Exception for Interests Held by Foreign Pension Funds, 26605-26623 [2019-11291]
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Federal Register / Vol. 84, No. 110 / Friday, June 7, 2019 / Proposed Rules
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(2) Contacting the Manufacturer: For any
requirement in this AD to obtain corrective
actions from a manufacturer, the action must
be accomplished using a method approved
by the Manager, New York ACO Branch,
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(m) Related Information
(1) Refer to Mandatory Continuing
Airworthiness Information (MCAI) Canadian
AD CF–2018–01R1, dated February 4, 2018,
for related information. This MCAI may be
found in the AD docket on the internet at
https://www.regulations.gov by searching for
and locating Docket No. FAA–2018–0453.
(2) For more information about this AD,
contact Darren Gassetto, Aerospace Engineer,
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Issued in Des Moines, Washington, on May
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Michael Kaszycki,
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[FR Doc. 2019–11879 Filed 6–6–19; 8:45 am]
BILLING CODE 4910–13–P
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG–109826–17]
RIN 1545–BN89
Exception for Interests Held by Foreign
Pension Funds
Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemaking.
AGENCY:
This document contains
proposed regulations regarding the
exception from taxation with respect to
gain or loss of a qualified foreign
pension fund attributable to certain
interests in United States real property.
The proposed 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 proposed regulations
affect certain holders of certain interests
in United States real property and
withholding agents that are required to
withhold tax on certain dispositions of,
and distributions with respect to, such
property.
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SUMMARY:
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Written or electronic comments
and requests for a public hearing must
be received by September 5, 2019.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–109826–17),
Internal Revenue Service, Room 5203,
P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions
may be hand-delivered Monday through
Friday between the hours of 8 a.m. and
4 p.m. to CC:PA:LPD:PR (REG–109826–
17), Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue NW,
Washington, DC 20224, or sent
electronically via the Federal
eRulemaking Portal at https://
www.regulations.gov (IRS REG–109826–
17).
FOR FURTHER INFORMATION CONTACT:
Concerning the proposed regulations,
Milton Cahn or Logan M. Kincheloe,
(202) 317–6937; concerning submissions
of comments or requests for a public
hearing, Regina Johnson, (202) 317–
6901 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
DATES:
Background
I. In General
This document contains proposed
amendments to 26 CFR part 1 under
sections 897, 1445, and 1446 (the
‘‘proposed regulations’’). Section 323(a)
of the Protecting Americans from Tax
Hikes Act of 2015, Public Law 114–113,
div. Q (the ‘‘PATH Act’’), added section
897(l) to the Code, and Section 101(q) of
the Tax Technical Corrections Act of
2018, Public Law 115–141, div. U (the
‘‘Technical Corrections Act’’) amended
certain aspects of section 897(l). Section
897(l) provides an exemption to the
application of section 897(a) on gain or
loss on certain dispositions of, and
distributions with respect to, United
States real property interests (‘‘USRPIs’’)
for certain foreign pension funds and
their subsidiaries. The proposed
regulations contain rules relating to the
qualification for the exemption under
section 897(l), as well as rules relating
to withholding requirements under
sections 1445 and 1446 for dispositions
of USRPIs by foreign pension funds and
their subsidiaries.
II. Taxation of Foreign Persons Under
Section 897
Section 897(a)(1) provides that gain or
loss of a nonresident alien individual or
foreign corporation from the disposition
of a USRPI is taken into account under
section 871(b)(1) or 882(a)(1), as
applicable, as if the nonresident alien
individual or foreign corporation were
engaged in a trade or business within
the United States during the taxable
year and such gain or loss were
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26605
effectively connected with that trade or
business.
Section 897(c)(1)(A) defines a USRPI
as an interest in real property (including
an interest in a mine, well, or other
natural deposit) located in the United
States or the Virgin Islands, and any
interest (other than solely as a creditor)
in any domestic corporation unless the
taxpayer establishes that such
corporation was at no time a United
States real property holding corporation
(‘‘USRPHC’’) during the applicable
testing period (generally, the five-year
period ending on the date of the
disposition of the interest). Under
section 897(c)(2), a USRPHC means any
corporation if the fair market value of its
USRPIs equals or exceeds 50 percent of
the total fair market value of its USRPIs,
its interests in real property located
outside the United States, plus any
other assets that are used or held for use
in a trade or business. However, section
897(c)(1)(B) generally provides that an
interest in a corporation is not a USRPI
if the corporation does not hold any
USRPIs as of the date its stock is sold
and the corporation disposed of all of
the USRPIs that it held during the
applicable testing period in transactions
in which the full amount of gain, if any,
was recognized.
Section 897(h)(1) provides that any
distribution by a qualified investment
entity (QIE) to a nonresident alien
individual, a foreign corporation, or
other QIE is, to the extent attributable to
gain from sales or exchanges by the QIE
of USRPIs, treated as gain recognized by
such nonresident alien individual,
foreign corporation, or other QIE from
the sale or exchange of a USRPI, subject
to certain exceptions. Under section
897(h)(4)(A), a QIE includes any real
estate investment trust (REIT) and
certain regulated investment companies.
III. Exception for Qualified Foreign
Pension Funds Under Section 897(l)
Section 897(l)(1) provides that a
qualified pension fund is not treated as
a nonresident alien individual or foreign
corporation for purposes of section 897.
Cf. section 897(a) (subjecting
nonresident alien individuals and
foreign corporations to tax on gain or
loss from the disposition of a USRPI).
For this purpose, an entity all the
interests of which are held by a
qualified foreign pension fund (referred
to in this Preamble and the proposed
regulations as a ‘‘qualified controlled
entity’’) is also treated as a qualified
foreign pension fund.
Under section 897(l)(2), a qualified
foreign pension fund is defined as any
trust, corporation, or other organization
or arrangement (any one of which is
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referred to in this Preamble and the
proposed regulations as an ‘‘eligible
fund’’) that satisfies five separate
requirements. Specifically, a qualified
foreign pension fund is an eligible fund
(A) that is created or organized under
the law of a country other than the
United States, (B) that is established (i)
by such country (or one or more
political subdivisions thereof) to
provide retirement or pension benefits
to participants or beneficiaries that are
current or former employees (including
self-employed individuals) 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 to provide
retirement or pension benefits to
participants or beneficiaries that are
current or former employees (including
self-employed individuals) or persons
designated by such employees in
consideration for services rendered by
such employees to such employers, (C)
that does not have a single participant
or beneficiary with a right to more than
five percent of its assets or income, (D)
that is subject to government regulation
and with respect to which annual
information about its beneficiaries is
provided, or is otherwise available, to
the relevant tax authorities in the
country in which it is established or
operates, and (E) with respect to which,
under the laws of the country in which
it is established or operates (i)
contributions to such eligible fund that
would otherwise be subject to tax under
such laws are deductible or excluded
from the gross income of such entity or
arrangement or taxed at a reduced rate,
or (ii) taxation of any investment
income of such eligible fund is deferred
or such income is excluded from gross
income of such entity or arrangement or
is taxed at a reduced rate.
Section 897(l)(3) provides that the
Secretary of the Treasury (Secretary)
shall prescribe such regulations as may
be necessary or appropriate to carry out
the purposes of section 897(l).
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IV. Applicable Withholding Rules
A. Section 1445 Withholding
Section 1445(a) generally imposes a
withholding tax obligation on the
transferee when a foreign person
disposes of a USRPI. Section 1445(e)(6)
provides that, if any portion of a
distribution from a QIE to a nonresident
alien individual or a foreign corporation
is treated under section 897(h)(1) as gain
realized by such individual or
corporation from the sale or exchange of
a USRPI, the QIE must deduct and
withhold tax under section 1445(a) on
the amount so treated.
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A transferee of a USRPI is not
required to withhold under section
1445(a) if the transferor furnishes to the
transferee a certification that, among
other things, states that the transferor is
not a foreign person. § 1.1445–2(b)(2)(i).
Generally, upon a distribution and other
transactions subject to withholding,
certain entities may treat a 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. § 1.1445–5(b)(3)(ii)(A). Upon the
distribution of any amount attributable
to the disposition of a USRPI, a QIE may
rely on the same certification, a Form
W–9, Request for Taxpayer
Identification Number and Certification,
or a form that is substantially similar to
the Form W–9 to determine whether an
interest holder is a U.S. person.
§ 1.1445–8(e).
Section 323(b) of the PATH Act
amended section 1445(f)(3) to provide
that, for purposes of section 1445, the
term ‘‘foreign person’’ means any person
other than (A) a United States person,
and (B) except as otherwise provided by
the Secretary, an entity with respect to
which section 897 does not apply by
reason of section 897(l). On February 19,
2016, the Department of the Treasury
(the ‘‘Treasury Department’’) and the
IRS published final regulations under
section 1445 of the Code (‘‘updated
section 1445 regulations’’) in the
Federal Register (81 FR 8398–01) to
reflect the PATH Act’s amendments to
section 1445(f)(3). A correcting
amendment to the updated section 1445
regulations was published on April 26,
2016 in the Federal Register (81 FR
24484–01). As corrected, the updated
section 1445 regulations provide that
neither a qualified foreign pension fund
nor an entity all of the interests of
which are held by a qualified foreign
pension fund is treated as a foreign
person, and thus may provide a
certification to a transferee. See
§§ 1.1445–2(b)(2)(i) (flush language) and
1.1445–5(b)(3)(ii)(A).
B. Section 1446 Withholding
A partnership generally must pay a
withholding tax under section 1446 on
effectively connected taxable income
(‘‘ECTI’’) allocable under section 704 to
a foreign partner. Section 1446(c)
provides that ECTI includes the taxable
income of a partnership that is
effectively connected (or treated as
effectively connected) with the conduct
of a trade or business in the United
States, subject to certain adjustments.
For this purpose, ECTI includes any
partnership income treated as
effectively connected with the conduct
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of a trade or business in the United
States pursuant to section 897. § 1.1446–
2(b)(2)(ii).
A foreign partner’s allocable share of
partnership ECTI does not include
income or gain exempt from U.S. tax by
reason of a provision of the Code or by
operation of any U.S. income tax treaty
or reciprocal agreement. § 1.1446–
2(b)(2)(iii). In the case of income
excluded by reason of a treaty provision,
such income must be derived by a
resident of an applicable treaty
jurisdiction, the resident must be the
beneficial owner of the item, and all
other requirements for benefits under
the treaty must be satisfied. To exclude
income or gain from ECTI, the
partnership must receive from the
partner a valid withholding certificate
(that is, Form W–8BEN–E, Certificate of
Foreign Status of Beneficial Owner for
United States Tax Withholding and
Reporting (Entities)) containing the
information necessary to support the
claim for treaty benefits required in the
forms and instructions. Id.
A domestic partnership required to
withhold under both sections 1445 and
1446 with respect to income treated as
ECTI pursuant to section 897 is deemed
to satisfy the withholding requirements
of section 1445 if it complies with the
requirements of section 1446. § 1.1446–
3(c)(2)(i).
V. Prior Request for Comments
In the Preamble to the updated
section 1445 regulations that were
published on February 19, 2016, the
Treasury Department and the IRS
requested comments regarding what
regulations, if any, should be issued
pursuant to section 897(l)(3). Twentyone comments were received,
requesting, in particular, guidance on
issues related to qualification as a
‘‘qualified foreign pension fund’’ under
section 897(l)(2). The comments will be
included in the administrative record
for this notice of proposed rulemaking.
The Treasury Department and the IRS
considered all of the comments, and in
response to the comments have issued
the proposed regulations to provide
clarification on the application of
section 897(l). Each significant
comment, other than any comment
rendered moot by the Technical
Corrections Act, is discussed in the
relevant part of the Explanation of
Provisions section of this preamble.
Explanation of Provisions
The proposed regulations provide
guidance regarding the scope of the
exception described in section 897(l)(1),
the application of the requirements
described in section 897(l)(2) that an
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eligible fund must satisfy to be treated
as a qualified foreign pension fund, and
rules regarding exemptions from
withholding under section 1445 or
section 1446.
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I. Scope of the Exception
A. General Rule
As described in the Background
section of this Preamble, section 897(a)
applies to gain or loss of a nonresident
alien individual or a foreign corporation
from the disposition of a USRPI.
Similarly, section 897(h) generally treats
any distribution from a QIE to a
nonresident alien individual, a foreign
corporation, or other QIE, to the extent
attributable to gain from sales or
exchanges by the QIE of USRPIs, as gain
recognized by such nonresident alien
individual, foreign corporation, or other
QIE from the sale or exchange of a
USRPI for purposes of section 897(a).
Section 897(l)(1) provides that, for
purposes of section 897, a qualified
foreign pension fund is not treated as a
nonresident alien individual or a foreign
corporation. For this purpose, a
qualified controlled entity is treated as
a qualified foreign pension fund.
Accordingly, section 897(l) excepts from
section 897(a) gain or loss of a qualified
foreign pension fund or a qualified
controlled entity from the disposition of
a USRPI, including gain from a
distribution described in section 897(h).
Consistent with section 897(l), the
proposed regulations provide that gain
or loss of a qualified foreign pension
fund or a qualified controlled entity
(under the proposed regulations, each a
‘‘qualified holder’’) from the disposition
of a USRPI, including gain from a
distribution described in section 897(h),
is not subject to section 897(a). This
exception from section 897(a) applies
solely with respect to gain or loss
recognized by a qualified holder that is
attributable to one or more qualified
segregated accounts maintained by the
qualified holder. The proposed
regulations define a qualified segregated
account as an identifiable pool of assets
maintained for the sole purpose of
funding qualified benefits (generally,
retirement, pension, and certain
ancillary benefits) to qualified recipients
(generally, plan participants and
beneficiaries). See Section II.B of this
Explanation of Provisions for a detailed
discussion of qualified benefits and
qualified recipients.
The proposed regulations provide
separate standards for determining
whether an identifiable pool of assets
constitutes a qualified segregated
account depending on whether the pool
of assets is maintained by an eligible
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fund (including an eligible fund that
satisfies the requirements to be treated
as a qualified foreign pension fund) or
a qualified controlled entity. An
identifiable pool of assets of an eligible
fund is a qualified segregated account if
the assets in the pool and the income
earned with respect to those assets are
subject to legal or contractual
requirements requiring that all such
income and assets are used exclusively
to fund the provision of qualified
benefits to qualified recipients or to
satisfy necessary reasonable expenses of
the eligible fund. A qualified controlled
entity is treated as maintaining a
qualified segregated account if 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, and
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 the
qualified segregated account of a
qualified foreign pension fund or
another qualified controlled entity upon
dissolution. In either case, a pool of
assets will not be treated as a qualified
segregated account if the assets or
income associated with such assets may
inure to the benefit of a person other
than a qualified recipient. For this
purpose, the fact that assets or income
may inure to the benefit of a
governmental unit by operation of
escheat or similar laws is ignored.
B. Qualified Controlled Entities
Several comments submitted in
response to the updated section 1445
regulations requested clarification
concerning the exception under section
897(l) for an entity all the interests of
which are held by a qualified foreign
pension fund. The proposed regulations
define a qualified controlled entity as a
trust or corporation organized under the
laws of a foreign country all of the
interests of which are held directly by
one or more qualified foreign pension
funds or indirectly through one or more
qualified controlled entities or
partnerships. The Treasury Department
and the IRS have determined that it is
unnecessary to treat partnerships as
qualified controlled entities because the
proposed regulations’ exemption from
section 897(a) applies to gain or loss
earned indirectly through one or more
partnerships. Accordingly, the proposed
regulations provide that only
corporations and trusts may be treated
as qualified controlled entities.
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1. Indirectly Held Entities
Comments requested that the
proposed regulations provide that an
entity held indirectly through one or
more corporations or partnerships by a
qualified foreign pension fund may be
treated as a qualified controlled entity.
Thus, for example, if a qualified foreign
pension fund owned all of the interests
of Entity A, and Entity A owned all of
the interests of Entity B, the comments
indicated that Entity B should be
eligible to be treated as a qualified
controlled entity. The Treasury
Department and the IRS agree that there
is no policy reason to distinguish
between direct and indirect ownership
for purposes of determining whether an
entity is a qualified controlled entity.
Accordingly, the proposed regulations
provide that a qualified controlled
entity may be owned directly or
indirectly through one or more qualified
controlled entities.
2. Multiple Qualified Foreign Pension
Fund Owners
Comments requested that the
proposed regulations provide that an
entity may qualify as a qualified
controlled entity when all of its interests
are owned by multiple qualified foreign
pension funds. Comments noted that
qualified foreign pension funds
frequently pool their investments, such
that permitting qualified controlled
entities to be held by multiple qualified
foreign pension funds would be
consistent with current investment
practices. Further, comments argued
that there is no policy rationale for
providing the exception of section 897(l)
to an investment that benefited one
qualified foreign pension fund but not
to an investment that benefited multiple
qualified foreign pension funds. The
Treasury Department and the IRS agree
with these comments. Accordingly, the
proposed regulations provide that the
interests in a qualified controlled entity
may be held by one or more qualified
foreign pension funds directly or
indirectly through one or more qualified
controlled entities.
3. Creditor Interests
One comment recommended that, for
purposes of determining whether an
entity is a qualified controlled entity,
only equity interests should be taken
into account. Cf. section 897(c)(1)(A)
(defining a USRPI as including any
interest (other than solely as a creditor)
in any domestic corporation unless the
taxpayer establishes that such
corporation was at no time a USRPHC
during the applicable testing period).
The comment noted that requiring a
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qualified foreign pension fund to hold
all of the creditor’s interests issued by
a qualified controlled entity would
prevent the use of external leverage by
a qualified controlled entity, even
though there is no such restriction on
direct leveraged investments by a
qualified foreign pension fund. The
Treasury Department and the IRS agree
that a creditor’s interest in an entity
should not be an interest taken into
account for purposes of determining
whether the entity is treated as a
qualified controlled entity if the interest
does not share in the earnings or growth
of the entity. Section 1.897–1(d)(5)
provides that, unless otherwise stated,
the term ‘‘interest’’ as used with regard
to an entity in the regulations under
sections 897, 1445, and 6039C, means
an interest other than an interest solely
as a creditor. Given the absence of an
express provision to the contrary in the
proposed regulations, the application of
§ 1.897–1(d)(5) results in an interest in
an entity solely as a creditor not being
taken into account for purposes of
determining whether the entity is a
qualified controlled entity.
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4. Interaction With Section 892
Comments requested clarification that
an entity may constitute a qualified
controlled entity whether or not the
entity constitutes a controlled entity as
defined in § 1.892–2T(a)(3). The
Treasury Department and the IRS have
determined that the definition of
‘‘qualified controlled entity’’ in the
proposed regulations plainly does not
limit qualified controlled entity status to
only those entities that would qualify as
a ‘‘controlled entity’’ within the
meaning of § 1.892–2T(a)(3). It is,
therefore, unnecessary for these
proposed regulations to provide an
express rule.
5. De Minimis Ownership
A comment requested that the
proposed regulations provide that de
minimis ownership of a qualified
controlled entity be disregarded under
certain circumstances. For instance, the
comment indicated that de minimis
ownership, including by managers or
directors, may be required by corporate
law in certain jurisdictions. The
Treasury Department and the IRS have
determined that permitting a person
other than a qualified foreign pension
fund to own an interest in a qualified
controlled entity would impermissibly
expand the scope of the exception in
section 897(l) by allowing taxpayers
other than qualified foreign pension
funds to avoid tax under section 897.
Accordingly, the proposed regulations
do not permit ownership of a qualified
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controlled entity by a person other than
a qualified foreign pension fund or
another qualified controlled entity.
6. Avoidance of Section 897
One comment recommended that the
Treasury Department and the IRS
consider rules to prevent a qualified
foreign pension fund from indirectly
acquiring a USRPI held by a foreign
corporation, which would permit the
acquired corporation to avoid tax on
gain that would otherwise be subject to
tax under section 897. For example,
assume that FP, a foreign corporation
that is not a qualified holder, owns 100
percent of the stock of FS, a foreign
corporation, and that FS owns a USRPI
with a basis of $80x and a fair market
value of $200x. Assume that FP sells the
stock of FS to a qualified foreign
pension fund. If FS were treated as a
qualified controlled entity and FS later
sold the USRPI for $200x, neither FP
nor FS would be subject to tax under
section 897 on the $120x gain
attributable to its investment in the
USRPI, even though the gain accrued
while FS was owned by FP. Similar
issues could arise with entities treated
as part of an organization or
arrangement that is a qualified foreign
pension fund.
To address the inappropriate
avoidance of section 897, the proposed
regulations provide 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 qualified foreign pension fund, a
part of a qualified foreign pension fund,
or a qualified controlled entity. For this
purpose, the testing period generally
means 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. This limitation does not
apply to an entity or governmental unit
that did not own a USRPI as of the date
it became a qualified controlled entity,
a qualified foreign pension fund, or part
of a qualified foreign pension fund.
C. Organizations or Arrangements
Section 897(l)(2) provides that a
qualified foreign pension fund may
include any ‘‘trust, corporation, or other
organization or arrangement’’ that
satisfies certain requirements. Congress
intended the term ‘‘arrangement’’ to be
a flexible term that accommodates a
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broad range of structures. See STAFF
OF THE JOINT COMM. ON TAX’N,
General Explanation of Tax Legislation
Enacted in 2015 (JCS–1–16) (General
Explanation) 283, n. 967 (2016)
(‘‘Foreign pension funds may be
structured in a variety of ways, and may
comprise one or more separate entities.
The word ‘arrangement’ encompasses
such alternative structures.’’).
Several comments submitted in
response to the updated section 1445
regulations described the multiple ways
that foreign retirement and pension
systems—particularly those that are
administered entirely or in part by a
foreign government—could be
organized. The comments described
structures involving multiple entities,
one or more accounts on government
balance sheets, foreign legal structures,
and a combination of the foregoing.
Although such pension and retirement
plans are often not organized as a single
trust or corporation, the organizations or
arrangements, when viewed as a whole,
may satisfy the requirements set forth in
section 897(l)(2). Based on the General
Explanation’s indication that foreign
pension funds may be structured in a
variety of ways, and may be comprised
of separate entities, the comments
recommended that the proposed
regulations permit a broad range of
alternative structures to be treated as a
qualified foreign pension fund.
The Treasury Department and the IRS
have determined that the purpose of
section 897(l) is best served by
permitting a broad range of structures to
be eligible to be treated as a qualified
foreign pension fund. Accordingly, the
proposed regulations provide that, for
purposes of section 897(l), the term
‘‘organization or arrangement’’ means
one or more trusts, corporations,
governmental units, or employers. The
proposed regulations provide that the
term ‘‘governmental unit’’ means any
foreign government or part thereof,
including any person, body, group of
persons, organization, agency, bureau,
fund, instrumentality, however
designated, of a foreign government.
The proposed regulations include
several examples illustrating the
application of the requirements of
section 897(l) and the proposed
regulations to different types of
organizations and arrangements,
including organizations and
arrangements that include governmental
units.
The proposed regulations permit an
employer to be part of an organization
or arrangement to address cases in
which an employer is organized as an
entity other than a trust or corporation
but operates as part of an organization
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or arrangement to provide pension or
retirement benefits.
II. Requirements Applicable to a
Qualified Foreign Pension Fund
A. Created or Organized
Section 897(l)(2)(A) and the proposed
regulations require that a qualified
foreign pension fund must be created or
organized under the law of a country
other than the United States. Comments
indicated that many foreign pension
funds are created or organized under the
laws of states or political subdivisions
of a foreign country and requested that
the proposed regulations clarify that
those pension funds would satisfy
section 897(l)(2)(A). The Treasury
Department and the IRS agree that it is
appropriate to allow such foreign
pension funds to be considered
qualified foreign pension funds.
