United States: IRS Issues Proposed Regulations Clarifying FIRPTA Exemption For Qualified Foreign Pension Funds

Last Updated: June 20 2019
Article by David A. Sausen, Joel Deuth and Gus Weinkam

On June 6, 2019 the US Internal Revenue Service (the IRS) and US Department of the Treasury issued proposed regulations (Proposed Regulations) that provide guidance with respect to (1) the scope of the exception for a "qualified foreign pension fund" (QFPF) from US federal tax imposed under Section 897(a) of the US Internal Revenue Code on gain or loss from the disposition of, and distributions with respect to, "United States real property interests" (USRPIs), (2) the parameters for qualifying as a QFPF, and (3) documentation permitted to certify that no US federal withholding tax is required on the disposition of a USRPI.

Section 897(a)(1) provides that gain or loss of a nonresident alien individual or a non-US corporation from the disposition of a USRPI is subject to tax as if the nonresident alien individual or non-US corporation were engaged in a US trade or business during the taxable year and such gain or loss were effectively connected with that US trade or business.

A USRPI generally includes an interest in real property located in the United States or the Virgin Islands, and any interest (other than solely as a creditor) in any US corporation unless the taxpayer establishes that such US corporation was at no time a "United States real property holding corporation"; during the five-year period ending on the date of the disposition of the interest. Section 897(h)(1) generally provides that any distribution by a real estate investment trust or certain regulated investment companies to a nonresident alien individual or non-US corporation is, to the extent attributable to gain from the sale or exchange of USRPIs, treated as gain recognized by such nonresident alien individual or non-US corporation from the sale or exchange of a USRPI.

Section 897(l) provides that a QFPF is not treated as a nonresident alien individual or a non-US corporation for purposes of Section 897. As such, a QFPF is not subject to US federal tax on the gain or loss from the disposition of, and distributions with respect to, USRPIs.

A QFPF is any trust, corporation or other organization or arrangement that:

  1. is created or organized under the law of a country other than the United States;
  2. is established to provide retirement or pension benefits to participants or beneficiaries that are current or former employees;
  3. does not have a single participant or beneficiary with a right to more than five percent of its assets or income;
  4. is subject to government regulation and provides, or otherwise makes available, annual information reporting about its beneficiaries to the relevant tax authorities in the country in which it is established or operates; and
  5. with respect to which, under the laws of the country in which it is established or operates, either (a) contributions to it that would otherwise be subject to tax are deductible or excluded from the gross income of such entity or taxed at a reduced rate, or (b) taxation of any of its investment income is deferred or such income is taxed at a reduced rate.

Qualified Controlled Entities and Anti-Abuse Rules

In addition to an entity that qualifies as a QFPF in its own right, the Proposed Regulations provide that a trust or corporation organized under the laws of a non-US jurisdiction, all of the interests (other than an interest solely as a creditor) of which are held by one or more QFPFs directly or indirectly through one or more qualified controlled entities or partnerships (QCEs) also is treated as a QFPF under Section 897(l).

As such, multiple QFPFs may directly or indirectly own a QCE and such QCE will be treated as a QFPF for purposes of Section 897(l), subject to certain anti-abuse rules discussed below. Furthermore, because the Proposed Regulations' definition of a QCE provides that Section 897(l) applies to gain or loss earned indirectly through one or more partnerships, the Proposed Regulations treat only corporations and trusts, but not partnerships, as QCEs. The Proposed Regulations also permit QCEs to be owned by other QCEs, effectively permitting tiered QFPF holding structures.

