
before December 29, 2022, see Sec. Sec. 1.1446-1(c)(2)(ii)(G) and (H),
as contained in 26 CFR part 1, revised as of April 1, 2021.
Melanie R. Krause,
Acting Deputy Commissioner for Services and Enforcement.
Approved: December 9, 2022
Lily Batchelder,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2022-27978 Filed 12-28-22; 8:45 am]
BILLING CODE 4830-01-P
</pre></body>
</html>Indexed from Federal Register on December 29, 2022.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.