Accordingly, the proposed regulations
provide that references to a foreign
country include references to a state,
province, or political subdivision of a
foreign country, subject to an exception
described in part II.E.4 of this
Explanation of Provisions.
B. Established To Provide Retirement or
Pension Benefits
Section 897(l)(2)(B) requires that an
eligible fund be established either (i) by
the country in which it is created or
organized (or one or more political
subdivisions thereof) to provide
retirement or pension benefits to
participants or beneficiaries that are
current or former employees (including
self-employed individuals), 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 to provide
retirement or pension benefits to
participants or beneficiaries that are
current or former employees (including
self-employed individuals) or persons
designated by such employees in
consideration for services rendered by
such employees to such employers.
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1. Pension Funds Eligible for Section
897(l)(2)(B)
Several comments requested that the
regulations clarify that multi-employer
pension funds and governmentsponsored public pension funds that
provide pension and pension-related
benefits may satisfy section 897(l)(2)(B).
These comments are consistent with the
General Explanation, which noted that
‘‘[m]ulti-employer and governmentsponsored public pension funds that
provide pension and pension-related
benefits may still satisfy [section
897(l)(2)(B)]. For example, such pension
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funds may be established for one or
more companies or professions, or for
the general working public of a foreign
country.’’ General Explanation at 283, n.
968.
The Treasury Department and the IRS
agree that it is appropriate to allow such
multi-employer pension funds and
government-sponsored public pension
funds to be considered qualified foreign
pension funds. Accordingly, the
proposed regulations provide 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, 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.
Under the proposed regulations,
qualified recipients generally include
persons eligible to participate in the
retirement or pension plan. Therefore,
with respect to an eligible fund
established by one or more employers,
the term ‘‘qualified recipient’’ includes
a current or former employee or any
person designated by such current or
former employee to receive qualified
benefits. With respect to an eligible fund
established by a foreign country to
provide qualified benefits to qualified
recipients as a result of services
rendered by such qualified recipients to
their employers, the term includes 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. In response to comments, the
proposed regulations provide that a
person is treated as designating another
person to receive qualified benefits if
such other person is entitled to receive
benefits under the contractual terms
applicable to the eligible fund or under
the laws of the foreign country in which
the eligible fund is created or organized,
whether or not the first person expressly
designated such person as a beneficiary.
In response to comments, the
proposed regulations clarify that a
retirement or pension fund that is
organized by a trade union, professional
association, or similar group may be
treated as a qualified foreign pension
fund by providing that an eligible fund
is treated as established by any
employer that funds, in whole or in
part, the eligible fund. In addition, the
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proposed regulations clarify that, for
purposes of the requirement in section
897(l)(2)(B), a self-employed individual
is treated as both an employer and an
employee.
2. Benefits Other Than Retirement or
Pension Benefits
Comments noted that many foreign
pension funds provide a limited amount
of other benefits, including death,
disability, survivor, medical,
unemployment, and similar benefits, to
participants and beneficiaries.
Comments requested guidance on
whether a qualified foreign pension
fund could provide certain benefits
other than retirement and pension
benefits, and whether there is any
limitation on the amount of those
benefits that a qualified foreign pension
fund may provide to participants and
beneficiaries. Some comments
recommended that the proposed
regulations set forth a specific limitation
on the percentage of benefits other than
retirement or pension benefits that a
qualified foreign pension fund may
provide, while other comments
recommended a facts and circumstances
test or another subjective standard.
The Treasury Department and the IRS
have determined that section 897(l) was
not intended to exclude common
foreign pension arrangements that
provide a relatively small amount of
ancillary benefits to participants and
beneficiaries. The Treasury Department
and the IRS have also determined that
a specific limit on the percentage of
ancillary benefits that a qualified foreign
pension fund may provide to its
participants and beneficiaries is more
administrable and provides more
certainty to taxpayers than a subjective
standard. Accordingly, the proposed
regulations require that all of the
benefits that an eligible fund provides
are qualified benefits to qualified
recipients, 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. For this purpose, qualified
benefits include retirement, pension, or
ancillary benefits. The proposed
regulations define ancillary benefits as
benefits payable upon the diagnosis of
a terminal illness, death benefits,
disability benefits, medical benefits,
unemployment benefits, or similar
benefits. The Treasury Department and
the IRS request comments on whether
the regulations should also define
retirement or pension benefits (for
example, with reference to whether
there are penalties for early
withdrawals).
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3. Insuring Qualified Benefits and
Similar Activities
One comment requested that the
proposed regulations provide that an
eligible fund may be treated as a
qualified foreign pension fund if it is
established by a foreign government to
provide qualified benefits to qualified
recipients (directly or indirectly) in the
event that one or more qualified foreign
pension funds that are created or
organized in the same foreign country
are unable to satisfy their liabilities with
respect to the provision of qualified
benefits to their own qualified
recipients. Although the proposed
regulations do not expressly address
such plans, the proposed regulations do
not differentiate between plans that are
primarily responsible for the provision
of qualified benefits to qualified
recipients, on the one hand, and plans
that are secondarily responsible for the
provision of qualified benefits to
qualified recipients, on the other hand.
Therefore, whether a plan is established
to provide qualified benefits to qualified
recipients is determined without regard
to whether such plan has primary
responsibility to provide qualified
benefits to qualified recipients or rather
is established to provide the qualified
benefits to qualified recipients only in
the event of the default of one or more
other plans.
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C. Five Percent Limitation
Consistent with section 897(l)(2)(C),
the proposed regulations provide that a
qualified foreign pension fund may not
have a single participant or beneficiary
with a right to more than five percent of
its assets or income (the five-percent
limitation). Comments submitted in
response to the updated section 1445
regulations indicated that it would be
appropriate for the proposed regulations
to include attribution rules to prevent a
single individual from using related
parties to circumvent the five-percent
limitation. The Treasury Department
and the IRS agree with the comments.
Accordingly, the proposed regulations
provide that, for purposes of applying
the five percent limitation, an
individual is considered to have a right
to the assets and income of an eligible
fund to which any person who bears a
relationship to the individual described
in section 267(b) or section 707(b) has
a right.
One comment requested guidance on
calculating a participant or beneficiary’s
entitlement to the assets and income of
a qualified foreign pension fund for
purposes of applying the five-percent
limitation. In light of the complexity
that any such rule would entail and the
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relatively few cases in which it would
be expected to apply, the proposed
regulations do not provide specific rules
regarding the computation of the fivepercent limitation. Instead, this
determination should be made based on
the underlying facts and circumstances
of each case.
D. Regulation and Information
Reporting
Section 897(l)(2)(D) and the proposed
regulations set forth two requirements
for a qualified foreign pension fund.
First, a qualified foreign pension fund
must be subject to government
regulation (‘‘regulation requirement’’).
Second, a qualified foreign pension
fund must provide annual information
about its beneficiaries to the relevant tax
authorities in the country in which it is
established or operates, or such
information must otherwise be available
to those authorities (‘‘information
requirement’’). Several comments
requested that the proposed regulations
set forth the specific information that
must be provided or otherwise made
available pursuant to the information
requirement in section 897(l)(2)(D). The
proposed regulations adopt the
recommendation included in several
comments by providing that an eligible
fund is treated as satisfying the
information requirement only if the
eligible fund annually provides to the
relevant tax authorities in the foreign
country in which it 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. An eligible fund is
not treated as failing to satisfy the
information 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. The Treasury
Department and the IRS request
comments as to whether the final
regulations should permit other types of
information to satisfy the information
requirement.
Several comments indicated that
foreign government-sponsored
retirement and pension plans frequently
are not subject to substantial
information reporting and regulation
compared with private foreign pension
or retirement plans, in part because the
government administers the pension or
retirement program itself. The
comments recommended that the
proposed regulations treat a
government-sponsored retirement or
pension plan as automatically satisfying
both the regulation and information
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requirements of section 897(l)(2)(D). The
Treasury Department and the IRS agree
that, when a government administers a
pension or retirement plan itself, the
requirements of section 897(l)(2)(D) are
effectively satisfied because the
government has control over the
program and access to the information
about the program’s beneficiaries.
Accordingly, the proposed regulations
generally provide that an eligible fund
that is administered by one or more
governmental units, other than in its
capacity as an employer, is deemed to
satisfy the requirements of section
897(l)(2)(D).
Comments noted that many foreign
pension funds must provide information
to one or more governmental bodies in
the country in which the foreign
retirement or pension fund is organized,
including agencies that are specifically
responsible for regulating pensions. In
many cases, those governmental bodies
may be distinct from the tax authority
in that foreign country. In light of the
wide range of foreign information
reporting regimes that may apply to an
eligible fund, the Treasury Department
and the IRS agree that a flexible rule is
necessary and appropriate to carry out
the purposes of section 897(l).
Accordingly, the proposed regulations
provide that an eligible fund is treated
as satisfying the information
requirement of section 897(l)(2)(D) if the
eligible fund is required, pursuant to the
laws of the foreign country in which it
is established or operates, to provide the
required information to one or more
governmental units of the foreign
country in which the eligible fund is
created or organized, or if such
information is otherwise available to
one or more governmental units of the
foreign country in which the eligible
fund is created or organized.
E. Foreign Tax Treatment
Section 897(l)(2)(E) and the proposed
regulations provide that, to be a
qualified foreign pension fund, the laws
of the foreign country in which the
eligible fund is established or operates
must provide that either (i)
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 (ii)
taxation of any investment income of
the eligible fund is deferred or such
income is excluded from the gross
income of the eligible fund or is taxed
at a reduced rate.
1. Countries With No Income Tax
Comments requested clarification that
an eligible fund may qualify for the
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exemption in section 897(l) if it is
created or organized in a country that
does not have an income tax. The
Treasury Department and the IRS have
determined that the purposes of section
897(l) would not be served by limiting
the availability of the exemption to
eligible funds organized in jurisdictions
with an income tax. Accordingly, the
proposed regulations provide that an
eligible fund is treated as satisfying the
requirement of section 897(l)(2)(E) if the
eligible fund is established and operates
in a foreign country that has no income
tax.
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2. Degree of Reduction
Comments noted that an eligible fund
that otherwise satisfies section
897(l)(2)(E) may be subject to current
income tax at ordinary rates with
respect to a relatively small portion of
its income or gain. The comments
requested guidance on the percentage of
income or contributions that must be
eligible for preferential tax treatment in
order for an eligible fund to satisfy
section 897(l)(2)(E). Other comments
requested guidance on the extent to
which ordinary income tax rates must
be reduced under section 897(l)(2)(E).
To address these comments, the
proposed regulations provide that an
eligible fund is treated as satisfying the
requirement of section 897(l)(2)(E) in a
taxable year if, under the income tax
laws of the foreign country in which the
eligible fund is established or operates,
at least 85 percent of the contributions
to the eligible fund are deductible or
excluded from the gross income or taxed
at a reduced rate, or tax on at least 85
percent of the investment income of the
eligible fund is deferred or taxed at a
reduced rate (including by excluding
such investment income from gross
income). The 85 percent threshold was
chosen based on the best judgment of
the Treasury Department and the IRS,
and is consistent with suggestions from
commenters for an appropriate
threshold in an analogous context in the
proposed regulations (namely, for the
percentage of benefits provided by an
eligible fund that must be retirement or
pension benefits as opposed to ancillary
benefits), but is not based on any
specific quantitative analysis. The
Treasury Department and the IRS
request additional comments regarding
whether the 85 percent threshold is
appropriate and especially solicit
comments that provide data, other
evidence, and models that can enhance
the rigor of the process by which such
threshold is determined.
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3. Other Preferential Regimes
Comments requested that the
proposed regulations provide that the
requirement of section 897(l)(2)(E) may
be satisfied if, under the income tax law
of the country in which an eligible fund
is established or operates, an eligible
fund is subject to a preferential tax
regime that is, in substance, equivalent
to the type of deductions or exclusions
specifically described in section
897(l)(2)(E). For example, one comment
described a preferential regime in which
certain eligible funds taxable as
insurance companies are entitled to
reserve deductions designed to
effectively exclude from gross income
investment income earned by the
eligible funds. The Treasury Department
and the IRS agree that the purposes of
section 897(l) are best served by
accommodating a broad range of
preferential tax regimes applicable to
retirement or pension funds. Therefore,
the proposed regulations provide that an
eligible fund that is not specifically
subject to the tax treatment described in
section 897(l)(2)(E) is nonetheless
treated as satisfying the requirement of
section 897(l)(2)(E) if the eligible fund
establishes that it is subject to a
preferential tax regime due to its status
as a retirement or pension fund, and
that the preferential tax regime has a
substantially similar effect as the
specific tax treatment described in
section 897(l)(2)(E).
4. Subnational Tax Exemptions
One comment requested that the
proposed regulations provide that
preferential treatment with respect to a
tax levied by a state, province, or
political subdivision (sub-national tax)
be sufficient to satisfy the requirement
of section 897(l)(2)(E). The Treasury
Department and the IRS have
determined that the exemption in
section 897(l) was not intended to
benefit foreign persons that fail to
benefit from an exemption from an
otherwise applicable national income
tax. Sub-national taxes generally
constitute a minor component of an
entity’s overall tax burden in a foreign
jurisdiction and therefore it would not
be appropriate to allow preferential
treatment with respect to sub-national
taxes to 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. Accordingly, the proposed
regulations do not adopt this
recommendation, and, to the contrary,
provide that for purposes of section
897(l)(2)(E), references to a foreign
country do not include references to a
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26611
state, province, or political subdivision
of a foreign country.
F. Application to Organizations and
Arrangements
The proposed regulations provide
rules on the application of the
requirements described in section
897(l)(2) to an eligible fund that is an
organization or arrangement.
1. Single Entity Treatment
The proposed regulations provide that
an eligible fund that is an organization
or arrangement is treated as a single
entity to determine whether the
requirements of section 897(l)(2) are
satisfied. Notwithstanding the foregoing,
the proposed regulations provide that
each person or governmental unit that is
part of an organization or arrangement
must independently satisfy the
requirement of section 897(l)(2)(A), such
that each component of the organization
or arrangement must be created or
organized under the law of a country
other than the United States.
2. Relevant Income and Assets
As noted in several comments, an
eligible fund may be organized in
various ways. For example, an eligible
fund may be comprised of multiple
entities and governmental bodies, one or
more of which may conduct activities
that are unrelated to the provision of
retirement or pension benefits.
Applying certain requirements of
section 897(l)(2) to an eligible fund
requires identifying the specific assets
and income of an organization or
arrangement that must be tested under
the proposed regulations. For instance,
under the proposed regulations, an
organization or arrangement may
include a pension system in which a
private employer provides pension
benefits to its employees that are funded
by the investments of a separate entity,
such as a pension trust organized by a
foreign government. Assets and income
of the private employer that do not fund
the provision of pension benefits would
generally not be relevant to determining
whether the organization or
arrangement satisfies the requirements
of section 897(l)(2) and the proposed
regulations. For instance, income of the
employer generally would not be subject
to preferential tax treatment, and the
assets of the employer not used to fund
the provision of pension benefits would
not be relevant for purposes of applying
the five percent limitation in section
897(l)(2)(C).
Accordingly, the proposed regulations
generally provide that the determination
as to whether an eligible fund satisfies
the requirements of section 897(l)(2) is
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made solely with respect to income and
assets held by the eligible fund 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 qualified segregated
accounts maintained by an eligible fund
are treated as a single qualified
segregated account.
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G. Coordination With Definition of a
Pension Fund Under U.S. Income Tax
Treaties
Comments requested that the
proposed regulations provide that an
entity that qualifies as a pension fund or
scheme under a U.S. income tax treaty
or as an exempt beneficial owner under
an intergovernmental agreement (IGA) is
treated as a qualified foreign pension
fund under section 897(l). The statute is
clear that an exemption from section
897(a) is allowed only for entities
meeting the definition of a ‘‘qualified
foreign pension fund.’’ There is no
indication in the legislative history that
Congress intended the Treasury
Department and the IRS to expand the
exemption to entities that met the
definition of a pension fund under a
U.S. income tax treaty or IGA.
Furthermore, the definitions of pension
fund under a U.S. income tax treaty or
IGA were designed with policy goals
that are unrelated to section 897, and
therefore pension funds as defined in
those agreements are not necessarily the
types of entities for which an exemption
from section 897(a) is appropriate. Thus,
a foreign pension fund that qualifies for
other benefits under an income tax
treaty or IGA must make a separate
determination as to whether it is a
qualified foreign pension fund under
section 897(l)(2).
III. Withholding Rules
Comments requested clarification
regarding the documentation a qualified
foreign pension fund should provide to
a transferee or partnership to claim an
exemption under section 897(l) and
requested a form for this purpose.
Comments suggested modifying existing
forms, such as Form W–8EXP,
Certificate of Foreign Government or
Other Foreign Organization for United
States Tax Withholding and Reporting,
for this purpose. Comments also
requested clarification regarding the
reporting and withholding
responsibilities of transferees and
partnerships that receive documentation
from a qualified foreign pension fund.
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In response to comments, the IRS
intends to revise Form W–8EXP to
permit qualified holders to certify their
status under section 897(l). Prior to the
release of revised Form W–8EXP, a
certificate of non-foreign status
described in § 1.1445–5(b)(3) may be
used for purposes of both section 1445
and section 1446. In addition to
permitting withholding agents and
partnerships to rely on revised Form
W–8EXP, the proposed regulations also
integrate the new exception for qualified
holders into existing reporting regimes
as described below.
A. Withholding Under Section 1445
1. Withholding on Dispositions of
USRPIs Under Section 1445(a)
Section 1445(a) requires a transferee
to withhold 15 percent of the amount
realized on any disposition of a USRPI
by a foreign person. Section 1445(b)(2)
provides that no withholding is required
if the transferor furnishes to the
transferee a certificate of non-foreign
status. Section 1445(f)(3)(B) provides
that for purposes of section 1445, the
term ‘‘foreign person’’ generally does
not include an entity described in
section 897(l)(1). The proposed
regulations revise the updated section
1445 regulations to utilize the
definitions in proposed § 1.897(l)–1(d)
and permit a qualified holder to certify
that it is exempt from withholding
under section 1445 by providing a
certificate of non-foreign status to a
withholding agent. The proposed
regulations provide that a qualified
holder may provide a Form W–8EXP for
this purpose, but the transferee, at its
option, may request a certification of
non-foreign status or Form W–8EXP.
Consistent with the approach of current
§ 1.1445–2(b)(1) (permitting a transferee
to request documentation satisfactory to
the transferee), the transferee may
withhold under section 1445 if the
requested certification is not provided
and will be considered to have been
required to withhold for purposes of
sections 1461 through 1463.
A transferee must report transactions
subject to section 1445(a) using Form
8288, U.S. Withholding Tax Return for
Dispositions by Foreign Persons of U.S.
Real Property Interests, and Form
8288–A, Statement of Withholding on
Dispositions by Foreign Persons of U.S.
Real Property Interests. § 1.1445–1(c).
However, because a transferee may treat
a qualified holder as not foreign, the
transferee is not required to file Form
8288 or Form 8288–A but is subject to
the retention and reliance rules
generally applicable to certificates of
non-foreign status. See § 1.1445–2(b)(3).
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2. Withholding on Certain Distributions
Under Section 1445(e)
Certain distributions and other
transactions involving domestic or
foreign corporations, partnerships,
trusts, and estates can give rise to a
withholding requirement under section
1445(e). However, an entity or fiduciary
is not required to withhold under
section 1445(e) with respect to a
distribution or transfer to an interest
holder that is not a foreign person.
Consistent with the changes to the
documentation requirements under
section 1445(a), the proposed
regulations provide that a qualified
holder may provide a certificate of nonforeign status or a revised Form
W–8EXP to certify its status as a
qualified holder. Although providing
such documentation will relieve the
entity or fiduciary from withholding
obligations under section 1445(e), any
otherwise applicable reporting
requirements (for example, reporting
required on Form 1042–S, Foreign
Person’s U.S. Source Income Subject to
Withholding) remain applicable.
B. Withholding Under Section 1446
A partnership determines whether it
must withhold tax under section 1446
by first determining whether it has any
foreign partners, and, if it does have
foreign partners, by determining
whether it has ECTI allocable under
section 704 to any of its foreign
partners. § 1.1446–1(b). A partner that is
treated as a U.S. person only for certain
specified purposes is considered a
foreign partner for purposes of section
1446. § 1.1446–1(c)(1). Accordingly, a
qualified holder is treated as a foreign
partner for purposes of section 1446.
However, the proposed regulations
generally provide that any gain from the
disposition of a USRPI, or distribution
received from a QIE, that is not
otherwise treated as effectively
connected with a trade or business in
the United States will not be treated as
ECTI subject to section 1446
withholding to the extent allocable to a
qualified holder.
A partnership may rely on a valid
Form W–8 submitted for purposes of
section 1441 or section 1442 to establish
a partner’s foreign status. § 1.1446–
1(c)(2)(ii). The proposed regulations
update the description of withholding
certificates applicable to each type of
partner by permitting a partnership to
rely on Form W–8EXP both to
determine a partner’s foreign status and,
as appropriate, to exclude any gain from
the disposition of a USRPI, including
any distribution treated as gain from the
disposition of a USRPI under section
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897(h), from the determination of such
partner’s allocable share of ECTI. A
partnership may also rely on a
certificate of non-foreign status to treat
a partner as a qualified holder.
The proposed regulations do not
modify general reporting requirements
applicable to partnerships. For example,
a partnership required to file a
partnership return for a taxable year
‘‘shall furnish to every person who was
a partner’’ a statement of the partner’s
distributive share of income, gain, loss,
deduction, or credit. § 1.6031(b)–1T.
The requirement applies regardless of
whether the partner is domestic or
foreign. As a result, a partnership that
is required to file Form 1065, U.S.
Return of Partnership Income, and
accompanying schedules must report
income allocable to a qualified holder
on Schedule K–1, Partner’s Share of
Income, Deductions, Credit, etc.,
notwithstanding that such income is
exempt from section 897.
C. Coordination With Sections 1441 and
1442
Sections 1441 and 1442 require
withholding agents to deduct and
withhold a 30 percent tax on payments
of U.S. source fixed or determinable,
annual or periodical income to foreign
persons, including a U.S. source
corporate distribution described in
section 301(c)(1). A corporate
distribution described in section
301(c)(2) or (c)(3) that is not subject to
withholding under section 1441 or
section 1442 (for example, because the
distributing corporation made the
election described in § 1.1441–3(c)(1))
may nonetheless be subject to
withholding under section 1445 if the
distributing corporation is a USRPHC or
QIE. Section 1.1441–3(c)(4)(i)(A) and a
similar rule in § 1.1441–3(c)(4)(i)(C)
coordinate withholding under sections
1441 and 1445 with respect to
distributions from USRPHCs and QIEs.
Because a qualified holder is treated as
foreign for purposes of section 1441 but
not for purposes of section 1445,
distributions that would otherwise be
subject to the coordination rule should
be subject exclusively to section 1441 if
made to a qualified holder. Accordingly,
the proposed regulations provide that
distributions made by a USRPHC or QIE
to a qualified holder are not subject to
the coordination rules under § 1.1441–
3(c)(4) and instead are subject only to
the requirements of section 1441.
IV. Applicability Dates
The proposed regulations are
generally proposed to apply with
respect to dispositions of USRPIs and
distributions described in section 897(h)
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occurring on or after the date of
publication of the Treasury decision
adopting these rules as final regulations
in the Federal Register. However,
proposed §§ 1.897(l)–1(b)(1), 1.897(l)–
1(d)(5), 1.897(l)–1(d)(7), 1.897(l)–1(d)(9),
1.897(l)–1(d)(11), and 1.897(l)–1(d)(14)
are proposed to apply with respect to
dispositions of USRPIs and distributions
described in section 897(h) occurring on
or after June 6, 2019. See section
7805(b)(1)(B). These provisions contain
definitions that prevent a person that
would otherwise be a qualified holder
from claiming the exemption under
section 897(l) in situations where the
exemption may inure, in whole or in
part, to the benefit of a person other
than a qualified recipient. See Section
I.B.6 of this Explanation of Provisions.
The Treasury Department and the IRS
have determined that an immediate
applicability date under section
7805(b)(1)(B) is appropriate for these
provisions in order to address
transactions that are inconsistent with
the purposes of section 897(l) that may
occur before these rules are adopted as
final regulations.
A taxpayer may rely on the proposed
regulations with respect to dispositions
or distributions occurring on or after
December 18, 2015, and prior to the
applicability date of the final
regulations, if the taxpayer consistently
and accurately complies with the rules
in the proposed regulations.
Special Analyses
I. Regulatory Planning and Review—
Economic Analysis
Executive Orders 13563 and 12866
direct agencies to assess costs and
benefits of available regulatory
alternatives and, if regulation is
necessary, to select regulatory
approaches that maximize net benefits,
including potential economic,
environmental, public health and safety
effects, distributive impacts, and equity.
Executive Order 13563 emphasizes the
importance of quantifying both costs
and benefits, of reducing costs, of
harmonizing rules, and of promoting
flexibility.
These proposed regulations have been
designated as a significant regulatory
action by the Office of Management and
Budget’s Office of Information and
Regulatory Affairs (‘‘OIRA’’) and subject
to review under 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.
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A. Background
Section 897, more commonly known
as the Foreign Investment in Real
Property Tax Act (‘‘FIRPTA’’), was
enacted in 1980 due to concerns that the
Code provided foreign persons an
advantage in investing in U.S. real
property interests (USRPI) over U.S.
taxpayers because, unlike U.S.
taxpayers, foreigners were not subject to
U.S. capital gains tax on dispositions of
USRPI. Under FIRPTA, when a foreign
person sells USRPI, any gain on the sale
generally is subject to U.S. income tax.
Section 897(l), enacted in 2015 in the
Protecting Americans from Tax Hikes
Act (‘‘PATH Act’’), exempts qualified
foreign pension funds (‘‘QFPFs’’) from
tax under FIRPTA on gain from the sale
of USRPI, the so-called ‘‘foreign pension
fund exemption.’’ Such an exemption
has the effect of encouraging foreign
pension fund investment in the United
States (through investment in real
property) and, in general, provides
consistent tax treatment between foreign
pension funds and U.S. pension funds,
which normally are not taxed at the
entity level. This exemption is the
subject of the proposed regulations.
The foreign pension fund exemption
also affects a related withholding tax
levied under section 1445 on the sale of
USRPI to help enforce payment of the
tax owed by reason of section 897. The
rate for this withholding is 15 percent
of gross sales. In cases where the gross
withholding tax would exceed the tax
owed on the net capital gains, foreigners
typically request and receive approval
for reduced rates of gross withholding
tax. If withholding is excessive or
insufficient relative to tax owed on the
net capital gains, the difference is made
up on the foreigner’s U.S. tax return.
Thus, guidance that governs the foreign
pension fund exemption additionally
necessitates guidance over the
withholding tax.
IRS tax data for 2015 and 2016 show
an average of approximately 160 foreign
pension funds earning income from U.S.
real property. Only a fraction of these
funds are likely to sell or transfer USRPI
in any given year.
B. The Need for Proposed Regulations
Comments received indicate that
some foreign pension funds have
refrained from investment in U.S. real
property, including infrastructure
projects, due to ambiguities over their
qualification for the foreign pension
fund exemption. Affected parties have
provided a number of comments
requesting clarifications of the statutes.
The Treasury Department and the IRS
have determined that such comments
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warrant the issuance of further
guidance. The proposed regulations do
not specifically aim to increase or
decrease foreign pension fund
investment in the U.S. Instead, they aim
to provide guidance such that
investment can be made on an efficient
basis consistent with the intents and
purposes of the statute.
C. Summary of Proposed Regulations
The regulations clarify and modify the
conditions under which foreign pension
funds are exempt from taxation under
section 897. In plain language, the
proposed regulations provide further
clarity over (a) the entities and
organizational structures that are
eligible for the foreign pension fund
exemption; (b) the nature of the benefits,
beneficiaries, and foreign taxation of
eligible funds; and (c) the
documentation rules that apply to
exemptions from withholding taxes
otherwise required by sections 1445
(these exemptions from withholding
taxes flow from the foreign pension
fund exemption from tax under section
897). In addition, the proposed
regulations provide rules to prevent the
inappropriate avoidance of FIRPTA by
imposing conditions on the sale of
certain investment vehicles wholly
owned by a foreign pension fund.
D. Economic Analysis
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1. Baseline
The Treasury Department and the IRS
have assessed the benefits and costs of
the proposed regulations relative to a
no-action baseline reflecting anticipated
Federal income tax-related behavior in
the absence of these proposed
regulations.
2. Summary of Economic Effects
In general, a tax system that
prioritizes minimization of distortions
aims to treat income earned by similar
economic activities similarly, subject to
considerations of compliance burden
and tax administrability and to the
intents and purposes of Congress. The
proposed guidance adheres to this
principle. In plain language, section
897(l) exempts certain foreign pension
funds from tax under FIRPTA, and the
proposed guidance qualifies the terms of
this exemption by further defining the
permissible activities, ownership
patterns, and other economic decisions
undertaken by foreign pension funds.
Such guidance helps ensure that the tax
system does not favor or disfavor
particular QFPF activities over
economically similar QFPF activities, a
requirement for an economically
efficient tax system conditional on the
underlying Code.
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As a result of the added clarity and
reduced compliance burdens relative to
the baseline, the proposed regulations
have the effect of providing more
efficient investment incentives, relative
to the baseline and in light of the intents
and purposes of the statute. The
Treasury Department and the IRS have
not estimated the effects of the proposed
regulations on the U.S. economy.
3. Economic Analysis of Specific
Provisions
The Treasury Department and the IRS
identified four provisions in the
proposed regulations for which
economic analysis might play a
meaningful role in selecting the form of
the regulations. This part I.D.2 of this
Special Analyses describes this analysis.
The Treasury Department and the IRS
solicit comments on the economics of
each of the items discussed
subsequently and of any other items of
the proposed regulations not discussed
in this section. The Treasury
Department and the IRS particularly
solicit comments that provide data,
other evidence, or models that could
enhance the rigor of the process by
which provisions might be developed
for the final regulations.
a. Investing in USRPI Directly and Using
Pooled Investment Vehicles
Foreign pension funds often hold
USRPI indirectly through intermediate
entities, including entities with multiple
foreign pension fund owners. While the
statute contains language stating that an
entity wholly owned by a QFPF is itself
a QFPF, section 897(l) is silent on
whether the entity must be wholly
owned by a single QFPF (or,
alternatively, may be wholly owned by
multiple QFPFs).
Because the economic incentives
faced by foreign pension funds under
these various ownership structures
regarding investment in USRPI are
similar to the incentives faced by QFPFs
with simpler structures, the Treasury
Department and the IRS have
determined that it would be consistent
with the intents and purposes of the
statute and minimize the potential for
distortionary choices for them to be
eligible for the foreign pension fund
exemption. Thus, the proposed
regulations explicitly allow indirect
investments and pooled investments to
qualify for the exemption. The Treasury
Department and the IRS considered
alternative guidance that was more
restrictive than the proposed regulations
but, under that alternative, foreign
pension funds could avail themselves of
an exemption only on a more restricted
set of U.S. investment options and
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would be denied the exemption on
economically similar investments, a
situation that would generally lead to an
economically inferior outcome.
b. Avoidance Through Use of Foreign
Subsidiary
A foreign person that is not a
qualified foreign pension fund (‘‘nonQFPF’’) that holds USRPI directly
would be taxed under FIRPTA if the
non-QFPF sells the USRPI. If the nonQFPF instead holds USRPI indirectly
through a foreign subsidiary, the nonQFPF can sell the foreign subsidiary
without taxation under section 897, but,
in that case, the unrealized gain in the
USRPI would remain potentially subject
to tax under FIRPTA on disposition of
the USRPI. Absent a provision to the
contrary in the proposed regulations, if
the non-QFPF instead sells the foreign
subsidiary to a QFPF, the QFPF could
cause the foreign subsidiary to sell the
USRPI immediately (or in the future)
without incurring tax under section 897,
thus eliminating the taxation (or
potential for future taxation) of gain in
the USRPI. As a result, subject to other
provisions and judicial doctrines (for
example, the step transaction doctrine
and the economic substance doctrine), a
QFPF could be used as a conduit for a
non-QFPF to sell a USRPI to a purchaser
without incurring (or preserving) tax
under section 897 on the unrealized
gain of the seller. The Treasury
Department and the IRS project that
such activity would reduce U.S. tax
revenue and would not result in an
accompanying economic benefit to the
U.S. economy.
To curtail this tax avoidance, the
proposed regulations provide a
transitory restriction on exemption
when a foreign subsidiary that owns
USRPI is purchased by a QFPF or
qualified controlled entity (‘‘QCE’’) of a
QFPF from a non-QFPF or a foreign
person that is not a QCE. This transitory
restriction, referred to as a testing
period, is described in full in part I.B.6
of the Explanation of Provisions of the
Preamble. Among other criteria, under
the proposed regulations the foreign
pension fund exemption generally is not
available for gain recognized by an
entity from the disposition of a USRPI
if such entity was not a QFPF or QCE
at any time during the 10-year period
prior to the recognition of that gain.
The Treasury Department and the IRS
considered as an alternative requiring
the controlled entity acquired by the
foreign pension fund to account for the
gain at the time the entity was acquired
by the foreign pension fund (known as
mark-to-market) or requiring tracking of
the unrealized gain at the time of sale
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to a QFPF or QCE for later recognition
and also considered, under the testing
period approach, different lengths for
that component of the testing period.
The mark-to-market or tracking
approaches impose greater compliance
and administrative costs relative to the
testing period approach without
providing any accompanying general
economic benefit.
The Treasury Department and the IRS
aim, through this testing period
approach and accompanying
requirements, to minimize tax
avoidance while facilitating efficient
foreign pension fund investment in
USRPI, consistent with the intents and
purposes of the statute. The Treasury
Department and IRS solicit comments
on this proposal, particularly comments
that provide data, other evidence, or
models that could enhance the rigor of
the process by which anti-abuse
provisions might be developed for the
final regulations.
c. Ancillary Benefits
Section 897(l) specifies, along with
other qualifications, that the exemption
is available to foreign entities that are
‘‘established’’ to provide retirement or
pension benefits. However, many
foreign pension funds provide ancillary
benefits such as death, terminal health,
disability, medical, unemployment, and
survivor benefits in addition to
retirement and pension benefits. These
funds may be reluctant to invest in
USRPI due to uncertainty over whether
the fund meets this particular statutory
criterion.
The Treasury Department and the IRS
considered an option to deny the
exemption to foreign pension funds that
provide any benefits other than
retirement and pension benefits. This
option runs the risk of effectively
eliminating foreign pension fund
investment in USRPI because it would
deny the exemption to foreign pension
funds no matter how close to 100
percent of their benefits were retirement
or pension related, or would require
funds that wanted to invest in the U.S.
under competitive conditions to
undergo costly restructuring to
eliminate or segregate those benefits, if
such options were even feasible under
the foreign country’s laws and
institutions. Both of these outcomes are
economically inefficient relative to the
proposed policies and the baseline
because relative to these options, they
incentivize socially costly tax avoidance
choices and/or overly restrict
incrementally improving market-driven
choices.
The proposed regulations provide a
bright-line test limiting the amount of
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ancillary benefits to 15 percent or lower.
Such threshold was chosen in part
based on suggestions from comments.
The Treasury Department and the IRS
aim, through the bright-line approach
and this specific percentage test, to
facilitate foreign pension fund
investment in the U.S. consistent with
the intents and purposes of the statute.
The Treasury Department and the IRS
solicit comments on this proposed
standard, and particularly solicit
comments that provide data, other
evidence, or models that could enhance
the rigor of the process by which the
percentage limitation might be
developed for the final regulations.
The Treasury Department and the IRS
recognize that the threshold approach
may result in a small number of foreign
pension funds oscillating between
qualifying and not qualifying on a yearto-year basis and that such approach
requires measurement of ancillary
benefits relative to retirement and
pension benefits. Thus, the Treasury
Department and the IRS further solicit
comments on alternatives to the
threshold approach and particularly
solicit comments that provide data,
other evidence, or models that could
enhance the rigor of the process by
which the tax treatment of foreign
pension funds that provide ancillary
benefits might be developed for the final
regulations.
d. Determination of Foreign Tax
Preference
Under the statute, to qualify for
exemption a foreign pension fund must
be subject to tax laws in the country in
which the fund is established or
operates such that contributions to the
fund are deductible or excluded from
the gross income of the fund or taxed at
a reduced rate, or tax on investment
income of the fund is deferred or that
income is taxed a reduced rate.
To provide further specificity over
what qualifies as a preferential tax rate
on contributions to or income from the
fund, the Treasury Department and the
IRS considered providing a substantive,
analytical test for determining whether
a foreign pension fund benefits from a
preferential tax rate. This option would
prove difficult to administer and require
complex rules to determine whether a
pension fund benefits from a
preferential tax regime in the country in
which it is established.
To reduce compliance burden and
enhance administrability, the proposed
regulations expand the scope of the
potential preferential tax regimes and
provide a bright-line test for
determining preferential treatment by
setting a threshold (85 percent) for the
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26615
percentage of fund contributions/
income that is subject to a preferential
regime. The 85 percent threshold was
chosen in part based on suggestions
from comments. The Treasury
Department and the IRS aim, through
this bright-line approach and this
specific percentage test, to facilitate
foreign pension fund investment in
USRPI consistent with the intents and
purposes of the statute while
minimizing the costs of tax
administrability.
The Treasury Department and the IRS
solicit comments on this proposal, and
in particular comments that provide
data, other evidence, or models that
could enhance the rigor of the process
by which the 897(l)(2)(E) requirements
might be developed for the final
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
proposed regulations are in §§ 1.1441–
3(c)(4)(iii), 1.1445–2, 1.1445–4, 1.1445–
5, 1.1445–8, and 1.1446–1.
In 2018, the IRS released and took
comment on drafts of three forms in
order to give members of the public the
opportunity to benefit from certain
specific revisions made to the Code. The
forms were Form 1042–S, ‘‘Foreign
Person’s U.S. Source Income Subject to
Withholding,’’ Form 1042, ‘‘Annual
Withholding Tax Return for U.S. Source
Income of Foreign Persons’’ and Form
W–8EXP, ‘‘Certificate of Foreign
Government or Other Foreign
Organization for United States Tax
Withholding or Reporting.’’ The IRS
received no comments on the forms
during the comment period.
Consequently, the IRS made the forms
available for use by the public on
November 30, 2018 (in the case of Form
1042–S), November 21, 2018 (in the case
of Form 1042), and July 20, 2017 (in the
case of Form W–8EXP). The IRS is
contemplating making additional
changes to those three forms in
connection with these regulations.
The Treasury Department and the IRS
request comments on all aspects of
information collection burdens related
to the proposed regulations, including
estimates for how much time it would
take to comply with the paperwork
burdens described below for each
relevant form and ways for the IRS to
minimize the paperwork burden.
Proposed revisions to these forms that
reflect the information collections
contained in these proposed regulations
will be made available for public
comment at www.irs.gov/draftforms and
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will not be finalized until after these
regulations take effect and have been
approved by OMB under the PRA. The
Treasury Department and the IRS have
not estimated the burden, including that
of any new information collections,
related to the requirements under the
proposed regulations.
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A. Information Collections Contained in
§ 1.1441–3(c)(4)(iii)
The proposed regulations provide that
distributions made by a USRPHC or QIE
to a qualified holder are subject only to
the requirements of section 1441 and
not the coordination rule under
§ 1.1441–3(c)(4). Proposed § 1.1441–
3(c)(4)(iii). As a result, 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 this reporting, the IRS
is planning to revise Form 1042–S to
include an income code designating
payments made to Qualified Foreign
Pension Plans. No revisions are being
made to Form 1042 in connection with
payments made to Qualified Foreign
Pension Plans.
For purposes of the PRA, the
reporting burden associated with
proposed § 1.1441–3(c)(4)(iii) 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). The PRA submissions for
Form 1042 reflect IRS’s transition to an
updated statistical model that calculates
burden based on the taxpayer filing
experience as a whole. As such, Form
1042 is in a transition state, as the
burden incurred by business filers is
captured in OMB control number 1545–
0123 (under the updated burden model)
and the burden represented incurred by
all other filers is represented in 1545–
0096 (legacy model).
B. Information Collections in §§ 1.1445–
2, 1.1445–4, 1.1445–5, 1.1445–8, and
1.1446–1
Proposed §§ 1.1445–2, 1.1445–4,
1.1445–5, 1.1445–8, and 1.1446–1
would require a qualified foreign
pension fund wishing to claim an
exemption under section 897(l) to
provide a withholding agent with either
a Form W–8EXP, ‘‘Certificate of Foreign
Government or Other Foreign
Organization for United States Tax
Withholding or Reporting,’’ or, at a
withholding agent’s request and in lieu
of Form W–8EXP, a certificate of non-
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foreign status containing the same
information as Form W–8EXP. The IRS
plans to revise Form W–8EXP for use by
qualified foreign pension funds. For
purposes of the PRA, the reporting
burden associated with proposed
§§ 1.1445–2, 1.1445–4, 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
proposed 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 2.70
million hours) and 1545–1621 (which
represents a total estimated burden
time, including all other related forms
and schedules for other filers, of 25.13
million hours and total estimated
monetized costs of $2.39 billion). 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 proposed
regulations. These numbers are
therefore unrelated to the future
calculations needed to assess the burden
imposed by the proposed 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 imposed
prior to the PATH Act.
III. Regulatory Flexibility Act
Pursuant to the Regulatory Flexibility
Act (5 U.S.C. chapter 6), it is hereby
certified that the proposed rule 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
foreign entities are not considered small
entities. These regulations will affect
foreign pension funds and not U.S.
pension funds. In addition, based on
comments received, the foreign pension
funds that are affected are sovereign
funds, which are not small entities.
Accordingly, a regulatory flexibility
analysis under the Regulatory
Flexibility Act is not required. Pursuant
to section 7805(f), this notice of
proposed rulemaking has been
submitted to the Chief Counsel for
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Advocacy of the Small Business
Administration for comment on its
impact on small business.
IV. 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. In 2018, that
threshold is approximately $150
million. This rule does 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.
V. 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. This
proposed rule does not have federalism
implications, does not impose
substantial direct compliance costs on
state and local governments, and does
not preempt state law within the
meaning of the Executive Order.
Comments and Requests for Public
Hearing
Before these proposed regulations are
adopted as final regulations,
consideration will be given to any
comments that are submitted timely to
the IRS as prescribed in this Preamble
under the ADDRESSES heading. The
Treasury Department and the IRS
request comments on all aspects of the
proposed rules. All comments will be
available at www.regulations.gov or
upon request. A public hearing will be
scheduled if requested in writing by any
person that timely submits written
comments. If a public hearing is
scheduled, notice of the date, time, and
place for the public hearing will be
published in the Federal Register.
Drafting Information
The principal authors of these
proposed regulations are Joshua Rabon,
formerly with the Office of Associate
Chief Counsel (International), and
Milton Cahn, Office of Associate Chief
Counsel (International). However, other
personnel from the Treasury
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Department and the IRS participated in
their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is
proposed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 is amended by adding entries
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).
*
*
*
*
*
Par. 2. Section 1.897(l)–1 is added to
read as follows:
■
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§ 1.897(l)–1 Exception for interests held by
foreign pension funds.
(a) Overview. This section provides
rules regarding the exception from
section 897 for qualified holders.
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 definitions.
Paragraph (e) of this section provides
examples illustrating the application of
the rules of this section. Paragraph (f) 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 §§ 1.1441–3, 1.1445–2,
1.1445–4, 1.1445–5, 1.1445–8, 1.1446–7.
(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. This
paragraph (c) provides rules regarding
the application of the requirements of
section 897(l)(2) to an eligible fund.
Paragraph (c)(2) of this section provides
requirements that an eligible fund must
satisfy to be treated as a qualified
foreign pension fund. Paragraph (c)(3) of
this section provides rules on the
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application of the requirements in
paragraph (c)(2) of this section,
including rules regarding the
application of the requirements in
paragraph (c)(2) of this section to an
eligible fund that is an organization or
arrangement.
(2) Requirements applicable to an
eligible fund—(i) Created or organized.
An eligible fund must be created or
organized under the law of a foreign
country. For purposes of this paragraph
(c)(2)(i), a governmental unit is treated
as created or organized in the foreign
country with respect to which it is, or
is a part of, the foreign government.
(ii) Purpose of eligible fund—(A) In
general. An eligible fund must be
established by—
(1) 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; or
(2) 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.
(B) Established to provide retirement
or pension benefits. An eligible fund is
treated as satisfying the requirement of
paragraph (c)(2)(ii)(A) of this section if
and only if—
(1) All of the benefits that an eligible
fund provides are qualified benefits
provided to qualified recipients; and
(2) At least 85 percent of the present
value of the qualified benefits that the
eligible fund reasonably expects to
provide are retirement or pension
benefits.
(C) 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 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 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
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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 and 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. An eligible
fund must—
(1) Be subject to government
regulation, and
(2) Provide annual information about
its beneficiaries to the relevant tax
authorities in the foreign country in
which it is established or operates, or
such information must otherwise be
available to the relevant tax authorities
in the foreign country in which it is
established or operates.
(B) Information to be provided. An
eligible fund is treated as satisfying the
requirement of paragraph (c)(2)(iv)(A)(2)
of this section only if the eligible fund
annually provides to the relevant tax
authorities in the foreign country in
which it 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 such relevant tax
authorities. An eligible fund is not
treated as failing to satisfy the
requirement of paragraph (c)(2)(iv)(A)(2)
of this section as a result of the eligible
fund not being required to provide
information to the relevant tax
authorities in a year in which no
qualified benefits are provided to
qualified recipients.
(C) Relevant tax authorities. An
eligible fund is treated as satisfying the
requirement of paragraph (c)(2)(iv)(A)(2)
of this section if the eligible fund is
required, pursuant to the laws of the
foreign country in which it is
established or operates, to provide the
information described in paragraph
(c)(2)(iv)(B) of this section to one or
more governmental units of the foreign
country in which the eligible fund is
created or organized, or if such
information is otherwise available to
one or more governmental units of the
foreign country in which the eligible
fund is created or organized.
(D) Treatment of certain governmental
units. An eligible fund that is described
in paragraph (c)(2)(ii)(A)(1) of this
section, but is not also described in
paragraph (c)(2)(ii)(A)(2) 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
laws of the foreign country in which the
eligible fund is established or operates
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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 income tax laws of the
foreign country 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 country in which it is
established and operates or the foreign
country in which it is established and
operates has no income tax.
(D) Other preferential tax regimes. An
eligible fund that does not receive the
tax treatment described in either
paragraphs (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 laws of the country in
which the eligible fund is established
and 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
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) Subnational jurisdictions. Solely
for purposes of this paragraph (c)(2)(v),
a reference to a foreign country does not
include a reference to a state, province,
or political subdivision of a foreign
country.
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(3) Rules on the application of the
requirements in paragraph (c)(2) of this
section—(i) In general. Except as
provided in paragraph (c)(3)(ii) of this
section, 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.
(ii) Foreign status determined
independently. Each person or
governmental unit that is part of an
organization or arrangement must
independently satisfy the requirement
of paragraph (c)(2)(i) of this section.
(iii) Relevant income, assets, and
functions. The determination of whether
an eligible fund satisfies the
requirements of paragraphs (c)(2)(ii)
through (v) of this section is made solely
with respect to the income and assets
held by the eligible fund 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 qualified segregated
accounts maintained by an eligible fund
are treated as a single qualified
segregated account.
(d) Definitions. The following
definitions apply for purposes of this
section.
(1) Ancillary benefits. The term
ancillary benefits means benefits
payable upon the diagnosis of a terminal
illness, death benefits, disability
benefits, medical benefits,
unemployment benefits, or similar
benefits.
(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 country. The term foreign
country means a country other than the
United States. Except for purposes of
paragraph (c)(2)(v) of this section,
references in this section to a foreign
country include references to a state,
province, or political subdivision of a
foreign country. Solely for purposes of
this section, the Commonwealth of
Puerto Rico and any possession of the
United States are treated as a foreign
country.
(5) Governmental unit. The term
governmental unit means any foreign
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government or part thereof, including
any person, body, group of persons,
organization, agency, bureau, fund, or
instrumentality, however designated, of
a foreign government.
(6) Organization or arrangement. The
term organization or arrangement
means one or more trusts, corporations,
governmental units, or employers.
(7) Qualification date. The term
qualification date means, with respect
to an entity or governmental unit, the
earliest date during an uninterrupted
period ending on the date of the
disposition or the distribution, as the
case may be, in which the trust,
corporation, governmental unit, or
employer is a qualified foreign pension
fund or a qualified controlled entity.
(8) Qualified benefits. The term
qualified benefits means retirement,
pension, or ancillary benefits.
(9) Qualified controlled entity. The
term qualified controlled entity means a
trust or corporation organized under the
laws of a foreign country 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 or
partnerships.
(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—(i) In general.
The term qualified holder means a
qualified foreign pension fund or a
qualified controlled entity.
(ii) Limitation. Notwithstanding
paragraph (d)(11)(i) of this section, a
qualified holder does not include any
trust, corporation, governmental unit, or
employer that, at any time during the
testing period, determined without
regard to this paragraph (d)(11)(ii), was
not a qualified foreign pension fund, a
part of a qualified foreign pension fund,
or a qualified controlled entity. The
preceding sentence does not apply to an
entity that owned no United States real
property interests as of the qualification
date.
(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) 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)(2) of
this section, a current or former
employee or any person designated by
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such current or former employee to
receive qualified benefits.
(ii) Special rule regarding automatic
designation. For purposes of paragraph
(d)(12)(i) of this section, a person is
treated as designating another person to
receive 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 contractual terms
applicable to the eligible fund or
pursuant to the laws of the foreign
country 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
for the sole purpose of funding qualified
benefits to qualified recipients.
(ii) Assets held by eligible funds. For
purposes of paragraph (d)(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 only if
the contractual terms applicable to the
eligible fund or the laws of the foreign
country 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 this purpose, the fact that
assets or income may inure to the
benefit of a governmental unit by
operation of escheat or similar laws is
ignored.
(iii) Assets held by qualified
controlled entities. For purposes of
paragraph (d)(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 its
income inuring to the benefit of a
person other than a qualified recipient;
and
(B) 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
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qualified segregated account of a
qualified foreign pension fund or
another qualified controlled entity upon
dissolution.
(14) Testing period. The term testing
period means, with respect to a trust,
corporation, governmental unit, or
employer and a disposition described in
section 897(a) or a distribution
described in section 897(h), as the case
may be, the shortest of—
(i) The period beginning on December
18, 2015, and ending on the date of the
disposition or the distribution;
(ii) The ten-year period ending on the
date of the disposition or the
distribution; and
(iii) The period during which the
entity (or its predecessor) was in
existence.
(e) Examples. This paragraph (e)
provides examples that illustrate the
rules of this section. The following
examples do not illustrate the
application of the applicable
withholding rules, including sections
1445 and 1446 and the regulations
thereunder. For the purposes of the
examples in this paragraph (e), unless
otherwise stated, the following facts are
presumed. 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
paragraph (c)(2)(iii)(B) of this section.
The limitation described in paragraph
(d)(11)(ii) of this section does not apply
to any entity.
(1) Example 1. No legal entity—(i) Facts.
Country A establishes Retirement Plan for the
sole purpose of providing retirement benefits
to all citizens of Country A aged 65 or older.
Retirement Plan is comprised 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 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. In Year 1, Agency sells Property,
which is an interest in real property located
in the United States owned by Asset Pool,
recognizing $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
comprised of Asset Pool and Agency, is
comprised of one or more governmental units
described in paragraph (d)(5) of this section.
Accordingly, Retirement Plan is an
organization or arrangement described in
paragraph (d)(6) of this section. Furthermore,
Retirement Plan maintains a qualified
segregated account in the form of Asset Pool,
an identifiable pool of assets maintained for
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26619
the sole purpose of funding retirement
benefits to beneficiaries of the Retirement
Fund (qualified recipients as defined in
paragraph (d)(12)(i)(A) of this section).
Therefore, Retirement Plan is an eligible fund
within the meaning of paragraph (d)(2) of this
section.
(B) In determining whether or not
Retirement Plan is an eligible fund that
satisfies the requirements of paragraph (c)(2)
of this section and is treated as a qualified
foreign pension fund, the rules of paragraph
(c)(3) of this section apply. Accordingly, the
activities of Asset Pool and Agency are
integrated and treated as undertaken by a
single entity to determine whether the
requirements of paragraphs (c)(2)(ii) through
(v) 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 comprised of Asset
Pool and Agency, each of which is a
governmental unit and treated as created or
organized under the law 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 to provide retirement benefits,
which are qualified benefits described in
paragraph (d)(8) of this section, to all citizens
of Country A, who are qualified recipients
described in paragraph (d)(12)(i)(A) of this
section because they are eligible to be
participants or beneficiaries of Retirement
Plan. In addition, all of the benefits that
Retirement Plan provides are qualified
benefits provided to qualified recipients, and
at least 85 percent of the benefits that
Retirement Plan reasonably expects to
provide are retirement or pension benefits.
Accordingly, Retirement Plan satisfies the
requirement of paragraph (c)(2)(ii) of this
section.
(E) Retirement Plan provides retirement
benefits to all 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 comprised solely of
governmental units within the meaning of
paragraph (d)(5) of this section. Accordingly,
under paragraph (c)(2)(iv)(D) 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 paragraphs (c)(2)(i) through
(v) of this section, Retirement Plan is a
qualified foreign pension fund as defined in
paragraph (d)(10) of this section. Because
Retirement Plan is a qualified foreign
pension fund and the limitation described in
paragraph (d)(11)(ii) of this section does not
apply, Retirement Plan is a qualified holder.
Retirement Plan’s gain with respect to
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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
recognized 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 benefits to current and
former employees of Employer and S1, a
Country B corporation that is wholly owned
by Employer. Fund is established as a trust
under the law of Country B, and Employer
retains discretion to invest assets and to
administer benefits on Fund’s behalf. Fund
receives contributions from Employer and
contributions from employees that 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 the 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 a death benefit to the beneficiary’s
designee (or deemed designee under local
law if the beneficiary fails to identify a
beneficiary). It is reasonably expected that
such death benefits will account for less than
fifteen percent of the present value of the
qualified benefits that Fund expects to
provide in the future. Fund annually
provides to the tax authorities of Country B
the amount of qualified 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.
(ii) Analysis. (A) Fund is a trust that
maintains an identifiable pool of assets for
the sole purpose of funding retirement and
ancillary benefits to current and former
employees of Employer (qualified recipients
as defined in paragraph (d)(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 (d)(13) of
this section. Accordingly, Fund is an eligible
fund within the meaning of paragraph (d)(2)
of this section.
(B) Because Fund is created or organized
under the law of Country B, Fund satisfies
the requirement of paragraph (c)(2)(i) of this
section.
(C) All of the benefits provided by Fund
are qualified benefits because the only
benefits that Fund provides are pension or
retirement benefits or ancillary benefits
described in paragraph (d)(1) of this section,
which are qualified benefits described in
paragraph (d)(8) of this section, to qualified
recipients. Furthermore, Fund reasonably
anticipates that more than 85 percent of the
present value of benefits paid to qualified
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participants will be retirement or pension
benefits. Accordingly, Fund is established by
Employer to provide retirement or pension
benefits to qualified recipients in
consideration for services rendered by such
qualified recipients to such employers, 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 country 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
described in paragraph (d)(10) of this section.
As a qualified foreign pension fund with
respect to which the limitation described in
paragraph (d)(11)(ii) of this section does not
apply, Fund is a qualified holder. All of
Fund’s assets are held in a qualified
segregated account within the meaning of
paragraph (d)(13) of this section.
Consequently, under paragraph (b) of this
section, any gain or loss of Fund from the
disposition of a United States real property
interest, including any distribution treated as
gain from the disposition of a United States
real property interest under section 897(h), is
not subject to section 897(a).
(3) Example 3. Employer controlled
group—(i) Facts. The facts are the same as in
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 testing 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) of this section and
an eligible fund under (d)(2) of this section
with respect to the qualified segregated
account held by Fund. Because the eligible
fund comprised of Fund and S2 satisfies the
requirements of paragraph (c)(2) of this
section (including the requirement under
paragraph (c)(3)(ii) of this section that each
entity satisfy the foreign organization
requirement of paragraph (c)(2)(i) of this
section), the eligible fund that is comprised
of Fund and S2 constitutes a qualified foreign
pension fund described in paragraph (d)(10)
of this section. Thus, under paragraph (b) of
this section, gain or loss of Fund from the
disposition of a United States real property
interest, including any distribution treated as
gain from the disposition of a United States
real property interest under section 897(h), is
not subject to section 897(a).
(4) Example 4. Third-party assumption of
pension liabilities—(i) Facts. The facts are the
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same as in Example 2, except that Fund
anticipates $100x of qualified benefits will be
paid each year beginning in Year 5. Fund
enters into an agreement with Guarantor, a
privately held Country B corporation, which
provides that Fund will, in Year 1, cede a
portion of its assets to Guarantor in exchange
for annual payments of $100x beginning in
Year 5 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. In Year 2, 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. In Year 4,
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.
(5) Example 5. Asset manager—(i) Facts.
The facts are the same as in Example 4
except that instead of ceding legal ownership
of the assets to Guarantor, Fund transfers
assets to Guarantor to be held in Trust on
behalf of Fund. Guarantor has exclusive
management authority over the assets, and is
entitled to a reasonable fixed management fee
which it withdraws annually from Trust’s
assets.
(ii) Analysis. Assets held by Fund,
including its interest in Trust, are treated as
held by Fund, a qualified holder within the
meaning of paragraph (d)(11) of this section,
in a qualified segregated account within the
meaning of paragraph (d)(13) of this section.
Paragraph (d)(13)(ii) of this section provides
that the assets of the 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. Consequently,
the limitation of paragraph (b)(2) of this
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section does not apply and Fund Guarantor
is 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. Partnership—(i) Facts. The
facts are the same as in Example 4 except that
instead of ceding legal ownership of the
assets to Guarantor, Fund contributes the
assets to a partnership (PRS) formed with
Guarantor. Guarantor contributes nominal
capital to the partnership, but receives a
profits interest in the partnership that is
reasonable in light of the Guarantor’s
management activity. Guarantor serves as the
general partner of PRS and has discretionary
authority to buy and sell PRS assets without
approval from Fund.
(ii) Analysis. All of Fund’s assets,
including the partnership interest, are held in
a qualified segregated account within the
meaning of paragraph (d)(13) of this section.
See Example 2, paragraph (ii)(A) of this
section. Accordingly, Fund is exempt under
paragraph (b) of this section with respect to
gain or loss from the disposition of a United
States real property interest, including any
distribution treated as gain from the
disposition of a United States real property
interest under section 897(h), that is allocable
to Fund from PRS. Guarantor is not exempt
under paragraph (b) of this section with
respect to gain or loss allocable to Guarantor
from PRS.
(7) Example 7. Wholly-owned entity—(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.
Fund originally formed OpCo on January 1,
2016, for the purpose of conducting the
manufacturing business and utilizing the
business profits to fund pension liabilities.
OpCo either retains or distributes to Fund all
of its net earnings, and upon dissolution,
must distribute all of its assets to
stockholders after satisfaction of liabilities to
its creditors. Fund has held all of the stock
of OpCo since OpCo was formed. On June 1,
2017, OpCo realizes $100 of gain on the
disposition of Property A, a United States
real property interest.
(ii) Analysis. (A) A qualified holder
described in paragraph (d)(11) of the section
includes a qualified controlled entity
described in paragraph (d)(9) of this section.
A qualified controlled entity includes any
corporation organized under the laws of a
foreign country 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.
(B) A qualified controlled entity is a
qualified holder under paragraph (d)(11) of
this section, but only if the qualified
controlled entity was a qualified controlled
entity throughout the entire testing period.
The testing period under paragraph (d)(14) of
this section is the shortest of the period
beginning on December 18, 2015, and ending
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on the date of the disposition or the
distribution; the ten-year period ending on
the date of the disposition or the distribution;
or the period during which the entity was in
existence. Thus, the testing period is January
1, 2016 (the date of formation) to June 1, 2017
(the date of the disposition). Because OpCo
was a qualified controlled entity as defined
in paragraph (d)(9) of this section at all times
during that period, the limitation in
paragraph (d)(11)(ii) of this section does not
apply to OpCo, and OpCo is a qualified
holder under paragraph (d)(11) of this
section.
(C) Under paragraph (b)(2) of this section,
only gain or loss attributable to a qualified
segregated account is exempt under section
897(l). All of OpCo’s net earnings are
credited to its own account or distributed to
Fund and credited to Fund’s qualified
segregated account. Upon dissolution, all of
OpCo’s assets, after satisfaction of liabilities
to persons having interests in the entity
solely as creditors, would be distributed to
OpCo’s sole shareholder, Fund, and credited
to Fund’s qualified segregated account.
Accordingly, all of OpCo’s assets constitute
a qualified segregated account. Therefore, the
limitation in paragraph (b)(2) of this section
does not apply, and the $100x gain realized
by OpCo, a qualified holder, from the
disposition of Property A on June 1, 2017, is
not subject to tax under section 897(a).
(8) Example 8. Not a qualified holder—(i)
Facts. The facts are the same as in Example
7, except that Opco was formed by a person
other than Fund on January 1, 2016, and
Fund acquired all the stock of OpCo on
November 1, 2016. During the period from
January 1, 2016, and October 31, 2016, Opco
was not a qualified foreign pension fund, a
part of a qualified foreign pension fund, or
a qualified controlled entity. OpCo owned
Property A before November 1, 2016.
(ii) Analysis. Under paragraph (d)(11)(ii) 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, 2016 (the date of formation of OpCo) to
June 1, 2017 (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, 2016 to November 1, 2016,
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, 2016.
(f) Applicability date—(1) In general.
Except as otherwise provided in
paragraph (f)(2) of this section, this
section applies to a disposition of a
United States real property interest, or
a distribution described in section
897(h), occurring on or after the date of
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publication of the Treasury decision
adopting these rules as final regulations
in the Federal Register.
(2) Certain Provisions. Paragraphs
(b)(1), (d)(5), (7), (9), (11), and (14) 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.
■ Par. 3. Section 1.1441–3 is amended
by adding paragraph (c)(4)(iii) to read as
follows:
§ 1.1441–3
withheld.
Determination of amounts to be
*
*
*
*
*
(c) * * *
(4) * * *
(iii) Special rule for qualified
holders—(A) In general. Any corporate
distribution made by a USRPHC or a
QIE to a payee that is a qualified holder
(as defined in § 1.897(l)–1(d)(11)) shall
not be subject to the rules of this
paragraph (c)(4) but shall be subject to
the requirements of paragraphs (c)(1)
through (3) of this section.
(B) Applicability date. Paragraph
(c)(4)(iii)(A) of this section applies to
distributions made by a USRPHC or a
QIE occurring on or after the date of
publication of the Treasury decision
adopting these rules as final regulations
in the Federal Register.
*
*
*
*
*
■ Par. 4. Section 1.1445–2 is amended
by revising paragraphs (b)(1) and
(b)(2)(i)(C) and adding paragraph
(b)(2)(v) and a new sentence at the end
of paragraph (e) to read as follows:
§ 1.1445–2 Situations in which withholding
is not required under section 1445(a).
*
*
*
*
*
(b) * * *
(1) In general. No withholding is
required under section 1445 if the
transferor of a U.S. real property interest
is not a foreign person. Therefore,
paragraph (b)(2) of this section provides
rules pursuant to which the transferor
can provide a certification of nonforeign status to inform the transferee
that withholding is not required. A
transferee that obtains such a
certification must retain that document
for five years, as provided in paragraph
(b)(3) of this section. Except to the
extent provided in paragraph (b)(4) of
this section, obtaining this certification
excuses the transferee from any liability
otherwise imposed by section 1445 and
§ 1.1445–1(e). However, section 1445
and the rules of this section do not
impose any obligation upon a transferee
to obtain a certification from the
transferor; thus, a transferee may instead
rely upon other means to ascertain the
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non-foreign status of the transferor. If,
however, the transferee relies upon
other means and the transferor was, in
fact, a foreign person, then the
transferee is subject to the liability
imposed by section 1445 and § 1.1445–
1(e).
(i) A transferee is in no event required
to rely upon other means to ascertain
the non-foreign status of the transferor
and may demand a certification of nonforeign status or Form W–8EXP in the
case of a qualified holder (as defined in
§ 1.897(l)–1(d)(11)). If the certification
or form is not provided, the transferee
may withhold tax under section 1445
and will be considered, for purposes of
sections 1461 through 1463, to have
been required to withhold such tax.
(ii) [Reserved]
(2) * * *
(i) * * *
(C) (1) Is signed under penalties of
perjury.
(2) In general, a foreign person is a
nonresident alien individual, foreign
corporation, foreign partnership, foreign
trust, or foreign estate, except that a
qualified holder (as defined in
§ 1.897(l)–1(d)(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 § 1.1445–7. Pursuant to
§ 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). 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).
Samples of acceptable certifications are
provided in paragraph (b)(2)(iv) of this
section.
*
*
*
*
*
(v) Qualified holders. As an
alternative to a certification of nonforeign status described in paragraph
(b)(2)(i) of this section, a qualified
holder (as defined in § 1.897(l)–1(d)(11))
may provide a Form W–8EXP to certify
that it is treated as not foreign for
purposes of section 1445. A Form
W–8EXP provided for this purpose is
subject to the general requirements of a
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certification of non-foreign status. For
example, a Form W–8EXP provided for
this purpose must be retained for the
five-year period described in paragraph
(b)(3) of this section regardless of
whether it is required to be retained for
purposes of section 1441 and the
regulations thereunder.
*
*
*
*
*
(e) * * * Paragraphs (b)(1), (b)(2)(i)
and (v) of this section, as revised by the
Treasury decision adopting these rules
as final regulations, apply with respect
to dispositions of U.S. real property
interests and distributions described in
section 897(h) occurring on or after the
date of publication of the Treasury
decision adopting these rules as final
regulations in the Federal Register.
■ Par. 5. Section 1.1445–4 is amended
by revising paragraphs (a)(2) and (b)(2)
and adding paragraph (g) to read as
follows:
§ 1.1445–4
Liability of agents.
(a) * * *
(2) The transferee is furnished with a
non-foreign certification pursuant to
§ 1.1445–2(b)(2) or a certification
regarding qualified holder status
provided on Form W–8EXP and either:
(i) The agent knows that the
certification is false; or
(ii) The agent represents a transferor
that is a foreign corporation that is not
a qualified holder. An agent that
represents a transferor that is a foreign
corporation is not required to provide
notice to the transferee if the foreign
corporation provided a non-foreign
certification or certification regarding
qualified holder status provided on
Form W–8EXP, as applicable, to the
transferee prior to such agent’s
employment and the agent does not
know that the corporation did so.
(b) * * *
(2) The entity or fiduciary is furnished
with a non-foreign certification
pursuant to § 1.1445–5(b)(3)(ii) or a
certification regarding qualified holder
status provided on Form W–8EXP and
either:
(i) The agent knows that such
certification is false; or
(ii) The agent represents a foreign
corporation (other than a qualified
holder) that made such a certification.
*
*
*
*
*
(g) Certain applicability dates.
Paragraphs (a)(2) and (b)(2) of this
section, as revised by the Treasury
decision adopting these rules as final
regulations, apply with respect to
dispositions of U.S. real property
interests and distributions described in
section 897(h) occurring on or after the
date of publication of the Treasury
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decision adopting these rules as final
regulations in the Federal Register.
■ Par. 6. Section 1.1445–5 is amended
by revising paragraph (b)(3)(ii)(A) and
adding a new sentence at the end of
paragraph (h) to read as follows:
§ 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 interestholder 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
qualified holder (as defined in
§ 1.897(l)–1(d)(11)) is not a foreign
person.
*
*
*
*
*
(h) * * * Paragraph (b)(3)(ii)(A) of
this section, as revised by the Treasury
decision adopting these rules as final
regulations, applies with respect to
dispositions of U.S. real property
interests and distributions described in
section 897(h) occurring on or after the
date of publication of the Treasury
decision adopting these rules as final
regulations in the Federal Register.
■ Par. 7. Section 1.1445–8 is amended
by revising paragraph (e) and adding
paragraph (j) to read as follows:
§ 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
certificate of non-foreign status pursuant
to § 1.1445–2(b), a Form W–9, a Form
W–8EXP (in the case of a qualified
holder (as defined in § 1.897(l)–
1(d)(11)), or a form that is substantially
similar to such forms, 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
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on such other means and the interest
holder proves, in fact, to be a foreign
person, then the withholding agent is
subject to any liability imposed
pursuant to section 1445 and the
regulations thereunder for failure to
withhold.
*
*
*
*
*
(j) Certain applicability dates.
Paragraph (e) of this section, as revised
by the Treasury decision adopting these
rules as final regulations, applies with
respect to dispositions of U.S. real
property interests and distributions
described in section 897(h) occurring on
or after the date of publication of the
Treasury decision adopting these rules
as final regulations in the Federal
Register.
■ Par. 8. Section 1.1446–1 is amended
by revising the second sentence of
paragraph (c)(2)(ii)(G) and revising
paragraph (c)(2)(ii)(H) to read as follows:
§ 1.1446–1 Withholding tax on foreign
partners’ share of effectively connected
taxable income.
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*
*
*
*
*
(c) * * *
(2) * * *
(ii) * * *
(G) * * * However, except as set forth
in § 1.1446–2(b)(2)(iii)(B) (regarding
certain qualified holders described in
§ 1.897(l)–1(d)(11)) and § 1.1446–3(c)(3)
(regarding certain tax-exempt
organizations described in section
501(c)), the submission of Form W–
8EXP 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 (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 (e.g., Form W–8BEN–E or Form
W–8IMY) to the partnership to establish
its foreign status for purposes of section
1446. In addition to Form W–8BEN–E,
a foreign entity may also submit Form
W–8EXP or a certification of non-foreign
status described in § 1.1445–5(b)(3) for
purposes of documenting itself as a
qualified holder (as defined in
§ 1.897(l)–1(d)(11)).
*
*
*
*
*
■ Par. 9. Section 1.1446–2 is amended
by adding paragraph (b)(4)(iii) to read as
follows:
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§ 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 qualified holder (as defined in
§ 1.897(l)–1(d)(11)), the foreign partner’s
allocable share of partnership ECTI does
not include gain or loss that is not taken
into account by the qualified holder
under § 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 or Form
W–8EXP. See § 1.1446–1(c)(2)(ii)(G) and
(H) regarding documentation of
qualified holders.
*
*
*
*
*
■ Par. 10. Section 1.1446–7 is amended
by revising the section heading and
adding a new sentence at the end of the
paragraph to read as follows:
§ 1.1446–7
Effective/Applicability date.
* * * Sections 1.1446–1(c)(2)(ii)(G)
and (H) and 1.1446–2(b)(2)(iii)(A) and
(B), as revised by the Treasury decision
adopting these rules as final regulations,
apply with respect to dispositions of
U.S. real property interests and
distributions described in section 897(h)
occurring on or after the date of
publication of the Treasury decision
adopting these rules as final regulations
in the Federal Register.
Kirsten Wielobob,
Deputy Commissioner for Services and
Enforcement.
[FR Doc. 2019–11291 Filed 6–6–19; 8:45 am]
BILLING CODE 4830–01–P
DEPARTMENT OF EDUCATION
34 CFR Chapter III
[ED–2019–OSERS–0044]
Proposed Waiver and Extension of the
Project Period for Various Grants That
Provide Technical Assistance on
Transition
Office of Special Education and
Rehabilitative Services (OSERS),
Department of Education.
ACTION: Proposed waiver and extension
of project periods.
AGENCY:
The Secretary proposes to
waive the requirements in the Education
Department General Administrative
Regulations that generally prohibit
SUMMARY:
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26623
project periods exceeding five years and
project period extensions involving the
obligation of additional Federal funds.
The proposed waiver and extension
would enable 33 projects under CFDA
numbers 84.326E, 84.328M, 84.235F
and 84.235G to receive funding for an
additional period, not to exceed
September 30, 2020.
DATES: We must receive your comments
on or before July 8, 2019.
ADDRESSES: Submit your comments
through the Federal eRulemaking Portal
or via postal mail, commercial delivery,
or hand delivery. We will not accept
comments submitted by fax or by email
or those submitted after the comment
period. To ensure that we do not receive
duplicate copies, please submit your
comments only once. In addition, please
include the Docket ID at the top of your
comments.
• Federal eRulemaking Portal: Go to
www.regulations.gov to submit your
comments electronically. Information
on using Regulations.gov, including
instructions for accessing agency
documents, submitting comments, and
viewing the docket, is available on the
site under ‘‘How to use
Regulations.gov’’ in the Help section.
• Postal Mail, Commercial Delivery,
or Hand Delivery: If you mail or deliver
your comments about the proposed
priority and requirements, address them
as follows:
For the National Technical Assistance
Center on Improving Transition to
Postsecondary Education and
Employment for Students with
Disabilities, CFDA number 84.326E, to
Selete Avoke, U.S. Department of
Education, 400 Maryland Avenue SW,
Room 5002, Potomac Center Plaza,
Washington, DC 20202–5076 or to
Kristen Rhinehart-Fernandez, U.S.
Department of Education, 400 Maryland
Avenue SW, Room 5094, Potomac
Center Plaza, Washington, DC 20202–
5076;
For the OSEP-funded Parent Training
and Information Centers, CFDA number
84.328M, to Carmen Sanchez, U.S.
Department of Education, 400 Maryland
Avenue SW, Room 5162, Potomac
Center Plaza, Washington, DC 20202–
5076; and
For the RSA-funded Parent
Information and Training Centers,
CFDA number 84.235F and the National
Technical Assistance for Parent
Information and Training Centers,
CFDA number 84.235G, to Tara Jordan,
U.S. Department of Education, 400
Maryland Avenue SW, Room 5058E,
Potomac Center Plaza, Washington, DC
20202–5076.
Privacy Note: The Department’s
policy is to make all comments received
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Agencies
[Federal Register Volume 84, Number 110 (Friday, June 7, 2019)]
[Proposed Rules]
[Pages 26605-26623]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-11291]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-109826-17]
RIN 1545-BN89
Exception for Interests Held by Foreign Pension Funds
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: This document contains proposed regulations regarding the
exception from taxation with respect to gain or loss of a qualified
foreign pension fund attributable to certain interests in United States
real property. The proposed 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 proposed
regulations affect certain holders of certain interests in United
States real property and withholding agents that are required to
withhold tax on certain dispositions of, and distributions with respect
to, such property.
DATES: Written or electronic comments and requests for a public hearing
must be received by September 5, 2019.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-109826-17), Internal
Revenue Service, Room 5203, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand-delivered Monday through
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
109826-17), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue NW, Washington, DC 20224, or sent electronically via the Federal
eRulemaking Portal at https://www.regulations.gov (IRS REG-109826-17).
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Milton Cahn or Logan M. Kincheloe, (202) 317-6937; concerning
submissions of comments or requests for a public hearing, Regina
Johnson, (202) 317-6901 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
I. In General
This document contains proposed amendments to 26 CFR part 1 under
sections 897, 1445, and 1446 (the ``proposed regulations''). Section
323(a) of the Protecting Americans from Tax Hikes Act of 2015, Public
Law 114-113, div. Q (the ``PATH Act''), added section 897(l) to the
Code, and Section 101(q) of the Tax Technical Corrections Act of 2018,
Public Law 115-141, div. U (the ``Technical Corrections Act'') amended
certain aspects of section 897(l). Section 897(l) provides an exemption
to the application of section 897(a) on gain or loss on certain
dispositions of, and distributions with respect to, United States real
property interests (``USRPIs'') for certain foreign pension funds and
their subsidiaries. The proposed regulations contain rules relating to
the qualification for the exemption under section 897(l), as well as
rules relating to withholding requirements under sections 1445 and 1446
for dispositions of USRPIs by foreign pension funds and their
subsidiaries.
II. Taxation of Foreign Persons Under Section 897
Section 897(a)(1) provides that gain or loss of a nonresident alien
individual or foreign corporation from the disposition of a USRPI is
taken into account under section 871(b)(1) or 882(a)(1), as applicable,
as if the nonresident alien individual or foreign corporation were
engaged in a trade or business within the United States during the
taxable year and such gain or loss were effectively connected with that
trade or business.
Section 897(c)(1)(A) defines a USRPI as an interest in real
property (including an interest in a mine, well, or other natural
deposit) located in the United States or the Virgin Islands, and any
interest (other than solely as a creditor) in any domestic corporation
unless the taxpayer establishes that such corporation was at no time a
United States real property holding corporation (``USRPHC'') during the
applicable testing period (generally, the five-year period ending on
the date of the disposition of the interest). Under section 897(c)(2),
a USRPHC means any corporation if the fair market value of its USRPIs
equals or exceeds 50 percent of the total fair market value of its
USRPIs, its interests in real property located outside the United
States, plus any other assets that are used or held for use in a trade
or business. However, section 897(c)(1)(B) generally provides that an
interest in a corporation is not a USRPI if the corporation does not
hold any USRPIs as of the date its stock is sold and the corporation
disposed of all of the USRPIs that it held during the applicable
testing period in transactions in which the full amount of gain, if
any, was recognized.
Section 897(h)(1) provides that any distribution by a qualified
investment entity (QIE) to a nonresident alien individual, a foreign
corporation, or other QIE is, to the extent attributable to gain from
sales or exchanges by the QIE of USRPIs, treated as gain recognized by
such nonresident alien individual, foreign corporation, or other QIE
from the sale or exchange of a USRPI, subject to certain exceptions.
Under section 897(h)(4)(A), a QIE includes any real estate investment
trust (REIT) and certain regulated investment companies.
III. Exception for Qualified Foreign Pension Funds Under Section 897(l)
Section 897(l)(1) provides that a qualified pension fund is not
treated as a nonresident alien individual or foreign corporation for
purposes of section 897. Cf. section 897(a) (subjecting nonresident
alien individuals and foreign corporations to tax on gain or loss from
the disposition of a USRPI). For this purpose, an entity all the
interests of which are held by a qualified foreign pension fund
(referred to in this Preamble and the proposed regulations as a
``qualified controlled entity'') is also treated as a qualified foreign
pension fund.
Under section 897(l)(2), a qualified foreign pension fund is
defined as any trust, corporation, or other organization or arrangement
(any one of which is
[[Page 26606]]
referred to in this Preamble and the proposed regulations as an
``eligible fund'') that satisfies five separate requirements.
Specifically, a qualified foreign pension fund is an eligible fund (A)
that is created or organized under the law of a country other than the
United States, (B) that is established (i) by such country (or one or
more political subdivisions thereof) to provide retirement or pension
benefits to participants or beneficiaries that are current or former
employees (including self-employed individuals) 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 to provide
retirement or pension benefits to participants or beneficiaries that
are current or former employees (including self-employed individuals)
or persons designated by such employees in consideration for services
rendered by such employees to such employers, (C) that does not have a
single participant or beneficiary with a right to more than five
percent of its assets or income, (D) that is subject to government
regulation and with respect to which annual information about its
beneficiaries is provided, or is otherwise available, to the relevant
tax authorities in the country in which it is established or operates,
and (E) with respect to which, under the laws of the country in which
it is established or operates (i) contributions to such eligible fund
that would otherwise be subject to tax under such laws are deductible
or excluded from the gross income of such entity or arrangement or
taxed at a reduced rate, or (ii) taxation of any investment income of
such eligible fund is deferred or such income is excluded from gross
income of such entity or arrangement or is taxed at a reduced rate.
Section 897(l)(3) provides that the Secretary of the Treasury
(Secretary) shall prescribe such regulations as may be necessary or
appropriate to carry out the purposes of section 897(l).
IV. Applicable Withholding Rules
A. Section 1445 Withholding
Section 1445(a) generally imposes a withholding tax obligation on
the transferee when a foreign person disposes of a USRPI. Section
1445(e)(6) provides that, if any portion of a distribution from a QIE
to a nonresident alien individual or a foreign corporation is treated
under section 897(h)(1) as gain realized by such individual or
corporation from the sale or exchange of a USRPI, the QIE must deduct
and withhold tax under section 1445(a) on the amount so treated.
A transferee of a USRPI is not required to withhold under section
1445(a) if the transferor furnishes to the transferee a certification
that, among other things, states that the transferor is not a foreign
person. Sec. 1.1445-2(b)(2)(i). Generally, upon a distribution and
other transactions subject to withholding, certain entities may treat a
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. Sec. 1.1445-
5(b)(3)(ii)(A). Upon the distribution of any amount attributable to the
disposition of a USRPI, a QIE may rely on the same certification, a
Form W-9, Request for Taxpayer Identification Number and Certification,
or a form that is substantially similar to the Form W-9 to determine
whether an interest holder is a U.S. person. Sec. 1.1445-8(e).
Section 323(b) of the PATH Act amended section 1445(f)(3) to
provide that, for purposes of section 1445, the term ``foreign person''
means any person other than (A) a United States person, and (B) except
as otherwise provided by the Secretary, an entity with respect to which
section 897 does not apply by reason of section 897(l). On February 19,
2016, the Department of the Treasury (the ``Treasury Department'') and
the IRS published final regulations under section 1445 of the Code
(``updated section 1445 regulations'') in the Federal Register (81 FR
8398-01) to reflect the PATH Act's amendments to section 1445(f)(3). A
correcting amendment to the updated section 1445 regulations was
published on April 26, 2016 in the Federal Register (81 FR 24484-01).
As corrected, the updated section 1445 regulations provide that neither
a qualified foreign pension fund nor an entity all of the interests of
which are held by a qualified foreign pension fund is treated as a
foreign person, and thus may provide a certification to a transferee.
See Sec. Sec. 1.1445-2(b)(2)(i) (flush language) and 1.1445-
5(b)(3)(ii)(A).
B. Section 1446 Withholding
A partnership generally must pay a withholding tax under section
1446 on effectively connected taxable income (``ECTI'') allocable under
section 704 to a foreign partner. Section 1446(c) provides that ECTI
includes the taxable income of a partnership that is effectively
connected (or treated as effectively connected) with the conduct of a
trade or business in the United States, subject to certain adjustments.
For this purpose, ECTI includes any partnership income treated as
effectively connected with the conduct of a trade or business in the
United States pursuant to section 897. Sec. 1.1446-2(b)(2)(ii).
A foreign partner's allocable share of partnership ECTI does not
include income or gain exempt from U.S. tax by reason of a provision of
the Code or by operation of any U.S. income tax treaty or reciprocal
agreement. Sec. 1.1446-2(b)(2)(iii). In the case of income excluded by
reason of a treaty provision, such income must be derived by a resident
of an applicable treaty jurisdiction, the resident must be the
beneficial owner of the item, and all other requirements for benefits
under the treaty must be satisfied. To exclude income or gain from
ECTI, the partnership must receive from the partner a valid withholding
certificate (that is, Form W-8BEN-E, Certificate of Foreign Status of
Beneficial Owner for United States Tax Withholding and Reporting
(Entities)) containing the information necessary to support the claim
for treaty benefits required in the forms and instructions. Id.
A domestic partnership required to withhold under both sections
1445 and 1446 with respect to income treated as ECTI pursuant to
section 897 is deemed to satisfy the withholding requirements of
section 1445 if it complies with the requirements of section 1446.
Sec. 1.1446-3(c)(2)(i).
V. Prior Request for Comments
In the Preamble to the updated section 1445 regulations that were
published on February 19, 2016, the Treasury Department and the IRS
requested comments regarding what regulations, if any, should be issued
pursuant to section 897(l)(3). Twenty-one comments were received,
requesting, in particular, guidance on issues related to qualification
as a ``qualified foreign pension fund'' under section 897(l)(2). The
comments will be included in the administrative record for this notice
of proposed rulemaking. The Treasury Department and the IRS considered
all of the comments, and in response to the comments have issued the
proposed regulations to provide clarification on the application of
section 897(l). Each significant comment, other than any comment
rendered moot by the Technical Corrections Act, is discussed in the
relevant part of the Explanation of Provisions section of this
preamble.
Explanation of Provisions
The proposed regulations provide guidance regarding the scope of
the exception described in section 897(l)(1), the application of the
requirements described in section 897(l)(2) that an
[[Page 26607]]
eligible fund must satisfy to be treated as a qualified foreign pension
fund, and rules regarding exemptions from withholding under section
1445 or section 1446.
I. Scope of the Exception
A. General Rule
As described in the Background section of this Preamble, section
897(a) applies to gain or loss of a nonresident alien individual or a
foreign corporation from the disposition of a USRPI. Similarly, section
897(h) generally treats any distribution from a QIE to a nonresident
alien individual, a foreign corporation, or other QIE, to the extent
attributable to gain from sales or exchanges by the QIE of USRPIs, as
gain recognized by such nonresident alien individual, foreign
corporation, or other QIE from the sale or exchange of a USRPI for
purposes of section 897(a). Section 897(l)(1) provides that, for
purposes of section 897, a qualified foreign pension fund is not
treated as a nonresident alien individual or a foreign corporation. For
this purpose, a qualified controlled entity is treated as a qualified
foreign pension fund. Accordingly, section 897(l) excepts from section
897(a) gain or loss of a qualified foreign pension fund or a qualified
controlled entity from the disposition of a USRPI, including gain from
a distribution described in section 897(h).
Consistent with section 897(l), the proposed regulations provide
that gain or loss of a qualified foreign pension fund or a qualified
controlled entity (under the proposed regulations, each a ``qualified
holder'') from the disposition of a USRPI, including gain from a
distribution described in section 897(h), is not subject to section
897(a). This exception from section 897(a) applies solely with respect
to gain or loss recognized by a qualified holder that is attributable
to one or more qualified segregated accounts maintained by the
qualified holder. The proposed regulations define a qualified
segregated account as an identifiable pool of assets maintained for the
sole purpose of funding qualified benefits (generally, retirement,
pension, and certain ancillary benefits) to qualified recipients
(generally, plan participants and beneficiaries). See Section II.B of
this Explanation of Provisions for a detailed discussion of qualified
benefits and qualified recipients.
The proposed regulations provide separate standards for determining
whether an identifiable pool of assets constitutes a qualified
segregated account 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 qualified foreign pension
fund) or a qualified controlled entity. An identifiable pool of assets
of an eligible fund is a qualified segregated account if the assets in
the pool and the income earned with respect to those assets are subject
to legal or contractual requirements requiring that all such income and
assets are used exclusively to fund the provision of qualified benefits
to qualified recipients or to satisfy necessary reasonable expenses of
the eligible fund. A qualified controlled entity is treated as
maintaining a qualified segregated account if 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, and 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 the
qualified segregated account of a qualified foreign pension fund or
another qualified controlled entity upon dissolution. In either case, a
pool of assets will not be treated as a qualified segregated account if
the assets or income associated with such assets may inure to the
benefit of a person other than a qualified recipient. For this purpose,
the fact that assets or income may inure to the benefit of a
governmental unit by operation of escheat or similar laws is ignored.
B. Qualified Controlled Entities
Several comments submitted in response to the updated section 1445
regulations requested clarification concerning the exception under
section 897(l) for an entity all the interests of which are held by a
qualified foreign pension fund. The proposed regulations define a
qualified controlled entity as a trust or corporation organized under
the laws of a foreign country all of the interests of which are held
directly by one or more qualified foreign pension funds or indirectly
through one or more qualified controlled entities or partnerships. The
Treasury Department and the IRS have determined that it is unnecessary
to treat partnerships as qualified controlled entities because the
proposed regulations' exemption from section 897(a) applies to gain or
loss earned indirectly through one or more partnerships. Accordingly,
the proposed regulations provide that only corporations and trusts may
be treated as qualified controlled entities.
1. Indirectly Held Entities
Comments requested that the proposed regulations provide that an
entity held indirectly through one or more corporations or partnerships
by a qualified foreign pension fund may be treated as a qualified
controlled entity. Thus, for example, if a qualified foreign pension
fund owned all of the interests of Entity A, and Entity A owned all of
the interests of Entity B, the comments indicated that Entity B should
be eligible to be treated as a qualified controlled entity. The
Treasury Department and the IRS agree that there is no policy reason to
distinguish between direct and indirect ownership for purposes of
determining whether an entity is a qualified controlled entity.
Accordingly, the proposed regulations provide that a qualified
controlled entity may be owned directly or indirectly through one or
more qualified controlled entities.
2. Multiple Qualified Foreign Pension Fund Owners
Comments requested that the proposed regulations provide that an
entity may qualify as a qualified controlled entity when all of its
interests are owned by multiple qualified foreign pension funds.
Comments noted that qualified foreign pension funds frequently pool
their investments, such that permitting qualified controlled entities
to be held by multiple qualified foreign pension funds would be
consistent with current investment practices. Further, comments argued
that there is no policy rationale for providing the exception of
section 897(l) to an investment that benefited one qualified foreign
pension fund but not to an investment that benefited multiple qualified
foreign pension funds. The Treasury Department and the IRS agree with
these comments. Accordingly, the proposed regulations provide that the
interests in a qualified controlled entity may be held by one or more
qualified foreign pension funds directly or indirectly through one or
more qualified controlled entities.
3. Creditor Interests
One comment recommended that, for purposes of determining whether
an entity is a qualified controlled entity, only equity interests
should be taken into account. Cf. section 897(c)(1)(A) (defining a
USRPI as including any interest (other than solely as a creditor) in
any domestic corporation unless the taxpayer establishes that such
corporation was at no time a USRPHC during the applicable testing
period). The comment noted that requiring a
[[Page 26608]]
qualified foreign pension fund to hold all of the creditor's interests
issued by a qualified controlled entity would prevent the use of
external leverage by a qualified controlled entity, even though there
is no such restriction on direct leveraged investments by a qualified
foreign pension fund. The Treasury Department and the IRS agree that a
creditor's interest in an entity should not be an interest taken into
account for purposes of determining whether the entity is treated as a
qualified controlled entity if the interest does not share in the
earnings or growth of the entity. Section 1.897-1(d)(5) provides that,
unless otherwise stated, the term ``interest'' as used with regard to
an entity in the regulations under sections 897, 1445, and 6039C, means
an interest other than an interest solely as a creditor. Given the
absence of an express provision to the contrary in the proposed
regulations, the application of Sec. 1.897-1(d)(5) results in an
interest in an entity solely as a creditor not being taken into account
for purposes of determining whether the entity is a qualified
controlled entity.
4. Interaction With Section 892
Comments requested clarification that an entity may constitute a
qualified controlled entity whether or not the entity constitutes a
controlled entity as defined in Sec. 1.892-2T(a)(3). The Treasury
Department and the IRS have determined that the definition of
``qualified controlled entity'' in the proposed regulations plainly
does not limit qualified controlled entity status to only those
entities that would qualify as a ``controlled entity'' within the
meaning of Sec. 1.892-2T(a)(3). It is, therefore, unnecessary for
these proposed regulations to provide an express rule.
5. De Minimis Ownership
A comment requested that the proposed regulations provide that de
minimis ownership of a qualified controlled entity be disregarded under
certain circumstances. For instance, the comment indicated that de
minimis ownership, including by managers or directors, may be required
by corporate law in certain jurisdictions. The Treasury Department and
the IRS have determined that permitting a person other than a qualified
foreign pension fund to own an interest in a qualified controlled
entity would impermissibly expand the scope of the exception in section
897(l) by allowing taxpayers other than qualified foreign pension funds
to avoid tax under section 897. Accordingly, the proposed regulations
do not permit ownership of a qualified controlled entity by a person
other than a qualified foreign pension fund or another qualified
controlled entity.
6. Avoidance of Section 897
One comment recommended that the Treasury Department and the IRS
consider rules to prevent a qualified foreign pension fund from
indirectly acquiring a USRPI held by a foreign corporation, which would
permit the acquired corporation to avoid tax on gain that would
otherwise be subject to tax under section 897. For example, assume that
FP, a foreign corporation that is not a qualified holder, owns 100
percent of the stock of FS, a foreign corporation, and that FS owns a
USRPI with a basis of $80x and a fair market value of $200x. Assume
that FP sells the stock of FS to a qualified foreign pension fund. If
FS were treated as a qualified controlled entity and FS later sold the
USRPI for $200x, neither FP nor FS would be subject to tax under
section 897 on the $120x gain attributable to its investment in the
USRPI, even though the gain accrued while FS was owned by FP. Similar
issues could arise with entities treated as part of an organization or
arrangement that is a qualified foreign pension fund.
To address the inappropriate avoidance of section 897, the proposed
regulations provide 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 qualified
foreign pension fund, a part of a qualified foreign pension fund, or a
qualified controlled entity. For this purpose, the testing period
generally means 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. This limitation
does not apply to an entity or governmental unit that did not own a
USRPI as of the date it became a qualified controlled entity, a
qualified foreign pension fund, or part of a qualified foreign pension
fund.
C. Organizations or Arrangements
Section 897(l)(2) provides that a qualified foreign pension fund
may include any ``trust, corporation, or other organization or
arrangement'' that satisfies certain requirements. Congress intended
the term ``arrangement'' to be a flexible term that accommodates a
broad range of structures. See STAFF OF THE JOINT COMM. ON TAX'N,
General Explanation of Tax Legislation Enacted in 2015 (JCS-1-16)
(General Explanation) 283, n. 967 (2016) (``Foreign pension funds may
be structured in a variety of ways, and may comprise one or more
separate entities. The word `arrangement' encompasses such alternative
structures.'').