To combat possible abuse of the QFPF exemption, the Proposed Regulations provide that a QFPF or QCE does not include any entity or governmental unit that, at any time during a specific "testing period," was not a QFPF, a part of a QFPF, or a QCE. For example, the Proposed Regulations explain that if FC1, a non-US corporation that is neither a QFPF or a QCE, owns 100% of FC2, a non-US corporation, that owns USRPIs, FC1 could sell all of the stock of FC2 to a QFPF without incurring any US tax liability. Absent an anti-abuse rule, this transaction would result in FC2 becoming a QCE, thereby allowing the avoidance of US federal tax on the immediate disposition of the USRPIs by FC2. The "testing period" is the shortest of (1) the period beginning on December 18, 2015 and ending on the date of a disposition described in Section 897(a) or a distribution described in Section 897(h), (2) the 10-year period ending on the date of the disposition or the distribution, or (3) the period during which the entity (or its predecessor) was in existence. However, this anti-abuse rule does not apply to an entity or governmental unit that did not own USRPIs as of the date it became a QFPF, a part of a QFPF or a QCE.

QFPF Qualification Requirements

The Proposed Regulations also provide the following additional guidance regarding the QFPF qualification requirements:

  • The Proposed Regulations clarify that a QFPF may be organized under the law of a state, a province or a political subdivision of any country other than the United States.
  • The Proposed Regulations clarify that (i) multi-employer pension funds, (ii) government-sponsored public pension funds that provide pension and pension-related benefits and (iii) pension funds organized by trade unions, professional associations and other similar groups may be treated as QFPFs.
  • The Proposed Regulations provide that up to 15% of an otherwise eligible pension fund's benefits may consist of so-called "ancillary benefits." "Ancillary benefits" are defined as benefits payable upon the diagnosis of a terminal illness, death benefits, disability benefits, medical benefits, unemployment benefits and similar benefits.
  • The Proposed Regulations provide that, for purposes of the five percent limitation, an individual is attributed ownership of assets and income to which certain family members and related entities have a right.
  • The Proposed Regulations provide that, when a government administers a pension or retirement plan itself, such government does not need to provide annual information to itself.
  • The Proposed Regulations provide that a QFPF may provide the required annual information to one or more governmental units in which the eligible fund is created or organized, instead of to the relevant tax authorities.
  • The Proposed Regulations clarify that, if a country has no income tax, then the otherwise eligible pension fund that is established and operates in such country automatically satisfies the requirement that contributions to such fund are tax-deductible or that the fund's investment income is taxed at a reduced rate.
  • The Proposed Regulations provide that, in order to satisfy the requirement that contributions to a fund are tax-deductible or that the fund's investment income is taxed at a reduced rate, at least 85%of the contributions to the fund must be deductible or excluded from the gross income or taxed at a reduced rate, or tax on at least 85% of the investment income of the fund must be deferred or taxed at a reduced rate.

Withholding Rules

Section 1445 generally requires a transferee to withhold 15% of the amount realized on any disposition of a USRPI by a non-US person. However, no withholding is required if the transferor furnishes to the transferee a so-called "certificate of non-foreign status." A QFPF may provide a certificate of non-foreign status in order to certify its exemption from withholding under Section 1445.

A partnership generally must withhold US federal tax under Section 1446 on effectively connected taxable income (ECTI) allocable to a non-US partner. The Proposed Regulations provide that any gain from the disposition of a USRPI will not be treated as ECTI subject to Section 1446 withholding to the extent allocable to a QFPF. A QFPF may provide a certificate of non-foreign status in order to certify its exemption from withholding under Section 1446.

The IRS intends to revise Form W-8EXP to permit QFPFs to certify their status under Section 897(l). Once Form W-8EXP has been revised, a QFPF may use either a revised Form W-8EXP or a certificate of non-foreign status to certify its exemption from withholding under both Section 1445 and Section 1446.

Effective Dates

The Proposed Regulations generally apply to dispositions of USRPIs and distributions described in Section 897(h) occurring on or after the date on which the Proposed Regulations are finalized. However, the QCE rules and anti-abuse rule discussed above, among other provisions, apply to dispositions of USRPIs and distributions described in Section 897(h) occurring on or after June 6, 2019. A taxpayer may rely on the Proposed Regulations with respect to transactions occurring on or after December 18, 2015, and prior to finalization of the Proposed Regulations, if the taxpayer consistently and accurately complies with the rules in the Proposed Regulations. Taxpayers should consider whether to amend prior year tax returns in order to consistently and accurately comply with the rules in the Proposed Regulations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions