[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]


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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.

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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 http://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