Several comments submitted in response to the updated section 1445
regulations described the multiple ways that foreign retirement and
pension systems--particularly those that are administered entirely or
in part by a foreign government--could be organized. The comments
described structures involving multiple entities, one or more accounts
on government balance sheets, foreign legal structures, and a
combination of the foregoing. Although such pension and retirement
plans are often not organized as a single trust or corporation, the
organizations or arrangements, when viewed as a whole, may satisfy the
requirements set forth in section 897(l)(2). Based on the General
Explanation's indication that foreign pension funds may be structured
in a variety of ways, and may be comprised of separate entities, the
comments recommended that the proposed regulations permit a broad range
of alternative structures to be treated as a qualified foreign pension
fund.
The Treasury Department and the IRS have determined that the
purpose of section 897(l) is best served by permitting a broad range of
structures to be eligible to be treated as a qualified foreign pension
fund. Accordingly, the proposed regulations provide that, for purposes
of section 897(l), the term ``organization or arrangement'' means one
or more trusts, corporations, governmental units, or employers. The
proposed regulations provide that the term ``governmental unit'' means
any foreign government or part thereof, including any person, body,
group of persons, organization, agency, bureau, fund, instrumentality,
however designated, of a foreign government. The proposed regulations
include several examples illustrating the application of the
requirements of section 897(l) and the proposed regulations to
different types of organizations and arrangements, including
organizations and arrangements that include governmental units.
The proposed regulations permit an employer to be part of an
organization or arrangement to address cases in which an employer is
organized as an entity other than a trust or corporation but operates
as part of an organization
[[Page 26609]]
or arrangement to provide pension or retirement benefits.
II. Requirements Applicable to a Qualified Foreign Pension Fund
A. Created or Organized
Section 897(l)(2)(A) and the proposed regulations require that a
qualified foreign pension fund must be created or organized under the
law of a country other than the United States. Comments indicated that
many foreign pension funds are created or organized under the laws of
states or political subdivisions of a foreign country and requested
that the proposed regulations clarify that those pension funds would
satisfy section 897(l)(2)(A). The Treasury Department and the IRS agree
that it is appropriate to allow such foreign pension funds to be
considered qualified foreign pension funds. Accordingly, the proposed
regulations provide that references to a foreign country include
references to a state, province, or political subdivision of a foreign
country, subject to an exception described in part II.E.4 of this
Explanation of Provisions.
B. Established To Provide Retirement or Pension Benefits
Section 897(l)(2)(B) requires that an eligible fund be established
either (i) by the country in which it is created or organized (or one
or more political subdivisions thereof) to provide retirement or
pension benefits to participants or beneficiaries that are current or
former employees (including self-employed individuals), 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 to
provide retirement or pension benefits to participants or beneficiaries
that are current or former employees (including self-employed
individuals) or persons designated by such employees in consideration
for services rendered by such employees to such employers.
1. Pension Funds Eligible for Section 897(l)(2)(B)
Several comments requested that the regulations clarify that multi-
employer pension funds and government-sponsored public pension funds
that provide pension and pension-related benefits may satisfy section
897(l)(2)(B). These comments are consistent with the General
Explanation, which noted that ``[m]ulti-employer and government-
sponsored public pension funds that provide pension and pension-related
benefits may still satisfy [section 897(l)(2)(B)]. For example, such
pension funds may be established for one or more companies or
professions, or for the general working public of a foreign country.''
General Explanation at 283, n. 968.
The Treasury Department and the IRS agree that it is appropriate to
allow such multi-employer pension funds and government-sponsored public
pension funds to be considered qualified foreign pension funds.
Accordingly, the proposed regulations provide 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, 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.
Under the proposed regulations, qualified recipients generally
include persons eligible to participate in the retirement or pension
plan. Therefore, with respect to an eligible fund established by one or
more employers, the term ``qualified recipient'' includes a current or
former employee or any person designated by such current or former
employee to receive qualified benefits. With respect to an eligible
fund established by a foreign country to provide qualified benefits to
qualified recipients as a result of services rendered by such qualified
recipients to their employers, the term includes 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. In
response to comments, the proposed regulations provide that a person is
treated as designating another person to receive qualified benefits if
such other person is entitled to receive benefits under the contractual
terms applicable to the eligible fund or under the laws of the foreign
country in which the eligible fund is created or organized, whether or
not the first person expressly designated such person as a beneficiary.
In response to comments, the proposed regulations clarify that a
retirement or pension fund that is organized by a trade union,
professional association, or similar group may be treated as a
qualified foreign pension fund by providing that an eligible fund is
treated as established by any employer that funds, in whole or in part,
the eligible fund. In addition, the proposed regulations clarify that,
for purposes of the requirement in section 897(l)(2)(B), a self-
employed individual is treated as both an employer and an employee.
2. Benefits Other Than Retirement or Pension Benefits
Comments noted that many foreign pension funds provide a limited
amount of other benefits, including death, disability, survivor,
medical, unemployment, and similar benefits, to participants and
beneficiaries. Comments requested guidance on whether a qualified
foreign pension fund could provide certain benefits other than
retirement and pension benefits, and whether there is any limitation on
the amount of those benefits that a qualified foreign pension fund may
provide to participants and beneficiaries. Some comments recommended
that the proposed regulations set forth a specific limitation on the
percentage of benefits other than retirement or pension benefits that a
qualified foreign pension fund may provide, while other comments
recommended a facts and circumstances test or another subjective
standard.
The Treasury Department and the IRS have determined that section
897(l) was not intended to exclude common foreign pension arrangements
that provide a relatively small amount of ancillary benefits to
participants and beneficiaries. The Treasury Department and the IRS
have also determined that a specific limit on the percentage of
ancillary benefits that a qualified foreign pension fund may provide to
its participants and beneficiaries is more administrable and provides
more certainty to taxpayers than a subjective standard. Accordingly,
the proposed regulations require that all of the benefits that an
eligible fund provides are qualified benefits to qualified recipients,
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. For this purpose, qualified
benefits include retirement, pension, or ancillary benefits. The
proposed regulations define ancillary benefits as benefits payable upon
the diagnosis of a terminal illness, death benefits, disability
benefits, medical benefits, unemployment benefits, or similar benefits.
The Treasury Department and the IRS request comments on whether the
regulations should also define retirement or pension benefits (for
example, with reference to whether there are penalties for early
withdrawals).
[[Page 26610]]
3. Insuring Qualified Benefits and Similar Activities
One comment requested that the proposed regulations provide that an
eligible fund may be treated as a qualified foreign pension fund if it
is established by a foreign government to provide qualified benefits to
qualified recipients (directly or indirectly) in the event that one or
more qualified foreign pension funds that are created or organized in
the same foreign country are unable to satisfy their liabilities with
respect to the provision of qualified benefits to their own qualified
recipients. Although the proposed regulations do not expressly address
such plans, the proposed regulations do not differentiate between plans
that are primarily responsible for the provision of qualified benefits
to qualified recipients, on the one hand, and plans that are
secondarily responsible for the provision of qualified benefits to
qualified recipients, on the other hand. Therefore, whether a plan is
established to provide qualified benefits to qualified recipients is
determined without regard to whether such plan has primary
responsibility to provide qualified benefits to qualified recipients or
rather is established to provide the qualified benefits to qualified
recipients only in the event of the default of one or more other plans.
C. Five Percent Limitation
Consistent with section 897(l)(2)(C), the proposed regulations
provide that a qualified foreign pension fund may not have a single
participant or beneficiary with a right to more than five percent of
its assets or income (the five-percent limitation). Comments submitted
in response to the updated section 1445 regulations indicated that it
would be appropriate for the proposed regulations to include
attribution rules to prevent a single individual from using related
parties to circumvent the five-percent limitation. The Treasury
Department and the IRS agree with the comments. Accordingly, the
proposed regulations provide that, for purposes of applying the five
percent limitation, an individual is considered to have a right to the
assets and income of an eligible fund to which any person who bears a
relationship to the individual described in section 267(b) or section
707(b) has a right.
One comment requested guidance on calculating a participant or
beneficiary's entitlement to the assets and income of a qualified
foreign pension fund for purposes of applying the five-percent
limitation. In light of the complexity that any such rule would entail
and the relatively few cases in which it would be expected to apply,
the proposed regulations do not provide specific rules regarding the
computation of the five-percent limitation. Instead, this determination
should be made based on the underlying facts and circumstances of each
case.
D. Regulation and Information Reporting
Section 897(l)(2)(D) and the proposed regulations set forth two
requirements for a qualified foreign pension fund. First, a qualified
foreign pension fund must be subject to government regulation
(``regulation requirement''). Second, a qualified foreign pension fund
must provide annual information about its beneficiaries to the relevant
tax authorities in the country in which it is established or operates,
or such information must otherwise be available to those authorities
(``information requirement''). Several comments requested that the
proposed regulations set forth the specific information that must be
provided or otherwise made available pursuant to the information
requirement in section 897(l)(2)(D). The proposed regulations adopt the
recommendation included in several comments by providing that an
eligible fund is treated as satisfying the information requirement only
if the eligible fund annually provides to the relevant tax authorities
in the foreign country in which it 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. An eligible fund is not treated as failing to
satisfy the information 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. The Treasury Department and the IRS request comments as to
whether the final regulations should permit other types of information
to satisfy the information requirement.
Several comments indicated that foreign government-sponsored
retirement and pension plans frequently are not subject to substantial
information reporting and regulation compared with private foreign
pension or retirement plans, in part because the government administers
the pension or retirement program itself. The comments recommended that
the proposed regulations treat a government-sponsored retirement or
pension plan as automatically satisfying both the regulation and
information requirements of section 897(l)(2)(D). The Treasury
Department and the IRS agree that, when a government administers a
pension or retirement plan itself, the requirements of section
897(l)(2)(D) are effectively satisfied because the government has
control over the program and access to the information about the
program's beneficiaries. Accordingly, the proposed regulations
generally provide that an eligible fund that is administered by one or
more governmental units, other than in its capacity as an employer, is
deemed to satisfy the requirements of section 897(l)(2)(D).
Comments noted that many foreign pension funds must provide
information to one or more governmental bodies in the country in which
the foreign retirement or pension fund is organized, including agencies
that are specifically responsible for regulating pensions. In many
cases, those governmental bodies may be distinct from the tax authority
in that foreign country. In light of the wide range of foreign
information reporting regimes that may apply to an eligible fund, the
Treasury Department and the IRS agree that a flexible rule is necessary
and appropriate to carry out the purposes of section 897(l).
Accordingly, the proposed regulations provide that an eligible fund is
treated as satisfying the information requirement of section
897(l)(2)(D) if the eligible fund is required, pursuant to the laws of
the foreign country in which it is established or operates, to provide
the required information to one or more governmental units of the
foreign country in which the eligible fund is created or organized, or
if such information is otherwise available to one or more governmental
units of the foreign country in which the eligible fund is created or
organized.
E. Foreign Tax Treatment
Section 897(l)(2)(E) and the proposed regulations provide that, to
be a qualified foreign pension fund, the laws of the foreign country in
which the eligible fund is established or operates must provide that
either (i) 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 (ii)
taxation of any investment income of the eligible fund is deferred or
such income is excluded from the gross income of the eligible fund or
is taxed at a reduced rate.
1. Countries With No Income Tax
Comments requested clarification that an eligible fund may qualify
for the
[[Page 26611]]
exemption in section 897(l) if it is created or organized in a country
that does not have an income tax. The Treasury Department and the IRS
have determined that the purposes of section 897(l) would not be served
by limiting the availability of the exemption to eligible funds
organized in jurisdictions with an income tax. Accordingly, the
proposed regulations provide that an eligible fund is treated as
satisfying the requirement of section 897(l)(2)(E) if the eligible fund
is established and operates in a foreign country that has no income
tax.
2. Degree of Reduction
Comments noted that an eligible fund that otherwise satisfies
section 897(l)(2)(E) may be subject to current income tax at ordinary
rates with respect to a relatively small portion of its income or gain.
The comments requested guidance on the percentage of income or
contributions that must be eligible for preferential tax treatment in
order for an eligible fund to satisfy section 897(l)(2)(E). Other
comments requested guidance on the extent to which ordinary income tax
rates must be reduced under section 897(l)(2)(E). To address these
comments, the proposed regulations provide that an eligible fund is
treated as satisfying the requirement of section 897(l)(2)(E) in a
taxable year if, under the income tax laws of the foreign country in
which the eligible fund is established or operates, at least 85 percent
of the contributions to the eligible fund are deductible or excluded
from the gross income or taxed at a reduced rate, or tax on at least 85
percent of the investment income of the eligible fund is deferred or
taxed at a reduced rate (including by excluding such investment income
from gross income). The 85 percent threshold was chosen based on the
best judgment of the Treasury Department and the IRS, and is consistent
with suggestions from commenters for an appropriate threshold in an
analogous context in the proposed regulations (namely, for the
percentage of benefits provided by an eligible fund that must be
retirement or pension benefits as opposed to ancillary benefits), but
is not based on any specific quantitative analysis. The Treasury
Department and the IRS request additional comments regarding whether
the 85 percent threshold is appropriate and especially solicit comments
that provide data, other evidence, and models that can enhance the
rigor of the process by which such threshold is determined.
3. Other Preferential Regimes
Comments requested that the proposed regulations provide that the
requirement of section 897(l)(2)(E) may be satisfied if, under the
income tax law of the country in which an eligible fund is established
or operates, an eligible fund is subject to a preferential tax regime
that is, in substance, equivalent to the type of deductions or
exclusions specifically described in section 897(l)(2)(E). For example,
one comment described a preferential regime in which certain eligible
funds taxable as insurance companies are entitled to reserve deductions
designed to effectively exclude from gross income investment income
earned by the eligible funds. The Treasury Department and the IRS agree
that the purposes of section 897(l) are best served by accommodating a
broad range of preferential tax regimes applicable to retirement or
pension funds. Therefore, the proposed regulations provide that an
eligible fund that is not specifically subject to the tax treatment
described in section 897(l)(2)(E) is nonetheless treated as satisfying
the requirement of section 897(l)(2)(E) if the eligible fund
establishes that it is subject to a preferential tax regime due to its
status as a retirement or pension fund, and that the preferential tax
regime has a substantially similar effect as the specific tax treatment
described in section 897(l)(2)(E).
4. Subnational Tax Exemptions
One comment requested that the proposed regulations provide that
preferential treatment with respect to a tax levied by a state,
province, or political subdivision (sub-national tax) be sufficient to
satisfy the requirement of section 897(l)(2)(E). The Treasury
Department and the IRS have determined that the exemption in section
897(l) was not intended to benefit foreign persons that fail to benefit
from an exemption from an otherwise applicable national income tax.
Sub-national taxes generally constitute a minor component of an
entity's overall tax burden in a foreign jurisdiction and therefore it
would not be appropriate to allow preferential treatment with respect
to sub-national taxes to 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. Accordingly, the proposed regulations do
not adopt this recommendation, and, to the contrary, provide 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.
F. Application to Organizations and Arrangements
The proposed regulations provide rules on the application of the
requirements described in section 897(l)(2) to an eligible fund that is
an organization or arrangement.
1. Single Entity Treatment
The proposed regulations provide that an eligible fund that is an
organization or arrangement is treated as a single entity to determine
whether the requirements of section 897(l)(2) are satisfied.
Notwithstanding the foregoing, the proposed regulations provide that
each person or governmental unit that is part of an organization or
arrangement must independently satisfy the requirement of section
897(l)(2)(A), such that each component of the organization or
arrangement must be created or organized under the law of a country
other than the United States.
2. Relevant Income and Assets
As noted in several comments, an eligible fund may be organized in
various ways. For example, an eligible fund may be comprised of
multiple entities and governmental bodies, one or more of which may
conduct activities that are unrelated to the provision of retirement or
pension benefits. Applying certain requirements of section 897(l)(2) to
an eligible fund requires identifying the specific assets and income of
an organization or arrangement that must be tested under the proposed
regulations. For instance, under the proposed regulations, an
organization or arrangement may include a pension system in which a
private employer provides pension benefits to its employees that are
funded by the investments of a separate entity, such as a pension trust
organized by a foreign government. Assets and income of the private
employer that do not fund the provision of pension benefits would
generally not be relevant to determining whether the organization or
arrangement satisfies the requirements of section 897(l)(2) and the
proposed regulations. For instance, income of the employer generally
would not be subject to preferential tax treatment, and the assets of
the employer not used to fund the provision of pension benefits would
not be relevant for purposes of applying the five percent limitation in
section 897(l)(2)(C).
Accordingly, the proposed regulations generally provide that the
determination as to whether an eligible fund satisfies the requirements
of section 897(l)(2) is
[[Page 26612]]
made solely with respect to income and assets held by the eligible fund
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 qualified segregated
accounts maintained by an eligible fund are treated as a single
qualified segregated account.
G. Coordination With Definition of a Pension Fund Under U.S. Income Tax
Treaties
Comments requested that the proposed regulations provide that an
entity that qualifies as a pension fund or scheme under a U.S. income
tax treaty or as an exempt beneficial owner under an intergovernmental
agreement (IGA) is treated as a qualified foreign pension fund under
section 897(l). The statute is clear that an exemption from section
897(a) is allowed only for entities meeting the definition of a
``qualified foreign pension fund.'' There is no indication in the
legislative history that Congress intended the Treasury Department and
the IRS to expand the exemption to entities that met the definition of
a pension fund under a U.S. income tax treaty or IGA. Furthermore, the
definitions of pension fund under a U.S. income tax treaty or IGA were
designed with policy goals that are unrelated to section 897, and
therefore pension funds as defined in those agreements are not
necessarily the types of entities for which an exemption from section
897(a) is appropriate. Thus, a foreign pension fund that qualifies for
other benefits under an income tax treaty or IGA must make a separate
determination as to whether it is a qualified foreign pension fund
under section 897(l)(2).
III. Withholding Rules
Comments requested clarification regarding the documentation a
qualified foreign pension fund should provide to a transferee or
partnership to claim an exemption under section 897(l) and requested a
form for this purpose. Comments suggested modifying existing forms,
such as Form W-8EXP, Certificate of Foreign Government or Other Foreign
Organization for United States Tax Withholding and Reporting, for this
purpose. Comments also requested clarification regarding the reporting
and withholding responsibilities of transferees and partnerships that
receive documentation from a qualified foreign pension fund.
In response to comments, the IRS intends to revise Form W-8EXP to
permit qualified holders to certify their status under section 897(l).
Prior to the release of revised Form W-8EXP, a certificate of non-
foreign status described in Sec. 1.1445-5(b)(3) may be used for
purposes of both section 1445 and section 1446. In addition to
permitting withholding agents and partnerships to rely on revised Form
W-8EXP, the proposed regulations also integrate the new exception for
qualified holders into existing reporting regimes as described below.
A. Withholding Under Section 1445
1. Withholding on Dispositions of USRPIs Under Section 1445(a)
Section 1445(a) requires a transferee to withhold 15 percent of the
amount realized on any disposition of a USRPI by a foreign person.
Section 1445(b)(2) provides that no withholding is required if the
transferor furnishes to the transferee a certificate of non-foreign
status. Section 1445(f)(3)(B) provides that for purposes of section
1445, the term ``foreign person'' generally does not include an entity
described in section 897(l)(1). The proposed regulations revise the
updated section 1445 regulations to utilize the definitions in proposed
Sec. 1.897(l)-1(d) and permit a qualified holder to certify that it is
exempt from withholding under section 1445 by providing a certificate
of non-foreign status to a withholding agent. The proposed regulations
provide that a qualified holder may provide a Form W-8EXP for this
purpose, but the transferee, at its option, may request a certification
of non-foreign status or Form W-8EXP. Consistent with the approach of
current Sec. 1.1445-2(b)(1) (permitting a transferee to request
documentation satisfactory to the transferee), the transferee may
withhold under section 1445 if the requested certification is not
provided and will be considered to have been required to withhold for
purposes of sections 1461 through 1463.
A transferee must report transactions subject to section 1445(a)
using Form 8288, U.S. Withholding Tax Return for Dispositions by
Foreign Persons of U.S. Real Property Interests, and Form 8288-A,
Statement of Withholding on Dispositions by Foreign Persons of U.S.
Real Property Interests. Sec. 1.1445-1(c). However, because a
transferee may treat a qualified holder as not foreign, the transferee
is not required to file Form 8288 or Form 8288-A but is subject to the
retention and reliance rules generally applicable to certificates of
non-foreign status. See Sec. 1.1445-2(b)(3).
2. Withholding on Certain Distributions Under Section 1445(e)
Certain distributions and other transactions involving domestic or
foreign corporations, partnerships, trusts, and estates can give rise
to a withholding requirement under section 1445(e). However, an entity
or fiduciary is not required to withhold under section 1445(e) with
respect to a distribution or transfer to an interest holder that is not
a foreign person. Consistent with the changes to the documentation
requirements under section 1445(a), the proposed regulations provide
that a qualified holder may provide a certificate of non-foreign status
or a revised Form W-8EXP to certify its status as a qualified holder.
Although providing such documentation will relieve the entity or
fiduciary from withholding obligations under section 1445(e), any
otherwise applicable reporting requirements (for example, reporting
required on Form 1042-S, Foreign Person's U.S. Source Income Subject to
Withholding) remain applicable.
B. Withholding Under Section 1446
A partnership determines whether it must withhold tax under section
1446 by first determining whether it has any foreign partners, and, if
it does have foreign partners, by determining whether it has ECTI
allocable under section 704 to any of its foreign partners. Sec.
1.1446-1(b). A partner that is treated as a U.S. person only for
certain specified purposes is considered a foreign partner for purposes
of section 1446. Sec. 1.1446-1(c)(1). Accordingly, a qualified holder
is treated as a foreign partner for purposes of section 1446. However,
the proposed regulations generally provide that any gain from the
disposition of a USRPI, or distribution received from a QIE, that is
not otherwise treated as effectively connected with a trade or business
in the United States will not be treated as ECTI subject to section
1446 withholding to the extent allocable to a qualified holder.
A partnership may rely on a valid Form W-8 submitted for purposes
of section 1441 or section 1442 to establish a partner's foreign
status. Sec. 1.1446-1(c)(2)(ii). The proposed regulations update the
description of withholding certificates applicable to each type of
partner by permitting a partnership to rely on Form W-8EXP both to
determine a partner's foreign status and, as appropriate, to exclude
any gain from the disposition of a USRPI, including any distribution
treated as gain from the disposition of a USRPI under section
[[Page 26613]]
897(h), from the determination of such partner's allocable share of
ECTI. A partnership may also rely on a certificate of non-foreign
status to treat a partner as a qualified holder.
The proposed regulations do not modify general reporting
requirements applicable to partnerships. For example, a partnership
required to file a partnership return for a taxable year ``shall
furnish to every person who was a partner'' a statement of the
partner's distributive share of income, gain, loss, deduction, or
credit. Sec. 1.6031(b)-1T. The requirement applies regardless of
whether the partner is domestic or foreign. As a result, a partnership
that is required to file Form 1065, U.S. Return of Partnership Income,
and accompanying schedules must report income allocable to a qualified
holder on Schedule K-1, Partner's Share of Income, Deductions, Credit,
etc., notwithstanding that such income is exempt from section 897.
