[Federal Register Volume 87, Number 249 (Thursday, December 29, 2022)]
[Rules and Regulations]
[Pages 80042-80067]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-27978]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9971]
RIN 1545-BN89


Exception for Interests Held by Foreign Pension Funds

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations regarding gain or 
loss of a qualified foreign pension fund attributable to certain 
interests in United States real property. The final regulations also 
include rules for certifying that a qualified foreign pension fund is 
not subject to withholding on certain dispositions of, and 
distributions with respect to, certain interests in United States real 
property. The final regulations affect certain holders of interests in 
United States real property and withholding agents that are required to 
withhold tax on dispositions of, and distributions with respect to, 
such property.

DATES: Effective Date: These regulations are effective on December 29, 
2022.
    Applicability dates: For dates of applicability, see Sec. Sec.  
1.897(l)-1(g), 1.1441-3(c)(4)(iii), 1.1445-2(e), 1.1445-5(h), 1.1445-
8(j), 1.1446-7.

FOR FURTHER INFORMATION CONTACT: Arielle M. Borsos or Milton Cahn at 
(202) 317-6937 (not a toll-free number).

SUPPLEMENTARY INFORMATION: 

Background

    Section 897(l) was added to the Internal Revenue Code (the 
``Code'') by section 323(a) of the Protecting Americans from Tax Hikes 
Act of 2015, Public Law 114-113, div. Q (the ``PATH Act''), and amended 
by section 101(q) of the Tax Technical Corrections Act of 2018, Pub. L. 
115-141, div. U. In the preamble to the updated section 1445 
regulations that were published in the Federal Register (81 FR 8398-01, 
as corrected at 81 FR 24484-01) on February 19, 2016, the Department of 
the Treasury (the ``Treasury Department'') and the IRS requested 
comments regarding what regulations, if any, should be issued pursuant 
to section 897(l)(3). The Treasury Department and the IRS considered 
all of the comments received in response to this request and, on June 
7, 2019, published proposed regulations under sections 897(l), 1441, 
1445 and 1446 in the Federal Register (84 FR 26605) (the ``proposed 
regulations''). The proposed regulations contained rules relating to 
the qualification for the exemption under section 897(l), as well as 
rules relating to withholding requirements under sections 1441, 1445 
and 1446, for dispositions of United States real property interests 
(``USRPIs'') by foreign pension funds and their subsidiaries and 
distributions described in section 897(h).
    This Treasury decision finalizes the proposed regulations, after 
taking into account and addressing comments received by the Treasury 
Department and the IRS with respect to the proposed regulations. Terms 
used but not defined in this preamble have the meaning provided in the 
final regulations.
    Comments outside the scope of this rulemaking are generally not 
addressed but may be considered in connection with future regulations. 
All written comments received in response to the proposed regulations 
are available at www.regulations.gov or upon request.

Summary of Comments and Explanation of Revisions

    The final regulations retain the general approach and structure of 
the proposed regulations, with certain revisions. This Summary of 
Comments and Explanation of Revisions section discusses the revisions 
as well as comments received in response to the solicitation of 
comments in the proposed regulations.

I. Comments and Revisions Related to the Scope of the Exception

A. Qualified Controlled Entities
    Under the proposed regulations, and consistent with section 897(l), 
gain or loss of a qualified foreign pension fund (``QFPF'') or a 
qualified controlled entity (``QCE'') (under the proposed regulations, 
each generally a ``qualified holder'') from the disposition of a USRPI 
is not subject to section 897(a). Prop. Sec.  1.897(l)-1(b)(1). The 
proposed regulations defined a QCE as a trust or corporation organized 
under the laws of a foreign country,\1\ all of the interests of which 
are held directly by one or more QFPFs or indirectly through one or 
more QCEs or partnerships. Prop. Sec.  1.897(l)-1(d)(9).
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    \1\ For consistency with other guidance, the final regulations 
adopt the term ``foreign jurisdiction'' instead of ``foreign 
country.'' See Sec.  1.897(l)-1(e)(4). See also Part II.C. of this 
Summary of Comments and Explanation of Revisions for a description 
of how the final regulations treat subnational tax regimes.
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1. Ownership by Non-QFPFs
    Several comments received in response to the proposed regulations 
addressed the ownership requirement with respect to QCEs. The proposed 
regulations did not permit ownership of a QCE by a person other than a 
QFPF or another QCE, declining to adopt a comment received before the 
publication of the proposed regulations requesting that de minimis 
ownership of a QCE by other persons be disregarded under certain 
circumstances, such as when de minimis ownership by managers or 
directors is required by corporate law in certain jurisdictions. The 
Treasury Department and the IRS determined that permitting a person 
other than a QFPF or another QCE to own an interest in a QCE would 
impermissibly expand the scope of the exception in section 897(l) by 
allowing investors other than QFPFs to avoid tax under section 897(a). 
However, under the proposed regulations, a QFPF could

[[Page 80043]]

invest in USRPIs with non-QFPFs through a partnership and still qualify 
for the exemption under section 897(l).
    Comments received in response to the proposed regulations similarly 
requested that the final regulations allow a de minimis exception for 
the ownership of a QCE by other persons. One comment reiterated that de 
minimis ownership, including by managers or directors, may be required 
by corporate law in certain jurisdictions and suggested that the final 
regulations include a rule that would permit an entity to be treated as 
a QCE if a small amount (for example, five percent) of the entity is 
held by a non-QFPF. The comment also suggested that, in order to 
prevent non-QFPF entities from inappropriately accessing the exemption 
under section 897(l), a non-QFPF de minimis owner of a QCE could be 
required to recognize gain or loss on any disposition of a USRPI held 
through the QCE under section 897(a). The comment asserted that there 
is no policy reason to differentiate between entities with QFPF and 
non-QFPF owners/beneficiaries because the entity is a corporation or 
trust rather than a partnership, and that permitting de minimis non-
QFPF ownership of a QCE would allow QFPFs flexibility with regard to 
the form of entity chosen for investment purposes.
    Another comment asserted that a de minimis exception should be 
allowed because certain jurisdictions may require or otherwise allow 
investment arrangements in which foreign pension funds pool investments 
with non-QFPFs. The comment argued that such investment arrangements 
should not be precluded from qualifying for the exception under section 
897(l), especially if those arrangements are allowed or required by 
local law and are consistent with generally accepted investment 
practice. The comment suggested that the final regulations permit a 
non-QFPF to have a de minimis level of ownership (for example, five 
percent) in a QCE. If a de minimis exception were not adopted, the 
comment suggested several alternatives to prevent minority investors 
from tainting the QFPF status for the majority QFPF investors, 
including that the final regulations allow QFPFs to qualify for the 
exception under section 897(l) on their share of income or gains 
distributed by an investment vehicle, provided the investment vehicle 
is majority owned by QFPFs. The comment also suggested that the QCE 
ownership requirement be modified to permit an eligible fund that is a 
non-QFPF solely because it has a single qualified recipient with a 
right to more than five percent of the assets or income of the eligible 
fund to be an owner of a QCE. The comment requested that, in that 
circumstance, the final regulations look through to the owners of the 
non-QFPF and apply the prohibition on a single five-percent beneficiary 
or participant by reference to the would-be QCE rather than the non-
QFPF.
    An additional comment suggested that a QFPF should be able to claim 
the section 897(l) exemption with respect to gains derived by an entity 
in which the QFPF is an investor where the entity is not a partnership 
and also is not a QCE because it is not wholly owned by QFPFs. The 
comment noted that, in certain foreign government facilitated 
arrangements involving a partnership formed under local law through 
which multiple foreign government entities jointly invest, the 
investment entity may be a per se corporation under Sec.  301.7701-
2(b)(6) that would not qualify as a QCE if not all of the government 
investors were QFPFs. The comment asserted that, in such circumstance, 
investors would be forced to include a non-government partner so that 
the investment entity could be treated as a partnership for U.S. 
federal tax purposes. To address this concern, the comment recommended 
that the final regulations provide that, if an entity is treated as a 
partnership under the law of the country in which the QFPF is formed, 
the QFPF should be able to treat its distributive share of partnership 
Foreign Investment in Real Property Tax Act (``FIRPTA'') gains as 
exempt under section 897(l).
    The Treasury Department and the IRS continue to believe that 
allowing any exception with respect to the ownership of a QCE would 
impermissibly expand the scope of the exception in section 897(l) by 
allowing investors other than QFPFs to avoid tax under section 897. 
Section 897(l)(1) expressly provides that an entity must be wholly 
owned by a QFPF to constitute a QCE and qualify for the exception under 
section 897(l). Accordingly, the final regulations do not provide a de 
minimis exception to the ownership of a QCE. For the same reasons, the 
final regulations do not adopt other suggested approaches that would 
permit an entity to be a QCE despite limited non-QFPF ownership, such 
as a tracing approach that would require non-QFPF owners of an entity 
to be subject to section 897(a) and allow only QFPF owners to benefit 
from the section 897(l) exemption, or a look-through approach that 
would allow a non-QFPF that cannot qualify as a QFPF because it 
violates the rule against having a single five-percent beneficiary or 
participant to own an interest in a QCE.
    The final regulations also do not adopt the recommendation to 
permit a QFPF to benefit from the section 897(l) exemption with respect 
to interests in an entity that is classified as a corporation for U.S. 
federal tax purposes but that does not qualify as a QCE due to 
ownership by non-QFPFs by treating the entity as a partnership in 
accordance with its treatment under applicable foreign law. In addition 
to expanding the definition of a QCE to permit ownership by non-QFPFs, 
such a rule would contradict the classification of the entity for U.S. 
federal tax purposes.
2. Investment Arrangements With QFPFs
    The proposed regulations permitted multiple QFPFs to wholly own a 
QCE, either directly or indirectly through one or more other QCEs, in 
recognition that it is common for QFPFs to pool their investments.
    One comment discussed the interaction between the requirement that 
QCEs must be wholly owned by QFPFs and the various requirements that an 
eligible fund must meet to maintain its status as a QFPF. The comment 
stated that a QFPF that invests with other QFPFs in a QCE might fail to 
qualify for the section 897(l) exemption solely because one of its co-
investors fails to qualify as a QFPF in any given year. The comment 
noted that QFPFs would be required to negotiate complex protections to 
shield against another co-investor from tainting the QCE's status. The 
comment further noted that investing through a partnership (which would 
allow the QFPF to invest with other non-QFPFs) may not be feasible 
because a foreign jurisdiction may have regulatory restrictions 
regarding the types of legal entities in which pension funds may invest 
or the entity may be wholly owned by QFPFs that form part of a single 
government (and thus may be a per se corporation under Sec.  301.7701-
2(b)(6)). The comment therefore recommended that the final regulations 
provide a rule that a QCE that inadvertently fails to constitute a 
qualified holder because one of its owners ceases to be treated as a 
QFPF be permitted, for a limited time, to partially benefit from 
section 897(l) to the extent that it continues to be owned by QFPFs.
    The final regulations do not provide an exception to the 
requirement that a QCE be wholly owned by a QFPF to insulate QFPF 
investors from the risk of losing QCE status in investment arrangements 
with other QFPFs. As with a de minimis exception to the

[[Page 80044]]

ownership of a QCE, the Treasury Department and the IRS believe that 
any such rule would impermissibly expand the scope of the section 
897(l) exception to allow investors other than QFPFs to avoid tax under 
section 897. The Treasury Department and the IRS also believe that the 
changes to the final regulations described in Parts II.A.2 and II.A.3 
of this Summary of Comments and Explanation of Revisions will 
appropriately alleviate concerns with respect to the risk that a QFPF 
may inadvertently fail to satisfy the requirements to constitute a 
QFPF.
3. Non-Economic Ownership
    As referenced in the preamble to the proposed regulations, given 
the absence of an express provision to the contrary, the definition of 
an ``interest'' for purposes of determining whether an entity is a QCE 
is determined in accordance with Sec.  1.897-1(d)(5), which provides 
that an interest in an entity means an interest in such entity other 
than an interest solely as a creditor. Section 1.897-1(d)(3) provides 
that an interest in an entity other than solely as a creditor is: (A) 
stock of a corporation; (B) an interest in a partnership as a partner 
within the meaning of section 761(b) and the regulations thereunder; 
(C) an interest in a trust or estate as a beneficiary within the 
meaning of section 643(c) and the regulations thereunder or an 
ownership interest in any portion of a trust as provided in sections 
671 through 679 and the regulations thereunder; (D) an interest which 
is, in whole or in part, a direct or indirect right to share in the 
appreciation in value of an interest in an entity described in 
subdivision (A), (B), or (C) of Sec.  1.897-1(d)(3)(i) or a direct or 
indirect right to share in the appreciation in value of assets of, or 
gross or net proceeds or profits derived by, the entity; or (E) a right 
(whether or not presently exercisable) directly or indirectly to 
acquire, by purchase, conversion, exchange, or in any other manner, an 
interest described in subdivision (A), (B), (C), or (D) of Sec.  1.897-
1(d)(3)(i).
    One comment requested that the final regulations clarify that non-
economic interests in an entity are not taken into account in 
determining whether an entity is a QCE. The comment noted that such a 
situation might arise when a foreign partnership that elects to be 
treated as a corporation for U.S. federal income tax purposes has a 
general partner that holds no economic interest in the entity. The 
comment recommended that the final regulations provide that interests 
in a QCE that do not entitle the holders to share in the income or 
assets of the QCE should be ignored in determining whether the QCE is a 
qualified holder, noting that such fully non-economic interests do not 
present potential for abuse and that disregarding those interests would 
be consistent with congressional intent to accommodate a variety of 
foreign pension fund structures under section 897(l).
    The Treasury Department and the IRS do not believe that additional 
guidance is necessary regarding the ownership interests taken into 
account in determining whether an entity constitutes a QCE. Thus, an 
``interest'' for purposes of determining whether an entity is a QCE is 
determined under Sec.  1.897-1(d)(3). Whether an interest in an entity 
constitutes one of the interests listed under Sec.  1.897-1(d)(3) or is 
instead disregarded is determined based on the facts, taking into 
account general tax principles.
B. Qualified Holder Rule
    The proposed regulations provided that a qualified holder does not 
include any entity or governmental unit that, at any time during the 
testing period, determined without regard to this limitation, was not a 
QFPF, a part of a QFPF, or a QCE (the ``qualified holder rule''). See 
Prop. Sec.  1.897(l)-1(d)(11)(ii). For this purpose, the proposed 
regulations provided that the testing period is the shortest of (i) the 
period beginning on the date that section 897(l) became effective 
(December 18, 2015), and ending on the date of a disposition described 
in section 897(a) or a distribution described in section 897(h); (ii) 
the ten-year period ending on the date of the disposition or the 
distribution; or (iii) the period during which the entity (or its 
predecessor) was in existence. See Prop. Sec.  1.897(l)-1(d)(14). Under 
the proposed regulations, the qualified holder rule does not apply to 
an entity or governmental unit that did not own a USRPI as of the date 
it became a QCE, a QFPF, or part of a QFPF. The preamble to the 
proposed regulations explained that the qualified holder rule is 
necessary to prevent the inappropriate avoidance of section 897(a) 
through QFPFs indirectly acquiring USRPIs held by foreign corporations 
that would not have otherwise qualified for the exception under section 
897(l).
    Comments recommended that the final regulations either modify the 
qualified holder rule or implement one of several alternatives. 
Comments agreed that the QFPF exception should not apply to exempt gain 
that would otherwise have been subject to tax under section 897. 
However, the comments argued that the qualified holder rule in the 
proposed regulations was overbroad because it could apply to any 
failure to qualify as a QFPF or QCE in the testing period, even if the 
failure was unintentional or had no potential for abuse.
    One comment requested that the final regulations provide a tolling 
period if there is an inadvertent failure to qualify as a QFPF and that 
failure is remedied in the following year. Another comment requested 
that the final regulations provide an exception to the qualified holder 
rule to exclude the situation in which a QFPF does not qualify solely 
because it fails to meet the requirements in proposed Sec.  1.897(l)-
1(c)(2) (relating to the requirements an eligible fund must satisfy to 
be treated as a QFPF). The comment further recommended allowing a mark-
to-market approach, whereby an election to recognize any net built-in 
gain at the time a QFPF acquires a non-QFPF that owns a USRPI could be 
made so that the non-QFPF could then be treated as a QCE with respect 
to any future disposition of its USRPI (similar to Sec.  1.337(d)-7(a) 
for the conversion of certain corporations to regulated investment 
companies (``RIC'') or real estate investment trusts (``REIT'')). In 
addition, the comment requested that the qualified holder rule be 
limited to apply only to USRPIs held by non-QFPFs when such non-QFPFs 
are acquired by a QFPF, resulting in a tracing approach that would 
prevent section 897(l) from applying only to a disposition of those 
specific USRPIs. The comment also recommended that the final 
regulations shorten the maximum testing period from ten to five years, 
which is consistent with the five-year maximum testing period for a RIC 
or REIT to be a domestically controlled qualified investment entity 
under section 897(h)(4).
    As alternatives to the qualified holder rule, one comment requested 
that the Treasury Department and the IRS either allow a mark-to-market 
approach at the taxpayer's election (similar to that suggested by other 
comments), under which the entity acquired by the QFPF would account 
for the gain when the entity is acquired by the QFPF, or require 
tracing the unrealized gain when the entity is acquired by a QFPF or 
QCE so that section 897(a) can apply to the pre-acquisition gain upon a 
subsequent sale or exchange.
    Under the final regulations, the substance of the qualified holder 
rule is the same as it was in the proposed regulations; however, for 
greater clarity, the final regulations identify the qualified holder 
rule as a separate

[[Page 80045]]

requirement to qualify for the section 897(l) exemption rather than as 
part of the definitions. Sec.  1.897(l)-1(d). To be a qualified holder, 
a QFPF or a QCE must satisfy one of two alternative tests at the time 
of the disposition of the USRPI or the distribution described in 
section 897(h). Sec.  1.897(l)-1(d)(1). Under the first test, a QFPF or 
a QCE is a qualified holder if it owned no USRPIs as of the earliest 
date during an uninterrupted period ending on the date of the 
disposition or distribution during which it qualified as a QFPF or a 
QCE. Sec.  1.897(l)-1(d)(2). Alternatively, if a QFPF or a QCE held 
USRPIs as of the earliest date during the period described in the 
preceding sentence, it can be a qualified holder only if it satisfies 
the applicable testing period requirement, which is unchanged from the 
proposed regulations. Sec.  1.897(l)-1(d)(3).
    The final regulations also include two transition rules. First, 
with respect to any period from December 18, 2015, to the date when the 
requirements of section 1.897(l)-1(c)(2) or (e)(9) first apply to a 
QFPF or QCE, as applicable (but in any event no later than December 29, 
2022, in the case of section 1.897(l)-1(c)(2), and no later than June 
6, 2019, in the case of section 1.897(l)-1(e)(9)), the QFPF or QCE is 
deemed to satisfy the requirements of section 1.897(l)-1(c)(2) and 
(e)(9), as applicable, for purposes of section 1.897(l)-1(d)(2) and (3) 
if the QFPF or QCE satisfies the requirements of section 897(l)(2) 
based on a reasonable interpretation of those requirements (including 
determining any applicable valuations using a consistent method). 
Second, in determining whether a QCE is a qualified holder, solely with 
respect to the two tests in section 1.897(l)-1(d)(2) and (3), the final 
regulations allow the QCE to disregard a de minimis interest owned by 
any person that provides services to the QCE from December 18, 2015 to 
February 27, 2023 (the ``transition period''). Sec.  1.897(l)-
1(d)(4)(ii). This second transition rule does not apply for purposes of 
determining QCE status under section 1.897(l)-1(e)(9) at the time of 
any disposition or distribution involving a USRPI. Thus, its 
application is limited to cases in which a trust or corporation failed 
to qualify as a QCE (and, therefore, as a qualified holder) during the 
transition period solely because of a de minimis interest owned by any 
person that provides services to the QCE (such as a manager or 
director). In that case, the transition rule allows the trust or 
corporation to eliminate the service provider's ownership within the 
transition period and thereby avoid having to apply the tests for 
qualified holder status under section 1.897(l)-1(d)(2) or (3) by 
reference to the date that the service provider's interest is 
eliminated. This may, for example, prevent the restarting of a ten-year 
testing period on the date that the service provider's interest is 
eliminated. Any disposition of USRPIs during the period when the trust 
or corporation had the service provider as an interest holder still 
would not qualify for the section 897(l) exemption.
    The Treasury Department and the IRS agree that the application of 
the qualified holder rule to an inadvertent failure to qualify as a 
QFPF could produce inappropriate results, particularly in the case 
where an eligible fund fails to meet the requirements in Sec.  
1.897(l)-1(c)(2)(ii)(B)(2) because it unexpectedly projects that it 
will provide less than 85 percent retirement and pension benefits. 
Although the final regulations ultimately adopt the qualified holder 
rule without the changes recommended by the comments, the final 
regulations provide relief in the following ways:
     adding an alternative calculation to the requirements in 
Sec.  1.897(l)-1(c)(2)(ii)(B)(2) and (3) based on the average of the 
present values of the future benefits expected to be provided, as 
determined in the 48 months preceding (and including) the most recent 
valuation (the ``48-month alternative calculation,'' described further 
in Part II.A.2 of this Summary of Comments and Explanation of 
Revisions);
     adding a definition of retirement and pension benefits;
     clarifying the scope of ancillary benefits; and
     allowing an eligible fund to provide a de minimis amount 
of non-ancillary benefits (described further in Part II.A.3 of this 
Summary of Comments and Explanation of Revisions).
    Together, these changes provide relief to eligible funds that would 
otherwise unexpectedly fail to qualify as a QFPF in any given year and 
alleviate the underlying concerns regarding the breadth of the 
qualified holder rule.
    In light of the changes described in the preceding paragraph, the 
final regulations do not adopt the recommendation to allow a tolling 
period to remedy the loss of QFPF status. For the same reasons, the 
final regulations also do not adopt the recommendation to provide an 
exception to the qualified holder rule for any failure to meet the 
requirements in Sec.  1.897(l)-1(c)(2) or to have the qualified holder 
rule apply only to USRPIs owned by non-QFPFs when such non-QFPFs are 
acquired by a QFPF. The section 897(l) exception provides a substantial 
benefit to investors, and it is appropriate to require an eligible fund 
to meet the requirements in the final regulations for a ten-year 
maximum testing period before obtaining tax-free treatment to ensure 
the exception is not claimed inappropriately. Cf. section 877 
(requiring taxpayer to be subject to potential additional U.S. taxation 
for ten years after relinquishing U.S. citizenship); Sec. Sec.  1400Z-2 
(allowing taxpayer to receive a step-up in basis of property equal to 
its fair market value if held for ten years); 1.937-2(f) (requiring 
individual to be bona fide resident of a territory for 10 years before 
sale of property is sourced to territory and receives beneficial tax 
rate). Accordingly, the final regulations also do not adopt a maximum 
testing period that is shorter than ten years.
    With respect to the suggested alternatives to the qualified holder 
rule, the preamble to the proposed regulations explained that the mark-
to-market and tracing approaches both imposed greater compliance and 
administrative costs relative to the testing-period approach without 
providing any accompanying general economic benefit. Even if the 
investor is given the option to elect a mark-to-market approach, it 
would still present compliance and administrative barriers because fair 
market valuations of real property are not readily available. The 
tracing approach would similarly impose compliance and administrative 
burdens, as such an approach would require obtaining a fair market 
valuation of real property when an entity became a QCE, as well as 
tracking the USRPIs that were acquired before the entity became a QCE 
so that the pre-acquisition built-in gain could be recognized upon a 
later disposition. Accordingly, the final regulations do not adopt the 
mark-to-market or tracing alternatives.
C. Qualified Segregated Accounts
    The proposed regulations provided that a qualified holder is exempt 
from section 897(a) only with respect to gain or loss that is 
attributable to one or more qualified segregated accounts maintained by 
the qualified holder. Prop. Sec.  1.897(l)-1(b)(2). The proposed 
regulations defined a qualified segregated account as an identifiable 
pool of assets maintained for the sole purpose of funding qualified 
benefits (that is, retirement, pension, or ancillary benefits) to 
qualified recipients (generally, plan participants and beneficiaries). 
See Prop. Sec.  1.897(l)-

[[Page 80046]]

1(d)(13)(i). The proposed regulations provided separate standards for 
determining whether an identifiable pool of assets is maintained for 
the sole purpose of funding qualified benefits depending on whether the 
pool of assets is maintained by an eligible fund (including an eligible 
fund that satisfies the requirements to be treated as a QFPF) or a QCE. 
See Prop. Sec.  1.897(l)-1(d)(13)(ii); Prop. Sec.  1.897(l)-
1(d)(13)(iii).
    Comments requested that the final regulations clarify the standards 
that apply for determining whether an identifiable pool of assets is 
maintained for the sole purpose of funding qualified benefits, and one 
comment recommended removing the standards altogether. Specifically, 
comments identified several situations in which qualified segregated 
accounts are maintained for the sole purpose of funding qualified 
benefits to qualified recipients, but where the funds could 
nevertheless be disbursed for other purposes or to non-qualified 
recipients. For example, one comment noted that an eligible fund could 
rebate an overfunded amount by a foreign defined benefit pension fund 
to an employer. Another comment noted that assets might not be 
disbursed to qualified recipients or used to pay reasonable plan 
expenses if a potential change in foreign law impacts how fund assets 
can be used. One comment highlighted that assets might revert to 
sponsoring employers if employees cease participating in the plan 
before their benefits have vested. Another comment cited the 
possibility that upon a dissolution of the eligible fund, assets could 
revert to the employer after satisfying its obligations to qualified 
recipients and creditors. In each such situation, the comments 
recommended that the final regulations clarify that a pool of assets 
would not fail to qualify as a qualified segregated account. One 
comment further recommended that the final regulations eliminate the 
requirement that all income and assets maintained in a qualified 
segregated account of an eligible fund be used to fund the provision of 
qualified benefits to qualified recipients because such a provision is 
unnecessary to ensure that income and assets of an eligible fund do not 
inure to inappropriate recipients.
    The Treasury Department and the IRS agree that in certain 
situations the reversion of funds to a governmental unit or an 
employer, after satisfaction of liabilities to creditors and qualified 
recipients, should not disqualify the account from being treated as 
maintained for the sole purpose of funding qualified benefits to be 
provided to qualified recipients. Accordingly, the final regulations 
clarify that a qualified segregated account that is held by an eligible 
fund is treated as maintained for the sole purpose of funding qualified 
benefits to be provided to qualified recipients notwithstanding that 
funds may revert (such as upon dissolution or the benefits failing to 
vest) to the governmental unit or employer in accordance with 
applicable foreign law so long as contributions to the plan are not 
more than what is reasonably necessary to fund the qualified benefits 
to be provided to qualified recipients. Sec.  1.897(l)-1(e)(13)(i). 
This requirement ensures that a governmental unit or employer does not 
qualify for benefits under section 897(l) to the extent it 
inappropriately overfunds the plan.
    One comment further recommended that the final regulations treat an 
eligible fund's interest in a corporation as a qualified segregated 
account. This recommendation was made to resolve the issue, described 
in Part I.A.1 of this Summary of Comments and Explanation of Revisions, 
that arises when multiple foreign government entities, some of which 
are QFPFs and some of which are not, jointly invest in USRPIs through a 
foreign partnership that is treated as a per se corporation for U.S. 
federal tax purposes (pursuant to Sec.  301.7701-2(b)(6)), but cannot 
qualify as a QCE because not all of the investors are QFPFs.
    The final regulations do not adopt this recommendation for several 
reasons. First, the suggestion contemplates a situation that is 
contrary to the requirement in section 897(l)(1) that requires an 
entity to be wholly owned by a QFPF in order to qualify for the 
exception under section 897(l). Thus, the recommendation potentially 
allows the exemption from taxation under section 897(a) to inure to 
non-QFPFs. Second, the issue described in the comment ultimately arises 
because of the rule under Sec.  301.7701-2(b)(6) rather than the final 
regulations, and therefore a modification to the final regulations is 
not the appropriate resolution. Third, the recommendation does not 
ensure that the assets or income of the corporation are used only for 
the purpose of providing benefits to qualified recipients, a key 
purpose of the qualified segregated account rules.

II. Comments and Revisions Relating to Requirements Applicable to a 
QFPF

A. Established To Provide Retirement And Pension Benefits
    The proposed regulations allowed pension funds established by one 
or more employers and government-sponsored public pension funds to be 
considered QFPFs. Specifically, the proposed regulations provided that 
an eligible fund must be established by either (i) the foreign country 
in which it is created or organized to provide retirement or pension 
benefits to participants or beneficiaries that are current or former 
employees or persons designated by such employees as a result of 
services rendered by such employees to their employers (``government-
established fund''), or (ii) one or more employers to provide 
retirement or pension benefits to participants or beneficiaries that 
are current or former employees or persons designated by such employees 
in consideration for services rendered by such employees to such 
employers (``employer fund''). Prop. Sec.  1.897(l)-1(c)(2)(ii)(A). The 
language in proposed Sec.  1.897(l)-1(c)(2)(ii)(A) generally reflected 
the statutory language in section 897(l)(2)(B).
1. Pension Funds Eligible for Section 897(l)(2)(B)
a. ``Established by'' Requirement
    One comment requested that the final regulations clarify the 
requirement that an eligible fund be ``established by'' a foreign 
government in the case of a government-established fund. The comment 
expressed concern that the ``established by'' requirement in the 
proposed regulations could exclude the national pension systems of 
certain countries under which accounts in the names of individual 
participants are maintained by private entities. The comment explained 
that some foreign countries have pension systems in which all employees 
(or employees working in a certain sector of the economy) are required 
by law to establish a pension account held and managed by a private 
pension administrator. Although the arrangement is created by 
government mandate and subject to government regulation, the private 
pension administrators form the investment vehicles, select the 
investment advisors, and receive, invest, and disburse the funds. The 
extent of additional government involvement varies, but could include 
the government being the conduit through which contributions by 
employers and employees are funneled into the plans or benefits are 
disbursed. The comment asserted that such an arrangement should be 
treated as ``established by'' the foreign government for purposes of 
qualifying as a government-established fund and that each private 
pension administrator, the investment vehicles that it establishes,

[[Page 80047]]

and any government office that is within the flow of funds should be 
treated as part of an ``arrangement'' that maintains qualified 
segregated accounts. According to the comment, if participation in the 
pension system is mandatory, a foreign government should meet the 
``established by'' requirement for a government-established fund even 
if the government does not actually receive contributions and disburse 
benefits or hold or invest the funds. The comment recommended that the 
final regulations clarify that an arrangement created pursuant to a 
foreign government mandate, but in which private investment managers 
hold and invest contributions, should be treated as ``established by'' 
the foreign government.
    The Treasury Department and the IRS recognize that eligible funds 
in foreign countries may be established and administered in numerous 
ways. The Treasury Department and the IRS also continue to believe that 
the purpose of section 897(l) is best served by permitting a broad 
range of structures to be treated as a QFPF. Accordingly, the final 
regulations clarify that an eligible fund may be established by, or at 
the direction of, a foreign jurisdiction for purposes of qualifying as 
a government-established fund. Sec.  1.897(l)-1(c)(2)(ii)(A)(1)(i). If 
an eligible fund is established at the direction of a foreign 
jurisdiction to provide benefits to the establishing entity's employees 
in consideration for services rendered to the establishing entity, the 
final regulations clarify that the fund will be considered an employer 
fund only. Sec.  1.897(l)-1(c)(2)(ii)(A)(2). Finally, the final 
regulations clarify that an eligible fund is treated as being 
established by a foreign jurisdiction or an employer notwithstanding 
that one or more persons that are not the foreign jurisdiction or 
employer administers the eligible fund. Sec.  1.897(l)-
1(c)(2)(ii)(A)(3). Thus, an arrangement created pursuant to a foreign 
government mandate in which private investment managers hold and invest 
contributions is treated as ``established by'' the foreign government.
b. Employer Fund Established by Foreign Government
    One comment indicated that, under the proposed regulations, it was 
not clear that a QFPF could include pension arrangements established by 
governmental units in their function as employers, while also noting 
that such funds could potentially qualify as both a government-
established fund and an employer fund. The comment recommended 
clarifying that an otherwise qualifying pension fund can be established 
by government employers.
    The final regulations clarify that an eligible fund can be 
established by a governmental unit acting in its capacity as an 
employer, and specify that such a fund constitutes an employer fund. 
Sec.  1.897(l)-1(c)(2)(ii)(A).
2. Purpose of Eligible Fund
    Proposed Sec.  1.897(l)-1(c)(2)(ii)(B) required that all of the 
benefits that an eligible fund provides are qualified benefits to 
qualified recipients (the ``100 percent threshold''), and that at least 
85 percent of the present value of the qualified benefits that the 
eligible fund reasonably expects to provide in the future are 
retirement or pension benefits (the ``85 percent threshold''). For this 
purpose, qualified benefits were defined as retirement, pension, or 
ancillary benefits. Prop. Sec.  1.897(l)-1(d)(8). As discussed in the 
preamble to the proposed regulations, the Treasury Department and the 
IRS adopted the 85 percent threshold because it was more administrable 
and provided more certainty to taxpayers than a subjective standard. 
The preamble to the proposed regulations indicated that the calculation 
of the 85 percent threshold would be made on an annual basis, but the 
proposed regulations did not explicitly identify a period for making 
this determination.
a. Comments Received
    Several comments stated that a strict numerical threshold created a 
cliff effect and caused uncertainty as to whether an eligible fund 
would qualify as a QFPF on a consistent basis over several years. 
Particular concern was expressed by one comment that an annual test may 
cause disqualification as a QFPF for reasons not entirely within the 
eligible fund's control, such as when the population of qualified 
recipients changes. Other comments stated that the present value 
calculation in the proposed regulations was vague, and one comment 
stated that the proposed regulations did not clearly identify the 
frequency with which the reasonable expectation of present value should 
be calculated.
    Based on these observations, several comments suggested that the 
objective 85 percent threshold should be replaced with a subjective 
test assessing the fund's purpose. These comments suggested that 
instead of the 85 percent threshold, a fund's purpose should be 
determined, considering all the facts and circumstances, by assessing 
whether the fund was established to provide retirement and pension 
benefits. Comments also suggested that the 85 percent threshold could 
be used as a safe harbor; a fund that does not meet that requirement 
would then have to show that it was established to provide retirement 
and pension benefits given all the facts and circumstances. One comment 
suggested another safe harbor whereby any fund that did not meet the 85 
percent threshold could still qualify as a QFPF on a proportionate 
basis by comparing the present value of the retirement and pension 
benefits the fund reasonably expects to pay to the present value of all 
benefits it reasonably expects to pay.
    Several comments stated that if the 85 percent threshold were 
retained, the final regulations should provide guidance on the 
assumptions that may be made in making the present value calculation, 
including the frequency of the calculation. One comment suggested that 
forecasts of anticipated future benefits that are already prepared by 
the eligible fund should be considered reasonable if they are based on 
data that the fund prepares for general business purposes in accordance 
with internal procedures. Another comment suggested that reasonable 
actuarial standards applied in good faith could be a basis for this 
calculation.
    In addition, several comments requested that the final regulations 
provide relief if a fund does not qualify as a QFPF in a particular 
year. These comments suggested that a look-back rule allow eligible 
funds to calculate compliance with the 85 percent threshold over a 
multi-year period, such as three years, rather than on an annual basis. 
One comment suggested other alternatives, such as providing a grace 
period during which a fund could regain compliance as a QFPF without 
losing its exempt status or the granting of proportionate eligibility 
as a QFPF.
b. 85 Percent Threshold
    The Treasury Department and the IRS continue to believe that the 85 
percent threshold is more administrable and provides more certainty 
than a subjective standard for determining whether an eligible fund is 
established to provide retirement and pension benefits. The Treasury 
Department and the IRS also continue to believe that this threshold 
allows an appropriate margin for nonconforming benefits. Accordingly, 
the final regulations retain the 100 percent threshold and 85 percent 
threshold, and do not adopt a subjective standard. Sec.  1.897(l)-
1(c)(2)(ii)(B). However, several other comments suggesting further 
clarity or relief with respect to the 85 percent threshold are 
incorporated in the final regulations, as described in paragraphs

[[Page 80048]]

II.A.2.c. and II.A.2.d. of this Summary of Comments and Explanation of 
Revisions.
c. Clarifications Regarding Present Valuation
    The Treasury Department and the IRS believe that further guidance 
with respect to determining the present value of benefits that an 
eligible fund reasonably expects to provide is appropriate. To clarify 
what this calculation is intended to value, the final regulations state 
that the eligible fund must measure the present value of benefits to be 
provided during the entire period during which the fund is expected to 
be in existence. Sec.  1.897(l)-1(c)(2)(ii)(C)(1). Comments articulated 
different, though potentially overlapping, benchmarks for determining 
what valuation methods would be considered reasonable--for example, 
making the determination based on data prepared for general business 
purposes in accordance with internal procedures or based on actuarial 
standards applied in good faith. As a result, the Treasury Department 
and the IRS have decided to use a broad standard that would accommodate 
all such suggestions by providing that an eligible fund may utilize any 
reasonable method for determining present value. Id. Although the final 
regulations are intended to provide flexibility as to the method used 
for determining present value, the Commissioner may determine that the 
present valuation requirement is not satisfied if the relevant facts 
and circumstances indicate that the method used was unreasonable (for 
example, it may be relevant that the method used results in a 
percentage calculation of retirement and pension benefits that differs 
materially from the actual percentage of the retirement and pension 
benefits provided before the most recent present valuation date). See 
also Sec.  1.897(l)-1(c)(3)(iii) for the requirement that an eligible 
fund maintain records to show it meets the requirements of Sec.  
1.897(l)-1(c)(2), which is discussed in Part III.B. of this Summary of 
Comments and Explanation of Revisions.
    The Treasury Department and the IRS believe that further guidance 
is also appropriate with respect to the frequency with which the 
valuation needs to be made. The final regulations state that such a 
determination must be made on at least an annual basis. Sec.  1.897(l)-
1(c)(2)(ii)(C)(1). Thus, for example, if an eligible fund changes its 
taxable year and has a short taxable year, the eligible fund may make 
its present value determination for the short taxable year provided 
that it makes another present value determination within one year. 
Consistent with the above, the final regulations clarify that an 
eligible fund must use its most recent present value determination (or 
its most recent 48-month alternative calculation, described in Part II. 
A.2.d. of this Summary of Comments and Explanation of Revisions) with 
respect to dispositions of USRPIs or distributions described in section 
897(h) that occur during the twelve months that succeed such present 
value determination (or 48-month alternative calculation), or until a 
new present value determination is made, whichever occurs first. Sec.  
1.897(l)-1(c)(2)(ii)(C)(3).
d. 48-Month Average Alternative
    Finally, the Treasury Department and the IRS agree that because 
unanticipated events may cause a fund to fail the 85 percent threshold 
in any one year, the fund should still qualify as a QFPF if it shows 
that is has consistently qualified as such over an extended period. The 
final regulations therefore adopt a 48-month alternative calculation 
test as another means to satisfy the 85 percent threshold. Sec.  
1.897(l)-1(c)(2)(ii)(C)(2). The 48-month alternative calculation test 
is satisfied if the average of the present values of the retirement and 
pension benefits the eligible fund reasonably expected to provide over 
its life, as determined by the valuations performed over the 48 months 
preceding (and including) the most recent present valuation, satisfies 
the 85 percent threshold.\2\ The determination of such average is based 
on the values (not percentages) of the qualified benefits the eligible 
fund reasonably expected to provide. In addition, the 48-month 
alternative calculation must be determined using a weighted average 
whereby values are adjusted, if necessary, when the length of valuation 
periods differs.\3\ If an eligible fund has been in existence for less 
than 48 months, the 48-month alternative calculation is applied to the 
period the eligible fund has been in existence. The 48-month 
alternative calculation may be satisfied based on any reasonable 
determination of the present valuation for any period that starts 
before the date that the valuation requirements first apply to an 
organization or arrangement and ends on or before December 29, 2022.
---------------------------------------------------------------------------

    \2\ The Commissioner may determine that the 48-month alternative 
calculation is not satisfied if, as discussed in Part II.A.2.c of 
this Summary of Comments and Explanation of Revisions, the relevant 
facts and circumstances indicate that the method used to determine 
present value was unreasonable.
    \3\ The length of the valuation periods may differ if the 
eligible fund performs valuations more than once a year.
---------------------------------------------------------------------------

    While the comments and related changes to the final regulations 
described above apply to the 85 percent threshold, similar rules have 
also been added for consistency with respect to the new category of 
non-ancillary benefits added to the final regulations and further 
described in Part II.A.3.b of this Summary of Comments and Explanation 
of Revisions.
3. Qualified Benefits
a. Retirement and Pension Benefits
    The proposed regulations did not provide a definition of retirement 
and pension benefits. Rather, in the preamble to the proposed 
regulations, the Treasury Department and the IRS requested comments on 
whether the regulations should define retirement and pension benefits 
(for example, with reference to whether there are penalties for early 
withdrawals).
    Although one comment suggested that the term retirement and pension 
benefits was clear and did not require a definition, most comments 
requested that the final regulations provide a definition of retirement 
and pension benefits. Comments recommended several sources that the 
final regulations might refer to in defining retirement and pension 
benefits, including the Employee Retirement Income Security Act of 1974 
(``ERISA''), U.S. federal income tax law principles (for example, 
Chapter 1, Subchapter D of the Code and corresponding Treasury 
Regulations), and income tax treaties. One comment suggested that the 
final regulations provide separate definitions of retirement and 
pension benefits based in part on these sources of U.S. tax law. This 
comment generally proposed defining retirement benefits as those 
benefits that are paid after reaching a predetermined retirement age 
that are provided in return for services rendered or contributions 
made. The comment generally proposed defining pension benefits as those 
benefits paid after the participant retires due to a proven disability 
before having reached a predetermined retirement age or paid to 
surviving beneficiaries if the participant dies before reaching the 
predetermined retirement age and that are provided in return for 
services rendered or contributions made.
    In response to these comments and to provide greater clarity, the 
final regulations provide a definition of retirement and pension 
benefits. Furthermore, the final regulations adopt

[[Page 80049]]

a broad definition of retirement and pension benefits to ensure that a 
wide variety of pension funds and foreign laws are accommodated. Thus, 
the final regulations provide that retirement and pension benefits mean 
benefits payable to qualified recipients after reaching retirement age 
under the terms of the eligible fund, or after an event in which the 
eligible fund recognizes that a qualified recipient is permanently 
unable to work, and including any such distribution made to a surviving 
beneficiary of the qualified recipient. Sec.  1.897(l)-1(e)(14). The 
inclusion of payments of accrued benefits after a specified event that 
results in a permanent disability (such that the qualified recipient is 
unable to work) or survivor benefits in the definition of retirement 
and pension benefits is intended to resolve concerns expressed in 
comments regarding the potential overlap of such benefits with the 
benefits listed in the definition of ancillary benefits in proposed 
Sec.  1.897(l)-1(d)(1) (for example, the proposed definition of 
ancillary benefits included death and disability benefits). To provide 
additional clarity regarding the factors that would indicate whether a 
benefit is a retirement and pension benefit, as well as the distinction 
between retirement and pension benefits and ancillary benefits, the 
final regulations also provide that retirement and pension benefits are 
generally based on contributions and investment performance, as well as 
factors such as years of service with an employer and compensation 
received by the qualified recipient. Id. The final regulations do not 
require retirement and pension benefits to be paid in a particular 
manner (that is, an annuity versus a lump-sum).
b. Ancillary and Non-Ancillary Benefits
    The proposed regulations defined ancillary benefits to mean 
benefits payable upon the diagnosis of a terminal illness, death 
benefits, disability benefits, medical benefits, unemployment benefits, 
or similar benefits. Prop. Sec.  1.897(l)-1(d)(1).
    As discussed in Part II.A.2 of this Summary of Comments and 
Explanation of Revisions, numerous comments requested that the final 
regulations provide clarifications and incorporate flexibility into the 
definition of ancillary benefits in light of the cliff effect caused by 
the use of the 100 percent and 85 percent thresholds to determine 
whether an eligible fund qualifies as a QFPF. Comments highlighted that 
the funds may be allowed, or required, to provide certain benefits to 
its participants or beneficiaries that are not enumerated in the 
definition of ancillary benefits, such as limited withdrawals to fund a 
first home. Comments expressed concern that the provision of such a 
benefit would disqualify the plan from the exemption under section 
897(l) because such a benefit is not listed in the definition of 
ancillary benefits, it is not certain whether such benefit is a 
``similar benefit,'' and the numerical thresholds do not allow for the 
provision of any benefits other than retirement and pension or 
ancillary benefits. The comments argued that the provision of such 
benefits should not disqualify the plan from the exemption under 
section 897(l) because, generally, the provision of such benefits is 
not the main purpose of the plan and represents only a small portion of 
the benefits paid out by the plan.
    Comments suggested clarifying the scope of the term ``similar 
benefits'' in the definition of ancillary benefits and expanding the 
definition of ancillary benefits to include any benefits that are 
allowed or required to be paid under the laws of the foreign 
jurisdiction in which the fund is created or organized. Comments also 
argued that a broad category of ancillary or other benefits tied to the 
benefits allowed under foreign law is needed to accommodate potential 
changes to the type of benefits allowed under foreign pension regimes. 
One comment recommended that such a rule also apply where pension plans 
and non-qualifying plans providing for other types of benefits are 
required by foreign law to be pooled into one fund or arrangement, 
which might otherwise preclude an eligible entity from being a QFPF 
even though it is predominantly a pension fund.
    Several comments recommended that the final regulations allow for a 
fund to provide a de minimis amount of benefits that are neither 
retirement and pension benefits nor any of the benefits listed under 
the definition of ancillary benefits in the proposed regulations. One 
comment recommended permitting a de minimis percentage of the total 
benefits provided by a fund (for example, up to five percent) to be any 
benefits that are not retirement and pension benefits or specifically 
listed in the definition of ancillary benefits, provided the benefits 
are required or allowed to be paid under the laws of the foreign 
jurisdiction where the fund is created or organized. Another comment, 
citing the broad range of foreign pension arrangements and the lack of 
clear guidance in certain jurisdictions regarding the potential 
benefits that can be provided by pension arrangements, suggested a de 
minimis amount (for example, three percent) of total benefits be 
allowed for non-ordinary benefits that fall outside the scope of the 
definition of ancillary benefits.
    Several comments also noted that certain of the benefits enumerated 
in the definition of ancillary benefits in the proposed regulations may 
be more closely related to the payment of retirement and pension 
benefits. For example, one comment noted that a participant or 
beneficiary may be eligible to make withdrawals of their retirement and 
pension benefits before reaching retirement age upon permanent 
disability or diagnosis of a terminal illness. These and other types of 
similar benefits, such as survivor benefits (that is, payments of the 
beneficiary or participant's retirement and pension benefits to a 
surviving designee upon the death of the beneficiary or participant), 
are paid in recognition of past service or because the plan participant 
is unable to continue working or care for their dependents. In such 
cases, the benefit is effectively being paid as a retirement and 
pension benefit, but such benefit could improperly be considered an 
ancillary benefit under the definition in proposed Sec.  1.897(l)-
1(d)(1). Another comment similarly noted that ancillary benefits should 
not refer to annuities payable to surviving beneficiaries or on early 
retirement because of a disability and suggested that the definition of 
ancillary benefits be modified to refer only to certain one-time 
payments made in connection with disability, terminal illness, or 
death. One comment noted that many benefits that otherwise might be 
ancillary benefits, such as medical and disability benefits, are often 
available principally to retirees. Thus, comments recommended that the 
definition of ancillary benefits be clarified such that benefits that 
are more appropriately characterized as retirement and pension benefits 
are not inappropriately treated as ancillary benefits.
    In response to the comments, the final regulations provide 
additional clarity with respect to the types of benefits permitted to 
be provided by a QFPF.
    First, as discussed in Part II.A.3.a of this Summary of Comments 
and Explanation of Revisions, the final regulations provide a 
definition of retirement and pension benefits, which is intended to 
clarify that certain benefits that may have potentially been 
categorized as ancillary benefits under the proposed regulations are 
retirement and pension benefits. This definition should assist in 
distinguishing retirement and pension benefits from ancillary benefits 
and, because more

[[Page 80050]]

benefits should be characterized as retirement and pension benefits, 
should lessen the concern that the provision of ancillary benefits will 
jeopardize qualification as a QFPF.
    Second, the final regulations modify the definition of ancillary 
benefits by providing a more detailed list of specific types of 
benefits that meet the ancillary benefits definition. Sec.  1.897(l)-
1(e)(1). The revised definition clarifies that, in addition to benefits 
payable upon the diagnosis of a terminal illness, medical benefits, or 
unemployment benefits, ancillary benefits also include incidental death 
benefits (for example, funeral expenses), short-term disability 
benefits, life insurance benefits, and shutdown or layoff benefits. To 
distinguish between unemployment, shutdown, or layoff benefits that 
might also be considered retirement and pension benefits, the final 
regulations state that those types of benefits will be considered 
ancillary benefits only if they do not continue past retirement age and 
do not affect the payment of accrued retirement and pension benefits. 
Sec.  1.897(l)-1(e)(1)(i)(B). In addition, the final regulations 
clarify what benefits are considered similar to the specifically 
identified ancillary benefits by indicating that such similar benefits 
should also be either health-related or unemployment benefits. Sec.  
1.897(l)-1(e)(1)(i)(C). Lastly, for the avoidance of doubt, the final 
regulations resolve any potential overlap between the definitions of 
retirement and pension benefits and ancillary benefits by providing 
that if any benefits fall within both definitions, they are only 
considered to be retirement and pension benefits. Sec.  1.897(l)-
1(e)(1)(ii). The Treasury Department and the IRS intend for this rule 
to have limited application given the definitions of retirement and 
pension benefits and ancillary benefits provided in the final 
regulations.
    Third, the Treasury Department and the IRS have determined that it 
is appropriate to permit a limited amount of benefits that are outside 
the scope of retirement and pension benefits and ancillary benefits. 
The final regulations therefore allow an eligible fund to provide a 
limited amount of non-ancillary benefits, which the final regulations 
define as any benefits provided by the eligible fund as permitted or 
required under the laws of the foreign jurisdiction in which the fund 
is established or operates that do not otherwise fall within the 
definition of retirement and pension benefits or ancillary benefits. 
Sec.  1.897(l)-1(e)(6). The final regulations provide that no more than 
five percent of the present value of the qualified benefits the 
eligible fund reasonably expects to provide to qualified recipients 
during the entire period during which the eligible fund is expected to 
be in existence can be non-ancillary benefits. Sec.  1.897(l)-
1(c)(2)(ii)(B)(3). This measurement of non-ancillary benefits is 
determined under the same rules that apply to the present valuation of 
retirement and pension benefits for purposes of the 85 percent 
threshold, which are described in Part II.A.2 of this Summary of 
Comments and Explanation of Revisions.
    The final regulations incorporate the allowance for non-ancillary 
benefits into the 100 percent threshold by revising the definition of 
``qualified benefits'' in the proposed regulations. Specifically, non-
ancillary benefits and ancillary benefits, together with the new 
definition of retirement and pension benefits, comprise the ``qualified 
benefits'' that an eligible fund must provide to meet the 100 percent 
threshold. Sec.  1.897(l)-1(e)(8).
c. Other Distributions and Early Withdrawals
    The proposed regulations did not explicitly address how early 
withdrawals from a QFPF should be treated for purposes of determining 
the amount of retirement or other benefits paid by the QFPF. 
Specifically, the proposed regulations did not discuss how to treat 
withdrawals made from one retirement plan and rolled over into a 
different retirement plan, early withdrawals that certain plans may 
permit in accordance with country-specific laws, or loans made by an 
eligible fund. One comment suggested that rollover distributions should 
not be considered as benefits paid by a plan and thus should be 
excluded when determining an eligible fund's eligibility as a QFPF. The 
comment also recommended that in-service plan withdrawals or loans 
should not be taken into account in calculating the benefits paid by an 
eligible fund provided that in-service withdrawals before retirement 
age are permissible under the plan terms or relevant law.
    The Treasury Department and the IRS have considered these 
recommendations and generally agree that the types of withdrawals 
described above should not be taken into account when calculating the 
100 percent threshold, the 85 percent threshold, or the limitation on 
non-ancillary benefits. As a result, the final regulations add three 
categories of distributions that are excluded when making these 
determinations. Sec.  1.897(l)-1(c)(2)(ii)(D).
    The first category is a loan to a qualified recipient pursuant to 
terms set by the eligible fund. Because there is an expectation of 
repayment, these types of loans should not be included when making 
threshold benefit determinations. This category, however, excludes a 
loan that a qualified recipient is not required to repay, in full or in 
part, upon default (which would generally constitute the provision of a 
non-ancillary benefit), unless such a default is subject to tax and 
penalty in a foreign jurisdiction.
    The second category is a distribution permitted under the laws of 
the foreign jurisdiction in which the eligible fund is established or 
operates and made before the participant or beneficiary reaches the 
retirement age as determined under relevant foreign laws, but only if 
the distribution is to a qualified holder or other retirement or 
pension arrangement subject to similar distribution or tax rules under 
the laws of the foreign jurisdiction. Such rollover distributions are 
simply shifting funds between one eligible fund and another similar 
fund (even if such fund does not qualify as a QFPF) and thus should 
also be excluded when making the 100 percent and 85 percent threshold 
determinations.
    The third category is a withdrawal of funds before the participant 
or beneficiary reaches retirement age to satisfy a financial need under 
principles similar to the U.S. hardship distribution rules permitted 
under the laws of the foreign jurisdiction in which the eligible fund 
is established or operates, provided the distribution (or at least the 
portion of the distribution exceeding basis) is subject to tax and 
penalty in such foreign jurisdiction. Because the qualified recipient 
bears some or all of the financial burden with regard to such hardship 
withdrawals, they are excluded when making threshold benefit 
determinations.
4. Qualified Recipient
    Proposed Sec.  1.897(l)-1(c)(2)(ii)(B)(1) required that all the 
benefits that an eligible fund provides be qualified benefits to 
qualified recipients. With respect to a government-established fund, 
proposed Sec.  1.897(l)-1(d)(12)(i)(A) defined a qualified recipient as 
any person eligible to be treated as a participant or beneficiary of 
such eligible fund and any person designated by such person to receive 
qualified benefits. Thus, the determination of whether a person was a 
qualified recipient of a government-established fund was made without 
regard to an individual's status as a current or former employee. With 
respect to an employer fund, proposed Sec.  1.897(l)-1(d)(12)(i)(B) 
defined a qualified recipient as a current

[[Page 80051]]

or former employee or any person designated by such current or former 
employee to receive qualified benefits.
    Several comments stated that the proposed regulations were too 
restrictive because they did not allow for the possible participation 
of individuals in an employer fund if they were neither current nor 
former employees, as allowed in some countries. The comments noted, 
however, that individuals who have never been employees represent only 
a minority of members in any fund. One comment suggested that the 
definition of qualified recipient be expanded accordingly to include 
any individual allowed to participate in an eligible fund under the 
laws of the foreign jurisdiction in which the fund is created or 
organized. Another comment requested that the definition of qualified 
recipient include a de minimis threshold for members of an eligible 
fund that are neither current nor former employees. For example, an 
eligible fund could qualify for the section 897(l) exemption (assuming 
all other requirements were met) if more than 70 percent of its members 
were current or former employees measured annually. The comment also 
recommended that spouses of eligible participants or beneficiaries 
should be explicitly identified as qualified recipients as defined in 
proposed Sec.  1.897(l)-1(d)(12).
    Another comment stated that, as to government-established funds, 
the term qualified recipient could potentially be read as encompassing 
a broad group of participants in other types of government programs 
beyond just pension funds. The comment requested that the final 
regulations make explicit that a recipient (or person designating the 
recipient) must both have been employed and be receiving benefits by 
reason of his or her employment. Finally, one comment noted that the 
proposed regulations appropriately treated a self-employed individual 
as both an employer and an employee. Prop. Sec.  1.897(l)-
1(c)(2)(ii)(C). The comment requested that proposed Sec.  1.897(l)-
1(e), example 1, be altered to clarify that the retirement benefits 
provided under the facts of the example were provided as a result of 
citizens' services as employed or self-employed individuals.
    The Treasury Department and the IRS agree that the proposed 
regulations may unnecessarily restrict arrangements, permitted in 
certain countries, that allow for the participation of individuals who 
were never employees in an employer fund. Further, the Treasury 
Department and the IRS understand that such individuals represent only 
a minority of members in any fund. The Treasury Department and the IRS 
believe that unlimited or significant participation by individuals who 
were never employees or their designees would be inappropriate. The 
final regulations therefore allow individuals who were never employees 
to constitute up to five percent of participants in plans established 
by employers (and therefore to be treated as qualified recipients). 
Sec.  1.897(l)-1(e)(12)(i)(C). The final regulations also include 
spouses of current or former employees in the definition of qualified 
recipients. Sec.  1.897(l)-1(e)(12)(i)(B).
    The Treasury Department and the IRS do not believe that further 
changes are necessary to (1) make explicit that a qualified recipient 
(or person designating the recipient) with respect to a government-
established fund must both have been employed and be receiving benefits 
by reason of his or her employment, or (2) to modify proposed Sec.  
1.897(l)-1(e), example 1, to state that the retirement and pension 
benefits provided by the government-established fund were provided as a 
result of citizens' services as employed or self-employed individuals. 
As provided in the proposed regulations, a government-established fund 
must be established to provide retirement or pension benefits to 
participants or beneficiaries that are current or former employees or 
persons designated by such employees as a result of services rendered 
by such employees to their employers, but may include participants on a 
basis broader than an employee relationship. The comments seeking to 
narrow the scope of qualified recipients for government-established 
funds are inconsistent with the request to broaden the definition of a 
qualified recipient with respect to an employer fund to include (within 
limits) individuals who were never employees. At the same time, the 
Treasury Department and the IRS believe that an explicit connection 
between the work of an employee and the qualified benefits provided by 
an eligible fund is reflected in the final regulations through the 
definition of a government-established fund, as well as the requirement 
that all eligible funds must reasonably expect to provide 85 percent 
retirement and pension benefits, which are defined in the final 
regulations at Sec.  1.897(l)-1(e)(14). These requirements provide an 
appropriate safeguard to ensure that government programs other than 
retirement and pension programs do not form the basis for exemption 
from tax under section 897(l). Finally, the Treasury Department and the 
IRS believe that the rule reflected in Sec.  1.897(l)-1(c)(2)(ii)(E)(1) 
(previously at proposed Sec.  1.897(l)-1(c)(2)(ii)(C)(1)), which 
explicitly states that a self-employed individual is considered both an 
employer and employee, makes adding a reference to self-employed 
individuals in proposed Sec.  1.897(l)-1(e), example 1, unnecessary.
B. Regulation and Information Reporting
    The proposed regulations provided that an eligible fund satisfies 
the information reporting requirement in section 897(l)(2)(D) only if 
the eligible fund annually provides to the relevant tax authorities in 
the foreign country in which the fund is established or operates the 
amount of qualified benefits provided to each qualified recipient by 
the eligible fund (if any), or such information is otherwise available 
to those authorities. Prop. Sec.  1.897(l)-1(c)(iv)(B). An eligible 
fund is not treated as failing to satisfy such requirement if the 
eligible fund is not required to provide information to the relevant 
tax authorities in a year in which no qualified benefits are provided 
to qualified recipients. Id. An eligible fund is also treated as 
satisfying the information reporting requirement in section 
897(l)(2)(D) only if the eligible fund is required to provide the 
information required by proposed Sec.  1.897(l)-1(c)(iv)(B), or such 
information is otherwise available, to one or more governmental units. 
Prop. Sec.  1.897(l)-1(c)(iv)(C).
    One comment highlighted that the rules in the proposed regulations 
are inadvertently inconsistent when an eligible fund is required by 
foreign law to provide information to a governmental unit (satisfying 
proposed Sec.  1.897(l)-1(c)(iv)(C)), but does not actually provide 
such information (not fulfilling proposed Sec.  1.897(l)-1(c)(iv)(B)), 
and requested that the final regulations clarify how these provisions 
are intended to work.
    Proposed Sec.  1.897(l)-1(c)(iv)(B) and proposed Sec.  1.897(l)-
1(c)(iv)(C) were not intended to function as two separate conditions 
that were required to be met. Rather, the provisions were intended to 
provide flexibility to eligible funds that provided the relevant 
information to tax authorities or other governmental units. To clarify 
this intent, the final regulations combine the two separate provisions 
into a single provision (Sec.  1.897(l)-1(c)(iv)(A)). Thus, the 
information reporting requirement in section 897(l)(2)(D) is satisfied 
if a fund annually provides information about the amount of qualified 
benefits provided to qualified recipients to the relevant tax 
authorities or other relevant governmental units, or such information

[[Page 80052]]

is otherwise available to the relevant tax authorities or other 
relevant governmental units. Sec.  1.897(l)-1(c)(iv)(A). A fund will 
not fail to satisfy such requirement if it is not required to provide 
information to the relevant tax authorities or other relevant 
governmental units in a year in which no qualified benefits are 
provided to qualified recipients. Id.
C. Subnational Tax Regime
    For purposes of the requirement that a QFPF be subject to 
preferential tax treatment, the proposed regulations provided that, for 
purposes of section 897(l)(2)(E), references to a foreign country do 
not include references to a state, province, or political subdivision 
of a foreign country. The preamble to the proposed regulations 
explained that subnational taxes generally constitute a minor component 
of an entity's overall tax burden in a foreign jurisdiction and 
therefore should not satisfy the requirement of section 897(l)(2)(E) 
when such preference had only a minimal impact on reducing the fund's 
overall tax burden.
    Upon further consideration, the Treasury Department and the IRS 
have determined that, to the extent the subnational tax law is covered 
under an income tax treaty with the United States, it should constitute 
a sufficient component of the foreign jurisdiction's taxation regime to 
be able to satisfy the requirement of section 897(l)(2)(E). 
Accordingly, the final regulations maintain the approach that 
subnational taxes generally do not satisfy the requirement of section 
897(l)(2)(E), but provide that those taxes can satisfy the requirement 
of section 897(l)(2)(E) if they are covered taxes under an income tax 
treaty between that foreign jurisdiction and the United States. See 
Sec.  1.897(l)-1(c)(2)(v)(E).

III. Other Comments and Revisions

A. Withholding Rules
1. Withholding on Foreign Partnerships
    Comments requested that the final regulations allow QFPFs that hold 
interests in USRPIs through foreign partnerships, which are not 
qualified holders under proposed Sec.  1.897(l)-1(d)(11) because they 
cannot be QCEs, to avoid withholding by providing a certification of 
non-foreign status (including on a Form W-8EXP). The comments 
highlighted the difference in withholding when a QFPF invests through a 
foreign partnership, which would result in withholding (even if the 
foreign partnership was wholly owned by QFPFs), as opposed to through a 
foreign corporation that constitutes a QCE or a domestic partnership, 
neither of which would result in withholding under section 1445. One 
comment recommended that, for purposes of withholding under section 
1445, the final regulations should implement rules similar to the 
regulations that implement the withholding regime under section 
1446(f), which includes a form of look-through rule. Another comment 
recommended that the final regulations provide that a foreign 
partnership that is wholly owned by QFPFs either be treated as a QCE, 
and therefore a qualified holder, or otherwise be excluded from the 
definition of a foreign person under section 1445 such that a foreign 
partnership could certify its non-foreign status to a transferee.
    The Treasury Department and the IRS agree that a foreign 
partnership that is held entirely by qualified holders should not be 
subject to withholding under section 1445 because the ultimate owners 
should qualify in full for the exemption under section 897(l). 
Accordingly, the final regulations provide that a qualified holder 
(under Sec.  1.897(l)-1(d)) and a foreign partnership all of the 
interests of which are held by qualified holders, including through one 
or more partnerships, may certify its status as a withholding qualified 
holder that is not treated as a foreign person for purposes of 
withholding under section 1445 (and section 1446, as relevant). Sec.  
1.1445-1(g)(11). To the extent any non-qualified holders hold interests 
in a foreign partnership, such foreign partnership does not qualify as 
a withholding qualified holder. However, qualified holders who hold 
interests in USRPIs through a foreign partnership that is not a 
withholding qualified holder would still be eligible for the section 
897(l) exemption on their distributive share of FIRPTA gains. Under the 
existing regulations in Sec.  1.1445-3, a transferor may, in 
appropriate cases, reduce withholding by obtaining a withholding 
certificate from the IRS.
2. Documentation Requirements
    The proposed regulations permitted a qualified holder to certify 
that it is exempt from withholding under section 1445 by providing a 
certification of non-foreign status. The proposed regulations also 
stated that the IRS intended to revise Form W-8EXP, ``Certificate of 
Foreign Government or Other Foreign Organization for United States Tax 
Withholding or Reporting,'' to permit qualified holders to be exempt 
from withholding under section 1445 by establishing their status under 
section 897(l). Prop. Sec. Sec.  1.1445-2(b)(2), 1.1445-2(b)(v), 
1.1445-5(b)(3)(ii), and 1.1445-8(e).
    Under the final regulations, a withholding qualified holder may 
submit a certification of non-foreign status to establish withholding 
qualified holder status for purposes of section 1445(a) pursuant to 
Sec.  1.1445-2(b)(2)(i), with certain modifications. Specifically, the 
requirements under Sec.  1.1445-2(b)(2)(i) are modified to require the 
transferor to state that it is not treated as a foreign person because 
it is a withholding qualified holder, and to permit the transferor to 
provide its foreign taxpayer identification number if it does not have 
a U.S. taxpayer identification number. The final regulations also 
clarify that a Form W-8EXP is a type of certification of non-foreign 
status within the meaning of Sec.  1.1445-2(b)(2)(i). Accordingly, the 
Form W-8EXP is subject to the general rules pertaining to 
certifications of non-foreign status, such as the period for retaining 
the certification in Sec.  1.1445-2(b)(3) and the rules pertaining to 
liability of agents in Sec.  1.1445-4. Because the final regulations 
require a transferor to represent its status as a withholding qualified 
holder on the certification of non-foreign status, the final 
regulations do not permit a transferor to submit a Form W-9, ``Request 
for Taxpayer Identification Number and Certification,'' to establish 
its status as a withholding qualified holder. See Sec.  1.1445-
2(b)(2)(vi). Before the release of revised Form W-8EXP, a certification 
of non-foreign status described in Sec.  1.1445-2(b)(2)(i) (but not a 
Form W-9) should be used by a transferor to establish its status as a 
withholding qualified holder for purposes of section 1445. Once 
revised, a withholding qualified holder may certify its non-foreign 
status with either a certification of non-foreign status described in 
Sec.  1.1445-2(b)(2)(i) (but not a Form W-9) or a Form W-8EXP.
    The final regulations provide similar rules for certifications of 
non-foreign status that establish withholding qualified holder status 
for purposes of section 1445(e) withholding. See Sec. Sec.  1.1445-
5(b)(3)(ii) and 1.1445-8(e).
3. Coordination With 1441 and 1442
    The proposed regulations provided that distributions made by a 
United States real property holding company (``USRPHC'') or qualified 
investment entity (``QIE'') to a qualified holder are not subject to 
the coordination rules under Sec.  1.1441-3(c)(4) and are instead 
subject only to the requirements of section 1441. Prop. Sec.  1.1441-
3(c)(4)(iii). Because a qualified holder is treated as a foreign person 
for purposes of section

[[Page 80053]]

1441, but not for purposes of 1445, the proposed rule was intended to 
subject a distribution to a qualified holder exclusively to the rules 
in section 1441 to determine if withholding applies.
    The Treasury Department and the IRS have determined that, for 
greater clarity, certain changes should be made to proposed Sec.  
1.1441-3(c)(4) to reach the result intended by the proposed 
regulations. Rather than provide that the coordination rules under 
Sec.  1.1441-3(c)(4) do not apply to qualified holders, the final 
regulations amend the coordination rules to provide that withholding 
qualified holders are not subject to section 1445 on distributions from 
USRPHCs that are not treated as dividends (for example, a distribution 
that is treated as gain from the sale or exchange of property under 
section 301(c)(3)) and on distributions from REITs or other QIEs that 
are capital gain dividends that are treated as gain attributable to the 
sale or exchange of USRPIs. Sec.  1.1441-3(c)(4)(i)(B)(2), Sec.  
1.1441-3(c)(4)(i)(C). Dividends from USRPHCs and dividends from REITs 
or other QIEs that are not capital gain dividends continue to be 
subject to withholding under section 1441. Sec.  1.1441-3(c)(4)(i)(A), 
Sec.  1.1441-3(c)(4)(i)(C). Section 1.1441-3(c)(4)(i) is also clarified 
to provide that a USRPHC (other than a REIT or other QIE) satisfies its 
obligations under sections 1441 and 1445 by following either Sec.  
1.1441-3(c)(4)(i)(A) or Sec.  1.1441-3(c)(4)(i)(B), but a USRPHC that 
is a REIT or other QIE must follow the coordination provision in Sec.  
1.1441-3(c)(4)(i)(C). The final regulations also clarify that, to the 
extent a capital gain dividend from a REIT or other QIE is excluded 
from withholding under section 1445 because it is made with respect to 
stock that is regularly traded on an established securities market in 
the United States to an individual or corporation that did not own more 
than 5 percent of the stock (see the second sentence of section 
897(h)(1)), withholding will apply under section 1441. See sections 
852(b)(3)(E) and 857(b)(3)(E); Sec.  1.1441-3(c)(4)(i)(C).
B. Additional Requests Regarding Qualification Under Section 897(l) and 
Recordkeeping
    Comments recommended that the Treasury Department and the IRS allow 
foreign entities that believe they are QFPFs or QCEs to apply for 
letter rulings on their qualifications under section 897(l). While the 
comment acknowledged the need for administrable standards, it noted 
that, in light of the wide range of possible arrangements under foreign 
law, certain funds that a ``reasonable observer'' would consider a QFPF 
could be excluded. Another comment recommended that the Treasury 
Department and the IRS adopt a ``white list'' regime (similar to the 
United Kingdom's Qualifying Recognized Overseas Pension Scheme) whereby 
pension plan regimes regulated in a list of countries could 
automatically be treated as QFPFs or be subject to a reduced set of 
qualifying requirements.
    The final regulations do not adopt either of these recommendations. 
The Treasury Department and the IRS do not believe that a private 
letter ruling program specific to QFPF qualification or a ``white 
list'' regime is necessary, as the final regulations provide flexible 
standards such that a wide variety of funds can constitute eligible 
funds.
    Another comment requested that the final regulations provide that, 
to the extent life insurance companies or other investment companies 
hold and invest assets of one or more QFPFs, those life insurance 
companies or investment companies themselves should qualify as QFPFs. 
To qualify as a QFPF, an eligible fund must satisfy all of the 
requirements in Sec.  1.897(l)-1(c)(2), and the final regulations do 
not adopt any special rule for life insurance companies or investment 
companies, including whether such assets are held as part of an 
arrangement comprising a QFPF.
    In addition, the final regulations require an eligible fund to 
maintain records consistent with section 6001 to show that it is 
eligible for the exemption under section 897(l) and which the 
Commissioner may request upon examination. The recordkeeping 
requirement is consistent with general recordkeeping requirements for 
U.S. taxpayers and is appropriate in light of the flexible standards 
provided in the final regulations.
C. Clarification With Respect to the Applicability of the Section 
897(l) Regulations
    These regulations reflect the particular policies and objectives 
underlying section 897(l) (as opposed to other areas of tax law that 
relate to pension funds). To clarify this, Sec.  1.897(l)-1(a) provides 
that the definitions and requirements in Sec.  1.897(l)-1 apply only 
for purposes of the regulations themselves, including applicable cross-
references from other sections, and that no inference is to be drawn 
with respect to the definitions and requirements in Sec.  1.897(l)-1, 
including with respect to the meaning of a pension fund, for any other 
purpose.

IV. Applicability Dates

    The final regulations apply with respect to dispositions of USRPIs 
and distributions described in section 897(h) occurring on or after 
December 29, 2022. However, in accordance with the applicability date 
incorporated in Sec.  1.897(l)-1(g)(2), the rule in Sec.  1.897(l)-
1(b)(1), the qualified holder rule in Sec.  1.897(l)-1(d) (previously 
proposed Sec.  1.897(l)-1(d)(11)), as well as the definitions of 
governmental unit (Sec.  1.897(l)-1(e)(5)) and QCE (Sec.  1.897(l)-
1(e)(9)) apply with respect to dispositions of USRPIs and distributions 
described in section 897(h) occurring on or after June 6, 2019, the 
date the proposed regulations were filed with the Federal Register. See 
section 7805(b)(1)(B). An eligible fund may choose to apply the final 
regulations with respect to dispositions and distributions occurring on 
or after December 18, 2015, and before the applicability date of the 
final regulations, if the eligible fund, and all persons bearing a 
relationship to the eligible fund described in section 267(b) or 
707(b), consistently apply the rules in the final regulations in their 
entirety for all relevant years. An eligible fund that chooses to apply 
the final regulations before their applicability date must apply the 
principles of Sec.  1.897(l)-1(d)(4)(i) to any valuation requirements 
with respect to dates preceding December 18, 2015.

Special Analyses

I. Regulatory Planning and Review--Economic Analysis

    These regulations are not subject to review under section 6(b) of 
Executive Order 12866 pursuant to the Memorandum of Agreement (April 
11, 2018) between the Treasury Department and the Office of Management 
and Budget regarding review of tax regulations.

II. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act, 44 U.S.C. 3501 et 
seq. (``PRA''), information collection requirements contained in these 
final regulations are in Sec. Sec.  1.1441-3, 1.1445-2, 1.1445-5, 
1.1445-8, and 1.1446-1. These collections of information retain the 
collections of information in the proposed regulations, with a 
refinement to Sec.  1.1441-3(c)(4) to clarify that the portions of 
distributions made by a USRPHC or QIE to a withholding qualified holder 
(as defined in Sec.  1.1445-1(g)(11)) that are attributable to the 
disposition of USRPIs are not subject to section 1445 and that the 
portions of distributions made by a USRPHC or QIE

[[Page 80054]]

to a withholding qualified holder that are not attributable to the 
disposition of a USRPI are subject to section 1441. No written comments 
regarding the information collection requirements were received in 
response to the solicitation of comments in the proposed regulations.
A. Information Collections Contained in Sec.  1.1441-3(c)(4)(iii)
    The final regulations provide that dividends from a USRPHC and 
dividends from REITs and other QIEs that are not capital gain dividends 
to a withholding qualified holder are subject only to the requirements 
of section 1441. Sec.  1.1441-3(c)(4)(i), Sec.  1.1441-
3(c)(4)(i)(B)(2), Sec.  1.1441-3(c)(4)(i)(C). The final regulations 
further provide that withholding qualified holders are not subject to 
section 1445 on distributions from USRPHCs that are not treated as 
dividends (for example, a distribution that is treated as gain from the 
sale or exchange of property under section 301(c)(3)) and on 
distributions from REITs or QIEs that are capital gain dividends that 
are treated as gain attributable to the sale or exchange of USRPIs. 
Sec.  1.1441-3(c)(4)(i)(B)(2), Sec.  1.1441-3(c)(4)(i)(C).
    A USRPHC or QIE making a distribution to a qualified holder would 
be required to report the distribution on Form 1042-S, ``Foreign 
Person's U.S. Source Income Subject to Withholding,'' and file Form 
1042, ``Annual Withholding Tax Return for U.S. Source Income of Foreign 
Persons.'' For purposes of reporting the portion of the distributions 
that are exempt from section 1445 withholding, the IRS revised Form 
1042-S to include an exemption code designating payments that are 
exempt under section 897(l). No revisions are being made to Form 1042 
in connection with payments that are exempt under section 897(l).
    For purposes of the PRA, the reporting burden associated with Sec.  
1.1441-3(c)(4) will be reflected in the PRA submissions for Form 1042 
(OMB control numbers 1545-0123 for business filers and 1545-0096 for 
all other Form 1042 filers) and Form 1042-S (OMB control number 1545-
0096).
B. Information Collections in Sec. Sec.  1.1445-2, 1.1445-5, 1.1445-8, 
and 1.1446-1
    Sections 1.1445-2, 1.1445-5, 1.1445-8, and 1.1446-1 would require a 
qualified holder wishing to claim an exemption under section 897(l) to 
provide a withholding agent with either a Form W-8EXP or a certificate 
of non-foreign status containing similar information to the Form W-
8EXP. The IRS plans to revise Form W-8EXP for use by qualified holders. 
For purposes of the PRA, the reporting burden associated with 
Sec. Sec.  1.1445-2, 1.1445-5, 1.1445-8, and 1.1446-1, will be 
reflected in the PRA submission for Form W-8EXP (OMB control number 
1545-1621).
    The reporting burdens associated with the information collections 
in the final regulations are included in the aggregate burden estimates 
for OMB control numbers 1545-0096 (which represents a total estimated 
burden time for all forms and schedules of 6.46 million hours) and 
1545-1621 (which represents a total estimated burden time, including 
all other related forms and schedules for other filers, of 30.5 million 
hours). The overall burden estimates for the OMB control numbers are 
aggregate amounts that relate to the entire package of forms associated 
with the applicable OMB control number and will in the future include, 
but not isolate, the estimated burden of the tax forms that will be or 
have been revised as a result of the information collections in the 
final regulations. These numbers are therefore unrelated to the future 
calculations needed to assess the burden imposed by the final 
regulations. These burdens have been reported for other regulations 
related to the taxation of cross-border income, and the Treasury 
Department and the IRS urge readers to recognize that these numbers are 
duplicates and to guard against overcounting the burden that 
international tax provisions impose.
    An agency may not conduct or sponsor and a person is not required 
to respond to a collection of information unless it displays a valid 
OMB control number.

III. Regulatory Flexibility Act

    Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it 
is hereby certified that this rulemaking will not have a significant 
economic impact on a substantial number of small entities within the 
meaning of section 601(6) of the Regulatory Flexibility Act. This 
certification is based on the fact that the final regulations affect 
foreign pension funds, including sovereign funds, which are entities 
that are created or organized outside of the United States, with no 
place of business in the United States, and which operate primarily 
outside of the United States. Accordingly, the entities affected by the 
final regulations are not considered small entities, and a regulatory 
flexibility analysis under the Regulatory Flexibility Act is not 
required.

IV. Section 7805(f)

    Pursuant to section 7805(f) of the Code, the proposed regulations 
(REG-109826-17) preceding these final regulations were submitted to the 
Chief Counsel for Advocacy of the Small Business Administration for 
comment on the impact on small businesses and no comments were 
received.

V. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 requires 
that agencies assess anticipated costs and benefits and take certain 
other actions before issuing a final rule that includes any Federal 
mandate that may result in expenditures in any one year by a state, 
local, or tribal government, in the aggregate, or by the private 
sector, of $100 million in 1995 dollars, updated annually for 
inflation. The final regulations do not include any Federal mandate 
that may result in expenditures by state, local, or tribal governments, 
or by the private sector in excess of that threshold.

VI. Executive Order 13132: Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either imposes substantial, direct compliance costs on state and local 
governments, and is not required by statute, or preempts state law, 
unless the agency meets the consultation and funding requirements of 
section 6 of the Executive order. The final regulations do not have 
federalism implications, do not impose substantial direct compliance 
costs on state and local governments, and do not preempt state law 
within the meaning of the Executive order.

Statement of Availability of IRS Documents

    IRS Revenue Procedures, Revenue Rulings, Notices, and other 
guidance cited in this document are published in the Internal Revenue 
Bulletin or Cumulative Bulletin and are available from the 
Superintendent of Documents, U.S. Government Publishing Office, 
Washington, DC 20402, or by visiting the IRS website at www.irs.gov.

Drafting Information

    The principal authors of these final regulations are Arielle Borsos 
and Milton Cahn, Office of Associate Chief Counsel (International). 
However, other personnel from the Treasury Department and the IRS 
participated in their development.

[[Page 80055]]

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by adding an 
entry in numerical order to read in part as follows:

    Authority:  26 U.S.C. 7805 * * *
* * * * *
    Section 1.897(l)-1 also issued under 26 U.S.C. 897(l).
* * * * *

0
Par. 2. Section 1.897(l)-1 is added to read as follows:


Sec.  1.897(l)-1  Exception for interests held by foreign pension 
funds.

    (a) Scope and overview. This section provides rules regarding the 
exception from section 897 for qualified holders. The definitions and 
requirements in this section apply only for purposes of this section 
(including as applicable by cross-reference from other sections), and 
no inference is to be drawn with respect to the definitions and 
requirements in this section, including with respect to the meaning of 
a pension fund, for any other purpose. Paragraph (b) of this section 
provides the general rule excepting qualified holders from section 897. 
Paragraph (c) of this section provides the requirements that an 
eligible fund must satisfy to be treated as a qualified foreign pension 
fund. Paragraph (d) of this section provides the requirements that a 
qualified foreign pension fund or a qualified controlled entity must 
satisfy to be treated as a qualified holder. Paragraph (e) of this 
section provides definitions. Paragraph (f) of this section provides 
examples illustrating the application of the rules of this section. 
Paragraph (g) of this section provides applicability dates. For rules 
applicable to a qualified foreign pension fund or qualified controlled 
entity claiming an exemption from withholding under chapter 3, see 
generally Sec. Sec.  1.1441-3, 1.1445-2, 1.1445-5, 1.1445-8, 1.1446-1, 
and 1.1446-2.
    (b) Exception from section 897--(1) In general. Gain or loss of a 
qualified holder from the disposition of a United States real property 
interest, including gain from a distribution described in section 
897(h), is not subject to section 897(a).
    (2) Limitation. Paragraph (b)(1) of this section applies solely 
with respect to gain or loss that is attributable to one or more 
qualified segregated accounts maintained by a qualified holder.
    (c) Qualified foreign pension fund requirements--(1) In general. An 
eligible fund is a qualified foreign pension fund if it satisfies the 
requirements of this paragraph (c). Paragraph (c)(2) of this section 
provides rules regarding the application of the requirements of section 
897(l)(2) to an eligible fund. Paragraph (c)(3) of this section 
provides rules on the application of the requirements in paragraph 
(c)(2) of this section, including rules regarding the application of 
those requirements to an eligible fund that is an organization or 
arrangement and rules regarding recordkeeping.
    (2) Applicable requirements--(i) Created or organized. An eligible 
fund must be created, organized, or established under the laws of a 
foreign jurisdiction. For purposes of this paragraph (c)(2)(i), a 
governmental unit is treated as created or organized in the foreign 
jurisdiction with respect to which it is, or is a part of, the foreign 
government.
    (ii) Establishment of eligible fund--(A) General requirement--(1) 
Purpose of and parties establishing eligible fund. An eligible fund 
must be established --
    (i) By, or at the direction of, the foreign jurisdiction in which 
it is created or organized to provide retirement and pension benefits 
to participants or beneficiaries that are current or former employees 
or persons designated by such employees as a result of services 
rendered by such employees to their employers; or
    (ii) By one or more employers (including a governmental unit in its 
capacity as an employer) to provide retirement and pension benefits to 
participants or beneficiaries that are current or former employees or 
persons designated by such employees in consideration for services 
rendered by such employees to such employers.
    (2) Identification of type of eligible fund. An eligible fund that 
is described in both paragraphs (c)(2)(ii)(A)(1)(i) and (ii) of this 
section shall be treated solely as described in the latter paragraph.
    (3) Role of parties other than the foreign jurisdiction or 
employer. For purposes of paragraph (c)(2)(ii)(A)(1) of this section, 
the determination of whether an eligible fund is established by, or at 
the direction of, a foreign jurisdiction or established by an employer 
is made without regard to whether one or more persons that are not the 
foreign jurisdiction or employer administer or otherwise provide 
services with regard to the eligible fund (including holding assets in 
a qualified segregated account as part of or on behalf of the eligible 
fund).
    (B) Established to provide retirement or pension benefits. An 
eligible fund is established to provide retirement or pension benefits 
for purposes of the general requirement in paragraph (c)(2)(ii)(A) of 
this section if--
    (1) All of the benefits that an eligible fund provides are 
qualified benefits provided to qualified recipients;
    (2) At least 85 percent of the present value of the qualified 
benefits that the eligible fund reasonably expects to provide to 
qualified recipients in the future are retirement and pension benefits; 
and
    (3) No more than five percent of the present value of the qualified 
benefits the eligible fund reasonably expects to provide to qualified 
recipients in the future are non-ancillary benefits.
    (C) Present valuation.--(1) In general. For purposes of satisfying 
the requirements in paragraphs (c)(2)(ii)(B)(2) and (3) of this 
section, an eligible fund must determine, on at least an annual basis, 
the present value of the qualified benefits that the eligible fund 
reasonably expects to provide to qualified recipients during the entire 
period during which the eligible fund is expected to be in existence. 
An eligible fund may utilize any reasonable method for performing the 
present valuation.
    (2) 48-month average alternative calculation. An eligible fund that 
does not satisfy the requirements of paragraph (c)(2)(ii)(B)(2) or (3) 
of this section based on the present value determination under 
paragraph (c)(2)(ii)(C)(1) of this section may satisfy the requirements 
of paragraph (c)(2)(ii)(B)(2) or (3) of this section based on the 
alternative calculation in this paragraph (c)(2)(ii)(C)(2). The 
alternative calculation in this paragraph is satisfied if the average 
of the present values of the future qualified benefits that the 
eligible fund reasonably expected to provide, as determined during the 
48-month period preceding (and including) the most recent present 
valuation determination, satisfies the requirements of paragraph 
(c)(2)(ii)(B)(2) or (3) of this section, respectively. The 
determination of such average must be based on the valuations described 
in paragraph (c)(2)(ii)(C)(1) of this section that were carried out 
during the 48-month period preceding (and including) the most recent 
present value determination, and must use the values (not percentages) 
of the qualified benefits the eligible fund reasonably expected to 
provide. The determination described in this paragraph must be 
calculated using a weighted average

[[Page 80056]]

whereby values are adjusted if the relevant valuations are applicable 
for different periods (as described in paragraph (c)(2)(ii)(C)(3) of 
this section) because an eligible fund performs valulations more 
frequently than on an annual basis. If an eligible fund has been in 
existence for less than 48 months, this paragraph (c)(2)(ii)(C)(2) is 
applied to the period that the eligible fund has been in existence. The 
alternative calculation in this paragraph (c)(2)(ii)(C)(2) may be 
satisfied based on any reasonable determination of the present 
valuation described in paragraph (c)(2)(ii)(C)(1) of this section for 
any period that starts before the date that the requirements of 
paragraph (c)(2)(ii)(C) of this section first apply to an organization 
or arrangement and ends on or before December 29, 2022.
    (3) Application of present valuation. An eligible fund must use the 
present value determination made as of the most recent valuation under 
paragraph (c)(2)(ii)(C)(1) of this section or the alternative 
calculation provided in paragraph (c)(2)(ii)(C)(2) of this section (to 
the extent the eligible fund did not satisfy the requirements of 
paragraphs (c)(2)(ii)(B)(2) and (3) of this section in the most recent 
valuation) for purposes of meeting the requirements in paragraphs 
(c)(2)(ii)(B)(2) and (3) of this section with respect to dispositions 
of United States real property interests or distributions described in 
section 897(h) occurring in the twelve months succeeding the most 
recent valuation, or until a new present value determination is made, 
whichever occurs first.
    (D) Certain distributions from eligible funds. The following 
distributions are not taken into account for purposes of determining 
whether an eligible fund satisfies the requirements of paragraph 
(c)(2)(ii)(B) of this section--
    (1) A loan to a qualified recipient pursuant to terms set by the 
eligible fund (other than a loan with respect to which a qualified 
recipient defaults and is not required to repay in whole or part, 
unless the default is subject to tax and penalty in such foreign 
jurisdiction);
    (2) A distribution (as permitted by the laws of the foreign 
jurisdiction in which the eligible fund is established or operates) 
made before the participant or beneficiary reaches the retirement age 
(as determined under the relevant foreign laws), provided that the 
distribution is to a designee that is a qualified holder or to another 
arrangement subject to similar distribution or tax rules under the laws 
of the foreign jurisdiction; and
    (3) A withdrawal of funds before the participant or beneficiary 
reaches the retirement age (as determined under the relevant foreign 
laws) to satisfy a financial need (under principles similar to the U.S. 
hardship distribution rules, see Sec.  1.401(k)-1(d)(3)) as permitted 
under the laws of the foreign jurisdiction in which the eligible fund 
is established or operates, provided the distribution (or at least the 
portion of the distribution exceeding basis) is subject to tax and 
penalty in such foreign jurisdiction.
    (E) Certain employers and employees. For purposes of this section, 
the following rules apply--
    (1) A self-employed individual is treated as both an employer and 
an employee;
    (2) Employees of an individual, trust, corporation, or partnership 
that is a member of an employer group are treated as employees of each 
member of the employer group that includes the individual, trust, 
corporation, or partnership; and
    (3) An eligible fund established by a trade union, professional 
association, or similar group, either alone or in combination with the 
employer or group of employers, is treated as established by any 
employer that funds, in whole or in part, the eligible fund.
    (iii) Single participant or beneficiary--(A) In general. An 
eligible fund may not have a single qualified recipient that has a 
right to more than five percent of the assets or income of the eligible 
fund.
    (B) Constructive ownership. For purposes of paragraph 
(c)(2)(iii)(A) of this section, an individual is considered to have a 
right to the assets or income of an eligible fund to which any person 
who bears a relationship to the individual described in section 267(b) 
or 707(b) has a right.
    (iv) Regulation and information reporting--(A) In general. The 
eligible fund must be subject to government regulation and annually 
provide to the relevant tax authorities (or other relevant governmental 
units) in the foreign jurisdiction in which the eligible fund is 
established or operates information about the amount of qualified 
benefits (if any) provided to each qualified recipient by the eligible 
fund, or such information must otherwise be available to the relevant 
tax authorities (or other relevant governmental units). An eligible 
fund is not treated as failing to satisfy the requirement of this 
paragraph (c)(2)(iv)(A) as a result of the eligible fund not being 
required to provide information to the relevant tax authorities (or 
other relevant governmental units) in a year in which no qualified 
benefits are provided to qualified recipients.
    (B) Treatment of certain eligible funds established by foreign 
jurisdictions. An eligible fund that is described in paragraph 
(c)(2)(ii)(A)(1)(i) of this section is deemed to satisfy the 
requirements of paragraph (c)(2)(iv)(A) of this section.
    (v) Tax treatment--(A) In general. The tax laws of the foreign 
jurisdiction in which the eligible fund is established or operates must 
provide that, due to the status of the eligible fund as a retirement or 
pension fund, either--
    (1) Contributions to the eligible fund that would otherwise be 
subject to tax under such laws are deductible or excluded from the 
gross income of the eligible fund or taxed at a reduced rate; or
    (2) Taxation of any investment income of the eligible fund is 
deferred or excluded from the gross income of the eligible fund or such 
income is taxed at a reduced rate.
    (B) Income subject to preferential tax treatment. An eligible fund 
is treated as satisfying the requirement of paragraph (c)(2)(v)(A) of 
this section in a taxable year if, under the tax laws of the foreign 
jurisdiction in which the eligible fund is established or operates--
    (1) At least 85 percent of the contributions to the eligible fund 
are subject to the tax treatment described in paragraph (c)(2)(v)(A)(1) 
of this section, or
    (2) At least 85 percent of the investment income of the eligible 
fund is subject to the tax treatment described in paragraph 
(c)(2)(v)(A)(2) of this section.
    (C) Income not subject to tax. An eligible fund is treated as 
satisfying the requirement of paragraph (c)(2)(v)(A) of this section if 
the eligible fund is exempt from the income tax of the foreign 
jurisdiction in which it is established or operates or the foreign 
jurisdiction in which it is established or operates has no income tax.
    (D) Other preferential tax regimes. An eligible fund that does not 
receive the tax treatment described in either paragraph (c)(2)(v)(A)(1) 
or (2) of this section is nonetheless treated as satisfying the 
requirement of paragraph (c)(2)(v)(A) of this section if the eligible 
fund establishes that each of the conditions described in paragraphs 
(c)(2)(v)(D)(1) and (2) of this section is satisfied:
    (1) Under the tax laws of the foreign jurisdiction in which the 
eligible fund is established or operates, the eligible fund is subject 
to a preferential tax regime due to its status as a retirement or 
pension fund; and
    (2) The preferential tax regime described in paragraph 
(c)(2)(v)(D)(1) of