C. Coordination With Sections 1441 and 1442
Sections 1441 and 1442 require withholding agents to deduct and
withhold a 30 percent tax on payments of U.S. source fixed or
determinable, annual or periodical income to foreign persons, including
a U.S. source corporate distribution described in section 301(c)(1). A
corporate distribution described in section 301(c)(2) or (c)(3) that is
not subject to withholding under section 1441 or section 1442 (for
example, because the distributing corporation made the election
described in Sec. 1.1441-3(c)(1)) may nonetheless be subject to
withholding under section 1445 if the distributing corporation is a
USRPHC or QIE. Section 1.1441-3(c)(4)(i)(A) and a similar rule in Sec.
1.1441-3(c)(4)(i)(C) coordinate withholding under sections 1441 and
1445 with respect to distributions from USRPHCs and QIEs. Because a
qualified holder is treated as foreign for purposes of section 1441 but
not for purposes of section 1445, distributions that would otherwise be
subject to the coordination rule should be subject exclusively to
section 1441 if made to a qualified holder. Accordingly, the proposed
regulations provide that distributions made by a USRPHC or QIE to a
qualified holder are not subject to the coordination rules under Sec.
1.1441-3(c)(4) and instead are subject only to the requirements of
section 1441.
IV. Applicability Dates
The proposed regulations are generally proposed to apply with
respect to dispositions of USRPIs and distributions described in
section 897(h) occurring on or after the date of publication of the
Treasury decision adopting these rules as final regulations in the
Federal Register. However, proposed Sec. Sec. 1.897(l)-1(b)(1),
1.897(l)-1(d)(5), 1.897(l)-1(d)(7), 1.897(l)-1(d)(9), 1.897(l)-
1(d)(11), and 1.897(l)-1(d)(14) are proposed to apply with respect to
dispositions of USRPIs and distributions described in section 897(h)
occurring on or after June 6, 2019. See section 7805(b)(1)(B). These
provisions contain definitions that prevent a person that would
otherwise be a qualified holder from claiming the exemption under
section 897(l) in situations where the exemption may inure, in whole or
in part, to the benefit of a person other than a qualified recipient.
See Section I.B.6 of this Explanation of Provisions. The Treasury
Department and the IRS have determined that an immediate applicability
date under section 7805(b)(1)(B) is appropriate for these provisions in
order to address transactions that are inconsistent with the purposes
of section 897(l) that may occur before these rules are adopted as
final regulations.
A taxpayer may rely on the proposed regulations with respect to
dispositions or distributions occurring on or after December 18, 2015,
and prior to the applicability date of the final regulations, if the
taxpayer consistently and accurately complies with the rules in the
proposed regulations.
Special Analyses
I. Regulatory Planning and Review--Economic Analysis
Executive Orders 13563 and 12866 direct agencies to assess costs
and benefits of available regulatory alternatives and, if regulation is
necessary, to select regulatory approaches that maximize net benefits,
including potential economic, environmental, public health and safety
effects, distributive impacts, and equity. Executive Order 13563
emphasizes the importance of quantifying both costs and benefits, of
reducing costs, of harmonizing rules, and of promoting flexibility.
These proposed regulations have been designated as a significant
regulatory action by the Office of Management and Budget's Office of
Information and Regulatory Affairs (``OIRA'') and subject to review
under 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.
A. Background
Section 897, more commonly known as the Foreign Investment in Real
Property Tax Act (``FIRPTA''), was enacted in 1980 due to concerns that
the Code provided foreign persons an advantage in investing in U.S.
real property interests (USRPI) over U.S. taxpayers because, unlike
U.S. taxpayers, foreigners were not subject to U.S. capital gains tax
on dispositions of USRPI. Under FIRPTA, when a foreign person sells
USRPI, any gain on the sale generally is subject to U.S. income tax.
Section 897(l), enacted in 2015 in the Protecting Americans from
Tax Hikes Act (``PATH Act''), exempts qualified foreign pension funds
(``QFPFs'') from tax under FIRPTA on gain from the sale of USRPI, the
so-called ``foreign pension fund exemption.'' Such an exemption has the
effect of encouraging foreign pension fund investment in the United
States (through investment in real property) and, in general, provides
consistent tax treatment between foreign pension funds and U.S. pension
funds, which normally are not taxed at the entity level. This exemption
is the subject of the proposed regulations.
The foreign pension fund exemption also affects a related
withholding tax levied under section 1445 on the sale of USRPI to help
enforce payment of the tax owed by reason of section 897. The rate for
this withholding is 15 percent of gross sales. In cases where the gross
withholding tax would exceed the tax owed on the net capital gains,
foreigners typically request and receive approval for reduced rates of
gross withholding tax. If withholding is excessive or insufficient
relative to tax owed on the net capital gains, the difference is made
up on the foreigner's U.S. tax return. Thus, guidance that governs the
foreign pension fund exemption additionally necessitates guidance over
the withholding tax.
IRS tax data for 2015 and 2016 show an average of approximately 160
foreign pension funds earning income from U.S. real property. Only a
fraction of these funds are likely to sell or transfer USRPI in any
given year.
B. The Need for Proposed Regulations
Comments received indicate that some foreign pension funds have
refrained from investment in U.S. real property, including
infrastructure projects, due to ambiguities over their qualification
for the foreign pension fund exemption. Affected parties have provided
a number of comments requesting clarifications of the statutes. The
Treasury Department and the IRS have determined that such comments
[[Page 26614]]
warrant the issuance of further guidance. The proposed regulations do
not specifically aim to increase or decrease foreign pension fund
investment in the U.S. Instead, they aim to provide guidance such that
investment can be made on an efficient basis consistent with the
intents and purposes of the statute.
C. Summary of Proposed Regulations
The regulations clarify and modify the conditions under which
foreign pension funds are exempt from taxation under section 897. In
plain language, the proposed regulations provide further clarity over
(a) the entities and organizational structures that are eligible for
the foreign pension fund exemption; (b) the nature of the benefits,
beneficiaries, and foreign taxation of eligible funds; and (c) the
documentation rules that apply to exemptions from withholding taxes
otherwise required by sections 1445 (these exemptions from withholding
taxes flow from the foreign pension fund exemption from tax under
section 897). In addition, the proposed regulations provide rules to
prevent the inappropriate avoidance of FIRPTA by imposing conditions on
the sale of certain investment vehicles wholly owned by a foreign
pension fund.
D. Economic Analysis
1. Baseline
The Treasury Department and the IRS have assessed the benefits and
costs of the proposed regulations relative to a no-action baseline
reflecting anticipated Federal income tax-related behavior in the
absence of these proposed regulations.
2. Summary of Economic Effects
In general, a tax system that prioritizes minimization of
distortions aims to treat income earned by similar economic activities
similarly, subject to considerations of compliance burden and tax
administrability and to the intents and purposes of Congress. The
proposed guidance adheres to this principle. In plain language, section
897(l) exempts certain foreign pension funds from tax under FIRPTA, and
the proposed guidance qualifies the terms of this exemption by further
defining the permissible activities, ownership patterns, and other
economic decisions undertaken by foreign pension funds. Such guidance
helps ensure that the tax system does not favor or disfavor particular
QFPF activities over economically similar QFPF activities, a
requirement for an economically efficient tax system conditional on the
underlying Code.
As a result of the added clarity and reduced compliance burdens
relative to the baseline, the proposed regulations have the effect of
providing more efficient investment incentives, relative to the
baseline and in light of the intents and purposes of the statute. The
Treasury Department and the IRS have not estimated the effects of the
proposed regulations on the U.S. economy.
3. Economic Analysis of Specific Provisions
The Treasury Department and the IRS identified four provisions in
the proposed regulations for which economic analysis might play a
meaningful role in selecting the form of the regulations. This part
I.D.2 of this Special Analyses describes this analysis. The Treasury
Department and the IRS solicit comments on the economics of each of the
items discussed subsequently and of any other items of the proposed
regulations not discussed in this section. The Treasury Department and
the IRS particularly solicit comments that provide data, other
evidence, or models that could enhance the rigor of the process by
which provisions might be developed for the final regulations.
a. Investing in USRPI Directly and Using Pooled Investment Vehicles
Foreign pension funds often hold USRPI indirectly through
intermediate entities, including entities with multiple foreign pension
fund owners. While the statute contains language stating that an entity
wholly owned by a QFPF is itself a QFPF, section 897(l) is silent on
whether the entity must be wholly owned by a single QFPF (or,
alternatively, may be wholly owned by multiple QFPFs).
Because the economic incentives faced by foreign pension funds
under these various ownership structures regarding investment in USRPI
are similar to the incentives faced by QFPFs with simpler structures,
the Treasury Department and the IRS have determined that it would be
consistent with the intents and purposes of the statute and minimize
the potential for distortionary choices for them to be eligible for the
foreign pension fund exemption. Thus, the proposed regulations
explicitly allow indirect investments and pooled investments to qualify
for the exemption. The Treasury Department and the IRS considered
alternative guidance that was more restrictive than the proposed
regulations but, under that alternative, foreign pension funds could
avail themselves of an exemption only on a more restricted set of U.S.
investment options and would be denied the exemption on economically
similar investments, a situation that would generally lead to an
economically inferior outcome.
b. Avoidance Through Use of Foreign Subsidiary
A foreign person that is not a qualified foreign pension fund
(``non-QFPF'') that holds USRPI directly would be taxed under FIRPTA if
the non-QFPF sells the USRPI. If the non-QFPF instead holds USRPI
indirectly through a foreign subsidiary, the non-QFPF can sell the
foreign subsidiary without taxation under section 897, but, in that
case, the unrealized gain in the USRPI would remain potentially subject
to tax under FIRPTA on disposition of the USRPI. Absent a provision to
the contrary in the proposed regulations, if the non-QFPF instead sells
the foreign subsidiary to a QFPF, the QFPF could cause the foreign
subsidiary to sell the USRPI immediately (or in the future) without
incurring tax under section 897, thus eliminating the taxation (or
potential for future taxation) of gain in the USRPI. As a result,
subject to other provisions and judicial doctrines (for example, the
step transaction doctrine and the economic substance doctrine), a QFPF
could be used as a conduit for a non-QFPF to sell a USRPI to a
purchaser without incurring (or preserving) tax under section 897 on
the unrealized gain of the seller. The Treasury Department and the IRS
project that such activity would reduce U.S. tax revenue and would not
result in an accompanying economic benefit to the U.S. economy.
To curtail this tax avoidance, the proposed regulations provide a
transitory restriction on exemption when a foreign subsidiary that owns
USRPI is purchased by a QFPF or qualified controlled entity (``QCE'')
of a QFPF from a non-QFPF or a foreign person that is not a QCE. This
transitory restriction, referred to as a testing period, is described
in full in part I.B.6 of the Explanation of Provisions of the Preamble.
Among other criteria, under the proposed regulations the foreign
pension fund exemption generally is not available for gain recognized
by an entity from the disposition of a USRPI if such entity was not a
QFPF or QCE at any time during the 10-year period prior to the
recognition of that gain.
The Treasury Department and the IRS considered as an alternative
requiring the controlled entity acquired by the foreign pension fund to
account for the gain at the time the entity was acquired by the foreign
pension fund (known as mark-to-market) or requiring tracking of the
unrealized gain at the time of sale
[[Page 26615]]
to a QFPF or QCE for later recognition and also considered, under the
testing period approach, different lengths for that component of the
testing period. The mark-to-market or tracking approaches impose
greater compliance and administrative costs relative to the testing
period approach without providing any accompanying general economic
benefit.
The Treasury Department and the IRS aim, through this testing
period approach and accompanying requirements, to minimize tax
avoidance while facilitating efficient foreign pension fund investment
in USRPI, consistent with the intents and purposes of the statute. The
Treasury Department and IRS solicit comments on this proposal,
particularly comments that provide data, other evidence, or models that
could enhance the rigor of the process by which anti-abuse provisions
might be developed for the final regulations.
c. Ancillary Benefits
Section 897(l) specifies, along with other qualifications, that the
exemption is available to foreign entities that are ``established'' to
provide retirement or pension benefits. However, many foreign pension
funds provide ancillary benefits such as death, terminal health,
disability, medical, unemployment, and survivor benefits in addition to
retirement and pension benefits. These funds may be reluctant to invest
in USRPI due to uncertainty over whether the fund meets this particular
statutory criterion.
The Treasury Department and the IRS considered an option to deny
the exemption to foreign pension funds that provide any benefits other
than retirement and pension benefits. This option runs the risk of
effectively eliminating foreign pension fund investment in USRPI
because it would deny the exemption to foreign pension funds no matter
how close to 100 percent of their benefits were retirement or pension
related, or would require funds that wanted to invest in the U.S. under
competitive conditions to undergo costly restructuring to eliminate or
segregate those benefits, if such options were even feasible under the
foreign country's laws and institutions. Both of these outcomes are
economically inefficient relative to the proposed policies and the
baseline because relative to these options, they incentivize socially
costly tax avoidance choices and/or overly restrict incrementally
improving market-driven choices.
The proposed regulations provide a bright-line test limiting the
amount of ancillary benefits to 15 percent or lower. Such threshold was
chosen in part based on suggestions from comments. The Treasury
Department and the IRS aim, through the bright-line approach and this
specific percentage test, to facilitate foreign pension fund investment
in the U.S. consistent with the intents and purposes of the statute.
The Treasury Department and the IRS solicit comments on this proposed
standard, and particularly solicit comments that provide data, other
evidence, or models that could enhance the rigor of the process by
which the percentage limitation might be developed for the final
regulations.
The Treasury Department and the IRS recognize that the threshold
approach may result in a small number of foreign pension funds
oscillating between qualifying and not qualifying on a year-to-year
basis and that such approach requires measurement of ancillary benefits
relative to retirement and pension benefits. Thus, the Treasury
Department and the IRS further solicit comments on alternatives to the
threshold approach and particularly solicit comments that provide data,
other evidence, or models that could enhance the rigor of the process
by which the tax treatment of foreign pension funds that provide
ancillary benefits might be developed for the final regulations.
d. Determination of Foreign Tax Preference
Under the statute, to qualify for exemption a foreign pension fund
must be subject to tax laws in the country in which the fund is
established or operates such that contributions to the fund are
deductible or excluded from the gross income of the fund or taxed at a
reduced rate, or tax on investment income of the fund is deferred or
that income is taxed a reduced rate.
To provide further specificity over what qualifies as a
preferential tax rate on contributions to or income from the fund, the
Treasury Department and the IRS considered providing a substantive,
analytical test for determining whether a foreign pension fund benefits
from a preferential tax rate. This option would prove difficult to
administer and require complex rules to determine whether a pension
fund benefits from a preferential tax regime in the country in which it
is established.
To reduce compliance burden and enhance administrability, the
proposed regulations expand the scope of the potential preferential tax
regimes and provide a bright-line test for determining preferential
treatment by setting a threshold (85 percent) for the percentage of
fund contributions/income that is subject to a preferential regime. The
85 percent threshold was chosen in part based on suggestions from
comments. The Treasury Department and the IRS aim, through this bright-
line approach and this specific percentage test, to facilitate foreign
pension fund investment in USRPI consistent with the intents and
purposes of the statute while minimizing the costs of tax
administrability.
The Treasury Department and the IRS solicit comments on this
proposal, and in particular comments that provide data, other evidence,
or models that could enhance the rigor of the process by which the
897(l)(2)(E) requirements might be developed for the final 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
proposed regulations are in Sec. Sec. 1.1441-3(c)(4)(iii), 1.1445-2,
1.1445-4, 1.1445-5, 1.1445-8, and 1.1446-1.
In 2018, the IRS released and took comment on drafts of three forms
in order to give members of the public the opportunity to benefit from
certain specific revisions made to the Code. The forms were Form 1042-
S, ``Foreign Person's U.S. Source Income Subject to Withholding,'' Form
1042, ``Annual Withholding Tax Return for U.S. Source Income of Foreign
Persons'' and Form W-8EXP, ``Certificate of Foreign Government or Other
Foreign Organization for United States Tax Withholding or Reporting.''
The IRS received no comments on the forms during the comment period.
Consequently, the IRS made the forms available for use by the public on
November 30, 2018 (in the case of Form 1042-S), November 21, 2018 (in
the case of Form 1042), and July 20, 2017 (in the case of Form W-8EXP).
The IRS is contemplating making additional changes to those three forms
in connection with these regulations.
The Treasury Department and the IRS request comments on all aspects
of information collection burdens related to the proposed regulations,
including estimates for how much time it would take to comply with the
paperwork burdens described below for each relevant form and ways for
the IRS to minimize the paperwork burden. Proposed revisions to these
forms that reflect the information collections contained in these
proposed regulations will be made available for public comment at
www.irs.gov/draftforms and
[[Page 26616]]
will not be finalized until after these regulations take effect and
have been approved by OMB under the PRA. The Treasury Department and
the IRS have not estimated the burden, including that of any new
information collections, related to the requirements under the proposed
regulations.
A. Information Collections Contained in Sec. 1.1441-3(c)(4)(iii)
The proposed regulations provide that distributions made by a
USRPHC or QIE to a qualified holder are subject only to the
requirements of section 1441 and not the coordination rule under Sec.
1.1441-3(c)(4). Proposed Sec. 1.1441-3(c)(4)(iii). As a result, 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 this reporting, the IRS is planning to
revise Form 1042-S to include an income code designating payments made
to Qualified Foreign Pension Plans. No revisions are being made to Form
1042 in connection with payments made to Qualified Foreign Pension
Plans.
For purposes of the PRA, the reporting burden associated with
proposed Sec. 1.1441-3(c)(4)(iii) 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). The PRA submissions for Form 1042
reflect IRS's transition to an updated statistical model that
calculates burden based on the taxpayer filing experience as a whole.
As such, Form 1042 is in a transition state, as the burden incurred by
business filers is captured in OMB control number 1545-0123 (under the
updated burden model) and the burden represented incurred by all other
filers is represented in 1545-0096 (legacy model).
B. Information Collections in Sec. Sec. 1.1445-2, 1.1445-4, 1.1445-5,
1.1445-8, and 1.1446-1
Proposed Sec. Sec. 1.1445-2, 1.1445-4, 1.1445-5, 1.1445-8, and
1.1446-1 would require a qualified foreign pension fund wishing to
claim an exemption under section 897(l) to provide a withholding agent
with either a Form W-8EXP, ``Certificate of Foreign Government or Other
Foreign Organization for United States Tax Withholding or Reporting,''
or, at a withholding agent's request and in lieu of Form W-8EXP, a
certificate of non-foreign status containing the same information as
Form W-8EXP. The IRS plans to revise Form W-8EXP for use by qualified
foreign pension funds. For purposes of the PRA, the reporting burden
associated with proposed Sec. Sec. 1.1445-2, 1.1445-4, 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 proposed 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 2.70 million
hours) and 1545-1621 (which represents a total estimated burden time,
including all other related forms and schedules for other filers, of
25.13 million hours and total estimated monetized costs of $2.39
billion). 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
proposed regulations. These numbers are therefore unrelated to the
future calculations needed to assess the burden imposed by the proposed
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 imposed prior to the PATH Act.
III. Regulatory Flexibility Act
Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it
is hereby certified that the proposed rule 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 foreign entities are not
considered small entities. These regulations will affect foreign
pension funds and not U.S. pension funds. In addition, based on
comments received, the foreign pension funds that are affected are
sovereign funds, which are not small entities. Accordingly, a
regulatory flexibility analysis under the Regulatory Flexibility Act is
not required. Pursuant to section 7805(f), this notice of proposed
rulemaking has been submitted to the Chief Counsel for Advocacy of the
Small Business Administration for comment on its impact on small
business.
IV. 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. In 2018, that threshold is approximately $150 million. This
rule does 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.
V. 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. This proposed rule does not have
federalism implications, does not impose substantial direct compliance
costs on state and local governments, and does not preempt state law
within the meaning of the Executive Order.
Comments and Requests for Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any comments that are submitted timely
to the IRS as prescribed in this Preamble under the ADDRESSES heading.
The Treasury Department and the IRS request comments on all aspects of
the proposed rules. All comments will be available at
www.regulations.gov or upon request. A public hearing will be scheduled
if requested in writing by any person that timely submits written
comments. If a public hearing is scheduled, notice of the date, time,
and place for the public hearing will be published in the Federal
Register.
Drafting Information
The principal authors of these proposed regulations are Joshua
Rabon, formerly with the Office of Associate Chief Counsel
(International), and Milton Cahn, Office of Associate Chief Counsel
(International). However, other personnel from the Treasury
[[Page 26617]]
Department and the IRS participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended by adding
entries 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) Overview. This section provides rules regarding the exception
from section 897 for qualified holders. 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 definitions. Paragraph (e)
of this section provides examples illustrating the application of the
rules of this section. Paragraph (f) 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, 1.1445-4, 1.1445-5, 1.1445-8, 1.1446-7.
(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.
This paragraph (c) provides rules regarding the application of the
requirements of section 897(l)(2) to an eligible fund. Paragraph (c)(2)
of this section provides requirements that an eligible fund must
satisfy to be treated as a qualified foreign pension 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 the requirements in paragraph (c)(2) of
this section to an eligible fund that is an organization or
arrangement.
(2) Requirements applicable to an eligible fund--(i) Created or
organized. An eligible fund must be created or organized under the law
of a foreign country. For purposes of this paragraph (c)(2)(i), a
governmental unit is treated as created or organized in the foreign
country with respect to which it is, or is a part of, the foreign
government.
(ii) Purpose of eligible fund--(A) In general. An eligible fund
must be established by--
(1) 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; or
(2) 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.
(B) Established to provide retirement or pension benefits. An
eligible fund is treated as satisfying the requirement of paragraph
(c)(2)(ii)(A) of this section if and only if--
(1) All of the benefits that an eligible fund provides are
qualified benefits provided to qualified recipients; and
(2) At least 85 percent of the present value of the qualified
benefits that the eligible fund reasonably expects to provide are
retirement or pension benefits.
(C) 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
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 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 and 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. An
eligible fund must--
(1) Be subject to government regulation, and
(2) Provide annual information about its beneficiaries to the
relevant tax authorities in the foreign country in which it is
established or operates, or such information must otherwise be
available to the relevant tax authorities in the foreign country in
which it is established or operates.
(B) Information to be provided. An eligible fund is treated as
satisfying the requirement of paragraph (c)(2)(iv)(A)(2) of this
section only if the eligible fund annually provides to the relevant tax
authorities in the foreign country in which it 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 such relevant tax authorities. An eligible fund
is not treated as failing to satisfy the requirement of paragraph
(c)(2)(iv)(A)(2) of this section as a result of the eligible fund not
being required to provide information to the relevant tax authorities
in a year in which no qualified benefits are provided to qualified
recipients.
(C) Relevant tax authorities. An eligible fund is treated as
satisfying the requirement of paragraph (c)(2)(iv)(A)(2) of this
section if the eligible fund is required, pursuant to the laws of the
foreign country in which it is established or operates, to provide the
information described in paragraph (c)(2)(iv)(B) of this section to one
or more governmental units of the foreign country in which the eligible
fund is created or organized, or if such information is otherwise
available to one or more governmental units of the foreign country in
which the eligible fund is created or organized.
(D) Treatment of certain governmental units. An eligible fund that
is described in paragraph (c)(2)(ii)(A)(1) of this section, but is not
also described in paragraph (c)(2)(ii)(A)(2) 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 laws of the foreign country
in which the eligible fund is established or operates
[[Page 26618]]
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 income tax laws of the
foreign country 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 country
in which it is established and operates or the foreign country in which
it is established and operates has no income tax.
(D) Other preferential tax regimes. An eligible fund that does not
receive the tax treatment described in either paragraphs
(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 laws of the country in which the eligible fund is
established and 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 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) Subnational jurisdictions. Solely for purposes of this
paragraph (c)(2)(v), a reference to a foreign country does not include
a reference to a state, province, or political subdivision of a foreign
country.
(3) Rules on the application of the requirements in paragraph
(c)(2) of this section--(i) In general. Except as provided in paragraph
(c)(3)(ii) of this section, 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.
(ii) Foreign status determined independently. Each person or
governmental unit that is part of an organization or arrangement must
independently satisfy the requirement of paragraph (c)(2)(i) of this
section.
(iii) Relevant income, assets, and functions. The determination of
whether an eligible fund satisfies the requirements of paragraphs
(c)(2)(ii) through (v) of this section is made solely with respect to
the income and assets held by the eligible fund 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 qualified segregated accounts
maintained by an eligible fund are treated as a single qualified
segregated account.
(d) Definitions. The following definitions apply for purposes of
this section.
(1) Ancillary benefits. The term ancillary benefits means benefits
payable upon the diagnosis of a terminal illness, death benefits,
disability benefits, medical benefits, unemployment benefits, or
similar benefits.
(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 country. The term foreign country means a country other
than the United States. Except for purposes of paragraph (c)(2)(v) of
this section, references in this section to a foreign country include
references to a state, province, or political subdivision of a foreign
country. Solely for purposes of this section, the Commonwealth of
Puerto Rico and any possession of the United States are treated as a
foreign country.
(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) Organization or arrangement. The term organization or
arrangement means one or more trusts, corporations, governmental units,
or employers.
(7) Qualification date. The term qualification date means, with
respect to an entity or governmental unit, the earliest date during an
uninterrupted period ending on the date of the disposition or the
distribution, as the case may be, in which the trust, corporation,
governmental unit, or employer is a qualified foreign pension fund or a
qualified controlled entity.
(8) Qualified benefits. The term qualified benefits means
retirement, pension, or ancillary benefits.
(9) Qualified controlled entity. The term qualified controlled
entity means a trust or corporation organized under the laws of a
foreign country 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 or partnerships.
(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--(i) In general. The term qualified holder
means a qualified foreign pension fund or a qualified controlled
entity.
(ii) Limitation. Notwithstanding paragraph (d)(11)(i) of this
section, a qualified holder does not include any trust, corporation,
governmental unit, or employer that, at any time during the testing
period, determined without regard to this paragraph (d)(11)(ii), was
not a qualified foreign pension fund, a part of a qualified foreign
pension fund, or a qualified controlled entity. The preceding sentence
does not apply to an entity that owned no United States real property
interests as of the qualification date.
(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) 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)(2) of this section, a current or former employee or any
person designated by
[[Page 26619]]
such current or former employee to receive qualified benefits.
(ii) Special rule regarding automatic designation. For purposes of
paragraph (d)(12)(i) of this section, a person is treated as
designating another person to receive 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
contractual terms applicable to the eligible fund or pursuant to the
laws of the foreign country 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 for the sole purpose of funding qualified benefits to
qualified recipients.
(ii) Assets held by eligible funds. For purposes of paragraph
(d)(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 only if the contractual
terms applicable to the eligible fund or the laws of the foreign
country 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
this purpose, the fact that assets or income may inure to the benefit
of a governmental unit by operation of escheat or similar laws is
ignored.
(iii) Assets held by qualified controlled entities. For purposes of
paragraph (d)(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 its income inuring to the benefit of a person other
than a qualified recipient; and
(B) 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
upon dissolution.
(14) Testing period. The term testing period means, with respect to
a trust, corporation, governmental unit, or employer and a disposition
described in section 897(a) or a distribution described in section
897(h), as the case may be, the shortest of--
(i) The period beginning on December 18, 2015, and ending on the
date of the disposition or the distribution;
(ii) The ten-year period ending on the date of the disposition or
the distribution; and
(iii) The period during which the entity (or its predecessor) was
in existence.
(e) Examples. This paragraph (e) provides examples that illustrate
the rules of this section. The following examples do not illustrate the
application of the applicable withholding rules, including sections
1445 and 1446 and the regulations thereunder. For the purposes of the
examples in this paragraph (e), unless otherwise stated, the following
facts are presumed. 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 paragraph (c)(2)(iii)(B) of this
section. The limitation described in paragraph (d)(11)(ii) of this
section does not apply to any entity.
(1) Example 1. No legal entity--(i) Facts. Country A
establishes Retirement Plan for the sole purpose of providing
retirement benefits to all citizens of Country A aged 65 or older.
Retirement Plan is comprised 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 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. In Year 1, Agency sells Property,
which is an interest in real property located in the United States
owned by Asset Pool, recognizing $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 comprised of Asset
Pool and Agency, is comprised of one or more governmental units
described in paragraph (d)(5) of this section. Accordingly,
Retirement Plan is an organization or arrangement described in
paragraph (d)(6) 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 benefits to beneficiaries of the Retirement Fund
(qualified recipients as defined in paragraph (d)(12)(i)(A) of this
section). Therefore, Retirement Plan is an eligible fund within the
meaning of paragraph (d)(2) of this section.
(B) In determining whether or not Retirement Plan is an eligible
fund that satisfies the requirements of paragraph (c)(2) of this
section and is treated as a qualified foreign pension fund, the
rules of paragraph (c)(3) of this section apply. Accordingly, the
activities of Asset Pool and Agency are integrated and treated as
undertaken by a single entity to determine whether the requirements
of paragraphs (c)(2)(ii) through (v) 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 comprised of Asset Pool and Agency, each
of which is a governmental unit and treated as created or organized
under the law 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 to provide
retirement benefits, which are qualified benefits described in
paragraph (d)(8) of this section, to all citizens of Country A, who
are qualified recipients described in paragraph (d)(12)(i)(A) of
this section because they are eligible to be participants or
beneficiaries of Retirement Plan. In addition, all of the benefits
that Retirement Plan provides are qualified benefits provided to
qualified recipients, and at least 85 percent of the benefits that
Retirement Plan reasonably expects to provide are retirement or
pension benefits. Accordingly, Retirement Plan satisfies the
requirement of paragraph (c)(2)(ii) of this section.
(E) Retirement Plan provides retirement benefits to all 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 comprised solely of governmental units
within the meaning of paragraph (d)(5) of this section. Accordingly,
under paragraph (c)(2)(iv)(D) 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
paragraphs (c)(2)(i) through (v) of this section, Retirement Plan is
a qualified foreign pension fund as defined in paragraph (d)(10) of
this section. Because Retirement Plan is a qualified foreign pension
fund and the limitation described in paragraph (d)(11)(ii) of this
section does not apply, Retirement Plan is a qualified holder.
Retirement Plan's gain with respect to
[[Page 26620]]
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 recognized 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 benefits to current and former employees of
Employer and S1, a Country B corporation that is wholly owned by
Employer. Fund is established as a trust under the law of Country B,
and Employer retains discretion to invest assets and to administer
benefits on Fund's behalf. Fund receives contributions from Employer
and contributions from employees that 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 the 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 a death
benefit to the beneficiary's designee (or deemed designee under
local law if the beneficiary fails to identify a beneficiary). It is
reasonably expected that such death benefits will account for less
than fifteen percent of the present value of the qualified benefits
that Fund expects to provide in the future. Fund annually provides
to the tax authorities of Country B the amount of qualified 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.
(ii) Analysis. (A) Fund is a trust that maintains an
identifiable pool of assets for the sole purpose of funding
retirement and ancillary benefits to current and former employees of
Employer (qualified recipients as defined in paragraph (d)(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 (d)(13) of this section. Accordingly, Fund is an eligible
fund within the meaning of paragraph (d)(2) of this section.
(B) Because Fund is created or organized under the law of
Country B, Fund satisfies the requirement of paragraph (c)(2)(i) of
this section.
(C) All of the benefits provided by Fund are qualified benefits
because the only benefits that Fund provides are pension or
retirement benefits or ancillary benefits described in paragraph
(d)(1) of this section, which are qualified benefits described in
paragraph (d)(8) of this section, to qualified recipients.
Furthermore, Fund reasonably anticipates that more than 85 percent
of the present value of benefits paid to qualified participants will
be retirement or pension benefits. Accordingly, Fund is established
by Employer to provide retirement or pension benefits to qualified
recipients in consideration for services rendered by such qualified
recipients to such employers, 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 country 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
described in paragraph (d)(10) of this section. As a qualified
foreign pension fund with respect to which the limitation described
in paragraph (d)(11)(ii) of this section does not apply, Fund is a
qualified holder. All of Fund's assets are held in a qualified
segregated account within the meaning of paragraph (d)(13) of this
section. Consequently, under paragraph (b) of this section, any gain
or loss of Fund from the disposition of a United States real
property interest, including any distribution treated as gain from
the disposition of a United States real property interest under
section 897(h), is not subject to section 897(a).
(3) Example 3. Employer controlled group--(i) Facts. The facts
are the same as in 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 testing 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) of this section and an eligible fund under (d)(2) of this
section with respect to the qualified segregated account held by
Fund. Because the eligible fund comprised of Fund and S2 satisfies
the requirements of paragraph (c)(2) of this section (including the
requirement under paragraph (c)(3)(ii) of this section that each
entity satisfy the foreign organization requirement of paragraph
(c)(2)(i) of this section), the eligible fund that is comprised of
Fund and S2 constitutes a qualified foreign pension fund described
in paragraph (d)(10) of this section. Thus, under paragraph (b) of
this section, gain or loss of Fund from the disposition of a United
States real property interest, including any distribution treated as
gain from the disposition of a United States real property interest
under section 897(h), is not subject to section 897(a).
(4) Example 4. Third-party assumption of pension liabilities--
(i) Facts. The facts are the same as in Example 2, except that Fund
anticipates $100x of qualified benefits will be paid each year
beginning in Year 5. Fund enters into an agreement with Guarantor, a
privately held Country B corporation, which provides that Fund will,
in Year 1, cede a portion of its assets to Guarantor in exchange for
annual payments of $100x beginning in Year 5 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. In Year 2, 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. In Year 4, 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.
(5) Example 5. Asset manager--(i) Facts. The facts are the same
as in Example 4 except that instead of ceding legal ownership of the
assets to Guarantor, Fund transfers assets to Guarantor to be held
in Trust on behalf of Fund. Guarantor has exclusive management
authority over the assets, and is entitled to a reasonable fixed
management fee which it withdraws annually from Trust's assets.
(ii) Analysis. Assets held by Fund, including its interest in
Trust, are treated as held by Fund, a qualified holder within the
meaning of paragraph (d)(11) of this section, in a qualified
segregated account within the meaning of paragraph (d)(13) of this
section. Paragraph (d)(13)(ii) of this section provides that the
assets of the 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. Consequently, the limitation of paragraph (b)(2)
of this
[[Page 26621]]
section does not apply and Fund Guarantor is 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. Partnership--(i) Facts. The facts are the same
as in Example 4 except that instead of ceding legal ownership of the
assets to Guarantor, Fund contributes the assets to a partnership
(PRS) formed with Guarantor. Guarantor contributes nominal capital
to the partnership, but receives a profits interest in the
partnership that is reasonable in light of the Guarantor's
management activity. Guarantor serves as the general partner of PRS
and has discretionary authority to buy and sell PRS assets without
approval from Fund.
(ii) Analysis. All of Fund's assets, including the partnership
interest, are held in a qualified segregated account within the
meaning of paragraph (d)(13) of this section. See Example 2,
paragraph (ii)(A) of this section. Accordingly, Fund is exempt under
paragraph (b) of this section with respect to gain or loss from the
disposition of a United States real property interest, including any
distribution treated as gain from the disposition of a United States
real property interest under section 897(h), that is allocable to
Fund from PRS. Guarantor is not exempt under paragraph (b) of this
section with respect to gain or loss allocable to Guarantor from
PRS.
(7) Example 7. Wholly-owned entity--(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.
Fund originally formed OpCo on January 1, 2016, for the purpose of
conducting the manufacturing business and utilizing the business
profits to fund pension liabilities. OpCo either retains or
distributes to Fund all of its net earnings, and upon dissolution,
must distribute all of its assets to stockholders after satisfaction
of liabilities to its creditors. Fund has held all of the stock of
OpCo since OpCo was formed. On June 1, 2017, OpCo realizes $100 of
gain on the disposition of Property A, a United States real property
interest.
(ii) Analysis. (A) A qualified holder described in paragraph
(d)(11) of the section includes a qualified controlled entity
described in paragraph (d)(9) of this section. A qualified
controlled entity includes any corporation organized under the laws
of a foreign country 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.
(B) A qualified controlled entity is a qualified holder under
paragraph (d)(11) of this section, but only if the qualified
controlled entity was a qualified controlled entity throughout the
entire testing period. The testing period under paragraph (d)(14) of
this section is the shortest of the period beginning on December 18,
2015, and ending on the date of the disposition or the distribution;
the ten-year period ending on the date of the disposition or the
distribution; or the period during which the entity was in
existence. Thus, the testing period is January 1, 2016 (the date of
formation) to June 1, 2017 (the date of the disposition). Because
OpCo was a qualified controlled entity as defined in paragraph
(d)(9) of this section at all times during that period, the
limitation in paragraph (d)(11)(ii) of this section does not apply
to OpCo, and OpCo is a qualified holder under paragraph (d)(11) of
this section.
(C) Under paragraph (b)(2) of this section, only gain or loss
attributable to a qualified segregated account is exempt under
section 897(l). All of OpCo's net earnings are credited to its own
account or distributed to Fund and credited to Fund's qualified
segregated account. Upon dissolution, all of OpCo's assets, after
satisfaction of liabilities to persons having interests in the
entity solely as creditors, would be distributed to OpCo's sole
shareholder, Fund, and credited to Fund's qualified segregated
account. Accordingly, all of OpCo's assets constitute a qualified
segregated account. Therefore, the limitation in paragraph (b)(2) of
this section does not apply, and the $100x gain realized by OpCo, a
qualified holder, from the disposition of Property A on June 1,
2017, is not subject to tax under section 897(a).
(8) Example 8. Not a qualified holder--(i) Facts. The facts are
the same as in Example 7, except that Opco was formed by a person
other than Fund on January 1, 2016, and Fund acquired all the stock
of OpCo on November 1, 2016. During the period from January 1, 2016,
and October 31, 2016, Opco was not a qualified foreign pension fund,
a part of a qualified foreign pension fund, or a qualified
controlled entity. OpCo owned Property A before November 1, 2016.
(ii) Analysis. Under paragraph (d)(11)(ii) 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, 2016 (the date of formation of OpCo) to June
1, 2017 (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, 2016
to November 1, 2016, 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, 2016.
(f) Applicability date--(1) In general. Except as otherwise
provided in paragraph (f)(2) of this section, this section applies to a
disposition of a United States real property interest, or a
distribution described in section 897(h), occurring on or after the
date of publication of the Treasury decision adopting these rules as
final regulations in the Federal Register.
(2) Certain Provisions. Paragraphs (b)(1), (d)(5), (7), (9), (11),
and (14) 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.
0
Par. 3. Section 1.1441-3 is amended by adding paragraph (c)(4)(iii) to
read as follows:
Sec. 1.1441-3 Determination of amounts to be withheld.
* * * * *
(c) * * *
(4) * * *
(iii) Special rule for qualified holders--(A) In general. Any
corporate distribution made by a USRPHC or a QIE to a payee that is a
qualified holder (as defined in Sec. 1.897(l)-1(d)(11)) shall not be
subject to the rules of this paragraph (c)(4) but shall be subject to
the requirements of paragraphs (c)(1) through (3) of this section.
(B) Applicability date. Paragraph (c)(4)(iii)(A) of this section
applies to distributions made by a USRPHC or a QIE occurring on or
after the date of publication of the Treasury decision adopting these
rules as final regulations in the Federal Register.
* * * * *
0
Par. 4. Section 1.1445-2 is amended by revising paragraphs (b)(1) and
(b)(2)(i)(C) and adding paragraph (b)(2)(v) and a new sentence at the
end of paragraph (e) to read as follows:
Sec. 1.1445-2 Situations in which withholding is not required under
section 1445(a).
* * * * *
(b) * * *
(1) In general. No withholding is required under section 1445 if
the transferor of a U.S. real property interest is not a foreign
person. Therefore, paragraph (b)(2) of this section provides rules
pursuant to which the transferor can provide a certification of non-
foreign status to inform the transferee that withholding is not
required. A transferee that obtains such a certification must retain
that document for five years, as provided in paragraph (b)(3) of this
section. Except to the extent provided in paragraph (b)(4) of this
section, obtaining this certification excuses the transferee from any
liability otherwise imposed by section 1445 and Sec. 1.1445-1(e).
However, section 1445 and the rules of this section do not impose any
obligation upon a transferee to obtain a certification from the
transferor; thus, a transferee may instead rely upon other means to
ascertain the
[[Page 26622]]
non-foreign status of the transferor. If, however, the transferee
relies upon other means and the transferor was, in fact, a foreign
person, then the transferee is subject to the liability imposed by
section 1445 and Sec. 1.1445-1(e).
(i) A transferee is in no event required to rely upon other means
to ascertain the non-foreign status of the transferor and may demand a
certification of non-foreign status or Form W-8EXP in the case of a
qualified holder (as defined in Sec. 1.897(l)-1(d)(11)). If the
certification or form is not provided, the transferee may withhold tax
under section 1445 and will be considered, for purposes of sections
1461 through 1463, to have been required to withhold such tax.
(ii) [Reserved]
(2) * * *
(i) * * *
(C) (1) Is signed under penalties of perjury.
(2) In general, a foreign person is a nonresident alien individual,
foreign corporation, foreign partnership, foreign trust, or foreign
estate, except that a qualified holder (as defined in Sec. 1.897(l)-
1(d)(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). 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). Samples of acceptable
certifications are provided in paragraph (b)(2)(iv) of this section.
* * * * *
(v) Qualified holders. As an alternative to a certification of non-
foreign status described in paragraph (b)(2)(i) of this section, a
qualified holder (as defined in Sec. 1.897(l)-1(d)(11)) may provide a
Form W-8EXP to certify that it is treated as not foreign for purposes
of section 1445. A Form W-8EXP provided for this purpose is subject to
the general requirements of a certification of non-foreign status. For
example, a Form W-8EXP provided for this purpose must be retained for
the five-year period described in paragraph (b)(3) of this section
regardless of whether it is required to be retained for purposes of
section 1441 and the regulations thereunder.
* * * * *
(e) * * * Paragraphs (b)(1), (b)(2)(i) and (v) of this section, as
revised by the Treasury decision adopting these rules as final
regulations, apply with respect to dispositions of U.S. real property
interests and distributions described in section 897(h) occurring on or
after the date of publication of the Treasury decision adopting these
rules as final regulations in the Federal Register.
0
Par. 5. Section 1.1445-4 is amended by revising paragraphs (a)(2) and
(b)(2) and adding paragraph (g) to read as follows:
Sec. 1.1445-4 Liability of agents.
(a) * * *
(2) The transferee is furnished with a non-foreign certification
pursuant to Sec. 1.1445-2(b)(2) or a certification regarding qualified
holder status provided on Form W-8EXP and either:
(i) The agent knows that the certification is false; or
(ii) The agent represents a transferor that is a foreign
corporation that is not a qualified holder. An agent that represents a
transferor that is a foreign corporation is not required to provide
notice to the transferee if the foreign corporation provided a non-
foreign certification or certification regarding qualified holder
status provided on Form W-8EXP, as applicable, to the transferee prior
to such agent's employment and the agent does not know that the
corporation did so.
(b) * * *
(2) The entity or fiduciary is furnished with a non-foreign
certification pursuant to Sec. 1.1445-5(b)(3)(ii) or a certification
regarding qualified holder status provided on Form W-8EXP and either:
(i) The agent knows that such certification is false; or
(ii) The agent represents a foreign corporation (other than a
qualified holder) that made such a certification.
* * * * *
(g) Certain applicability dates. Paragraphs (a)(2) and (b)(2) of
this section, as revised by the Treasury decision adopting these rules
as final regulations, apply with respect to dispositions of U.S. real
property interests and distributions described in section 897(h)
occurring on or after the date of publication of the Treasury decision
adopting these rules as final regulations in the Federal Register.
0
Par. 6. Section 1.1445-5 is amended by revising paragraph (b)(3)(ii)(A)
and adding a new sentence 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 qualified holder (as defined in Sec.
1.897(l)-1(d)(11)) is not a foreign person.
* * * * *
(h) * * * Paragraph (b)(3)(ii)(A) of this section, as revised by
the Treasury decision adopting these rules as final regulations,
applies with respect to dispositions of U.S. real property interests
and distributions described in section 897(h) occurring on or after the
date of publication of the Treasury decision adopting these rules as
final regulations in the Federal Register.
0
Par. 7. Section 1.1445-8 is amended by revising paragraph (e) and
adding 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 certificate of non-foreign status
pursuant to Sec. 1.1445-2(b), a Form W-9, a Form W-8EXP (in the case
of a qualified holder (as defined in Sec. 1.897(l)-1(d)(11)), or a
form that is substantially similar to such forms, 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
[[Page 26623]]
on such other means and the interest holder proves, in fact, to be a
foreign person, then the withholding agent is subject to any liability
imposed pursuant to section 1445 and the regulations thereunder for
failure to withhold.
* * * * *
(j) Certain applicability dates. Paragraph (e) of this section, as
revised by the Treasury decision adopting these rules as final
regulations, applies with respect to dispositions of U.S. real property
interests and distributions described in section 897(h) occurring on or
after the date of publication of the Treasury decision adopting these
rules as final regulations in the Federal Register.
0
Par. 8. Section 1.1446-1 is amended by revising the second sentence of
paragraph (c)(2)(ii)(G) and 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)(2)(iii)(B) (regarding certain qualified holders described in Sec.
1.897(l)-1(d)(11)) and Sec. 1.1446-3(c)(3) (regarding certain tax-
exempt organizations described in section 501(c)), the submission of
Form W-8EXP 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 (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 (e.g., Form W-8BEN-E or Form W-8IMY) to the partnership to
establish its foreign status for purposes of section 1446. In addition
to Form W-8BEN-E, a foreign entity may also submit Form W-8EXP or a
certification of non-foreign status described in Sec. 1.1445-5(b)(3)
for purposes of documenting itself as a qualified holder (as defined in
Sec. 1.897(l)-1(d)(11)).
* * * * *
0
Par. 9. Section 1.1446-2 is amended by adding paragraph (b)(4)(iii) to
read as follows:
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 qualified holder (as defined in Sec. 1.897(l)-
1(d)(11)), the foreign partner's allocable share of partnership ECTI
does not include gain or loss that is not taken into account by the
qualified holder 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 or Form W-8EXP. See Sec. 1.1446-
1(c)(2)(ii)(G) and (H) regarding documentation of qualified holders.
* * * * *
0
Par. 10. Section 1.1446-7 is amended by revising the section heading
and adding a new sentence at the end of the paragraph to read as
follows:
Sec. 1.1446-7 Effective/Applicability date.
* * * Sections 1.1446-1(c)(2)(ii)(G) and (H) and 1.1446-
2(b)(2)(iii)(A) and (B), as revised by the Treasury decision adopting
these rules as final regulations, apply with respect to dispositions of
U.S. real property interests and distributions described in section
897(h) occurring on or after the date of publication of the Treasury
decision adopting these rules as final regulations in the Federal
Register.
Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2019-11291 Filed 6-6-19; 8:45 am]
BILLING CODE 4830-01-P