[[Page 80057]]

this section has a substantially similar effect as the tax treatment 
described in paragraphs (c)(2)(v)(A)(1) or (2) of this section.
    (E) Tax law of subnational jurisdictions. Solely for purposes of 
this paragraph (c)(2)(v), a reference to the tax law of a foreign 
jurisdiction includes the tax law of a political subdivision or other 
local authority of a foreign jurisdiction, provided that income taxes 
imposed under the subnational tax law are treated as covered taxes 
under an income tax treaty between that foreign jurisdiction and the 
United States.
    (3) Operating rules--(i) Rules on the application of the 
requirements in paragraph (c)(2) of this section--(A) Organizations or 
arrangements. An organization or arrangement is treated as a single 
entity for purposes of determining whether the requirements of 
paragraph (c)(2) of this section are satisfied, except that each person 
or governmental unit that is part of or party to an organization or 
arrangement must satisfy the requirement of paragraph (c)(2)(i) of this 
section.
    (B) Relevant income, assets, and functions. The determination of 
whether an eligible fund satisfies the requirements of paragraph (c)(2) 
of this section is made solely with respect to the assets and income of 
the eligible fund held in one or more qualified segregated accounts, 
the qualified benefits funded by the qualified segregated accounts, the 
information reporting and regulation related to the qualified 
segregated accounts, and the qualified recipients whose benefits are 
funded by the qualified segregated accounts. For this purpose, all 
assets held by an eligible fund in qualified segregated accounts 
(within the meaning of paragraph (e)(13)(ii) of this section) are 
treated as a single qualified segregated account.
    (ii) Aggregate approach to partnerships. For purposes of this 
section, assets held by a partnership shall be treated as held 
proportionately by its partners, and activities conducted by a 
partnership shall be treated as conducted by its partners.
    (iii) Recordkeeping. An eligible fund that claims the exemption 
under section 897(l) must have records sufficient to establish that it 
satisfies the requirements of paragraph (c)(2) of this section. See 
section 6001 and Sec.  1.6001-1, requiring records to be maintained.
    (d) Qualified holder requirements--(1) In general. With respect to 
a disposition described in section 897(a) or a distribution described 
in section 897(h), a qualified foreign pension fund (including a part 
of a qualified foreign pension fund) or a qualified controlled entity 
is a qualified holder only if it satisfies the requirement of paragraph 
(d)(2) or (3) of this section.
    (2) Qualified holders that did not hold U.S. real property 
interests. The requirement of this paragraph (d)(2) is satisfied if the 
qualified foreign pension fund or qualified controlled entity owned no 
United States real property interests as of the earliest date during an 
uninterrupted period, ending on the date of the disposition or 
distribution, in which the qualified foreign pension fund or qualified 
controlled entity satisfied the requirements of paragraph (c)(2) of 
this section or paragraph (e)(9) of this section, as applicable.
    (3) Qualified holders that satisfy the testing period--(i) In 
general. The requirement of this paragraph (d)(3) is satisfied if the 
qualified foreign pension fund or qualified controlled entity 
continuously satisfies the requirements of paragraph (c)(2) of this 
section or paragraph (e)(9) of this section, as applicable, for the 
duration of the testing period.
    (ii) Testing Period. The term testing period means whichever of the 
following periods is the shortest:
    (A) The period beginning on December 18, 2015, and ending on the 
date of the disposition or the distribution;
    (B) The ten-year period ending on the date of the disposition or 
the distribution; and,
    (C) The period beginning on the date the entity (or its 
predecessor) was created or organized and ending on the date of the 
disposition or the distribution.
    (4) Transition Rules--(i) Qualified foreign pension fund or 
qualified controlled entity requirements. With respect to any period 
from December 18, 2015, to the date when the requirements of paragraph 
(c)(2) or (e)(9) of this section first apply to a qualified foreign 
pension fund or qualified controlled entity under paragraph (g) of this 
section, as applicable (but in any event no later than December 29, 
2022, in the case of paragraph (c)(2) of this section, and no later 
than June 6, 2019, in the case of paragraph (e)(9) of this section), 
the qualified foreign pension fund or qualified controlled entity is 
deemed to satisfy the requirements of paragraphs (c)(2) and (e)(9) of 
this section, as applicable, for purposes of paragraphs (d)(2) and (3) 
of this section if the qualified foreign pension fund or qualified 
controlled entity satisfies the requirements of section 897(l)(2) based 
on a reasonable interpretation of those requirements (including 
determining any applicable valuations using a consistent method).
    (ii) Ownership of qualified controlled entity by service providers. 
Solely for purposes of paragraphs (d)(2) and (3) of this section, the 
determination of whether a corporation or trust is a qualified 
controlled entity will not include stock or interests held directly or 
indirectly by any person that provides services to such corporation or 
trust, provided that such stock or interests are, in the aggregate, no 
more than five percent (by vote or value) of the stock or interests of 
such corporation or trust. This paragraph (d)(4)(ii) applies to 
interests held from December 18, 2015 until February 27, 2023.
    (e) Definitions. The following definitions apply for purposes of 
this section.
    (1) Ancillary benefits--(i) In general. The term ancillary benefits 
means--
    (A) Benefits payable upon the diagnosis of a terminal illness, 
incidental death benefits (for example, funeral expenses), short-term 
disability benefits, life insurance benefits, and medical benefits;
    (B) Unemployment, shutdown, or layoff benefits that do not continue 
past retirement age and do not affect the payment of accrued retirement 
and pension benefits; and
    (C) Other health-related or unemployment benefits that are similar 
to the benefits described in paragraphs (e)(1)(i) and (ii) of this 
section.
    (ii) Overlap with retirement and pension benefits. Ancillary 
benefits do not include any benefits that could also be defined as 
retirement and pension benefits within the meaning of paragraph (e)(14) 
of this section.
    (2) Eligible fund. The term eligible fund means a trust, 
corporation, or other organization or arrangement that maintains one or 
more qualified segregated accounts.
    (3) Employer group. The term employer group means all individuals, 
trusts, partnerships, and corporations with a relationship to each 
other specified in section 267(b) or section 707(b).
    (4) Foreign jurisdiction. The term foreign jurisdiction means a 
jurisdiction other than the United States, including a country, a 
state, province, or political subdivision of a foreign country, and a 
territory of the United States.
    (5) Governmental unit. The term governmental unit means any foreign 
government or part thereof, including any person, body, group of 
persons, organization, agency, bureau, fund, or instrumentality, 
however designated, of a foreign government.
    (6) Non-ancillary benefits. The term non-ancillary benefits means 
benefits

[[Page 80058]]

that are neither ancillary benefits (within the meaning of paragraph 
(e)(1) of this section) nor retirement and pension benefits (within the 
meaning of paragraph (e)(14) of this section), and are provided by the 
eligible fund as permitted or required under the laws of the foreign 
jurisdiction in which the eligible fund is established or operates.
    (7) Organization or arrangement. The term organization or 
arrangement means one or more trusts, corporations, governmental units, 
or employers.
    (8) Qualified benefits. The term qualified benefits means 
retirement and pension benefits, ancillary benefits and non-ancillary 
benefits. However, the portions of qualified benefits consisting of 
ancillary benefits and non-ancillary benefits provided by a qualified 
foreign pension fund are limited as provided in paragraph (c)(2)(ii)(B) 
of this section.
    (9) Qualified controlled entity. The term qualified controlled 
entity means a trust or corporation created or organized under the laws 
of a foreign jurisdiction all of the interests of which are held by one 
or more qualified foreign pension funds directly or indirectly through 
one or more qualified controlled entities.
    (10) Qualified foreign pension fund. The term qualified foreign 
pension fund means an eligible fund that satisfies the requirements of 
paragraph (c) of this section.
    (11) Qualified holder. The term qualified holder means a qualified 
foreign pension fund or qualified controlled entity that satisfies the 
requirements of paragraph (d) of this section.
    (12) Qualified recipient--(i) In general. The term qualified 
recipient means--
    (A) With respect to an eligible fund described in paragraph 
(c)(2)(ii)(A)(1)(i) of this section, any person eligible to be treated 
as a participant or beneficiary of such eligible fund and any person 
designated by such participant or beneficiary to receive qualified 
benefits, and
    (B) With respect to an eligible fund described in paragraph 
(c)(2)(ii)(A)(1)(ii) of this section, a current or former employee, a 
spouse of a current or former employee, and any person designated by 
such participants or beneficiaries to receive qualified benefits.
    (C) To the extent not already described in paragraph (e)(12)(i)(B) 
of this section, with respect to an eligible fund described in 
paragraph (c)(2)(ii)(A)(1)(ii) of this section, any person eligible to 
be treated as a participant or beneficiary of such fund and any person 
designated by such participant or beneficiary to receive qualified 
benefits, so long as such recipients do not exceed five percent of the 
eligible fund's total qualified recipients or have a right to more than 
five percent of the assets or income of the eligible fund. An eligible 
fund must make a determination for purposes of this paragraph 
(e)(12)(i)(C) on at least an annual basis and may utilize any 
reasonable method in doing so. An eligible fund must use its most 
recent determination under this paragraph with respect to dispositions 
of United States real property interests or distributions described in 
section 897(h) occurring in the twelve months succeeding such 
determination, or until a new determination is made, whichever occurs 
first.
    (ii) Special rule regarding automatic designation. For purposes of 
paragraph (e)(12)(i) of this section, a person is treated as 
designating another person to receive qualified benefits if the other 
person is, by reason of such person's relationship or other status with 
respect to the first person, entitled to receive benefits pursuant to 
the terms applicable to the eligible fund or pursuant to the laws of 
the foreign jurisdiction in which the eligible fund is created or 
organized, whether or not the first person expressly designated such 
person as a beneficiary.
    (13) Qualified segregated account--(i) In general. The term 
qualified segregated account means an identifiable pool of assets 
maintained by an eligible fund or a qualified controlled entity for the 
sole purpose of funding and providing qualified benefits to qualified 
recipients.
    (ii) Assets held by eligible funds. For purposes of paragraph 
(e)(13)(i) of this section, an identifiable pool of assets of an 
eligible fund is treated as maintained for the sole purpose of funding 
qualified benefits to qualified recipients, and hence as a qualified 
segregated account, only if the terms applicable to the eligible fund 
or the laws of the foreign jurisdiction in which the eligible fund is 
established or operates require that all the assets in the pool, and 
all the income earned with respect to such assets, be used exclusively 
to fund the provision of qualified benefits to qualified recipients or 
to satisfy necessary reasonable expenses of the eligible fund, and that 
such assets or income may not inure to the benefit of a person other 
than a qualified recipient. For purposes of this paragraph (e)(13)(ii), 
the fact that assets or income may inure to the benefit of a 
governmental unit by operation of escheat or similar laws, or may 
revert (such as upon plan termination or dissolution (after all 
obligations to qualified recipients and creditors have been satisfied) 
or the qualified recipients' benefits failing to vest) to the 
governmental unit or employer in accordance with applicable foreign law 
is ignored, so long as contributions to the plan are not more than 
reasonably necessary to fund the qualified benefits to be provided to 
qualified recipients.
    (iii) Assets held by qualified controlled entities. For purposes of 
paragraph (e)(13)(i) of this section, the assets of a qualified 
controlled entity are treated as an identifiable pool of assets 
maintained for the sole purpose of funding qualified benefits to 
qualified recipients only if both of the following requirements are 
satisfied:
    (A) All of the net earnings of the qualified controlled entity are 
credited to its own account or to the qualified segregated account of a 
qualified foreign pension fund or another qualified controlled entity, 
with no portion of the net earnings of the qualified controlled entity 
inuring to the benefit of a person other than a qualified recipient; 
and
    (B) Upon dissolution, all of the assets of the qualified controlled 
entity, after satisfaction of liabilities to persons having interests 
in the entity solely as creditors, vest in a qualified segregated 
account of a qualified foreign pension fund or another qualified 
controlled entity.
    (14) Retirement and pension benefits. The term retirement and 
pension benefits means distributions to qualified recipients that are 
made after the qualified recipient reaches retirement age as determined 
under or in accordance with the laws in the foreign jurisdiction in 
which the eligible fund is established or operates (including a benefit 
paid to a qualified recipient who retires on or after a stated early 
retirement age), or after a specified event that results in a qualified 
recipient being permanently unable to work, and includes any such 
distribution made to a surviving beneficiary of the qualifying 
recipient. Retirement and pension benefits may be based on one or more 
of the following factors: contributions, investment performance, years 
of service with an employer, or compensation received by the qualified 
recipient.
    (f) Examples. This paragraph (f) provides examples that illustrate 
the rules of this section. The examples do not illustrate the 
application of the applicable withholding rules, including sections 
1445 and 1446 and the regulations thereunder. It is assumed that no 
person is entitled to more than five percent of any eligible fund's 
assets or income, taking into account the constructive ownership rules 
in

[[Page 80059]]

paragraph (c)(2)(iii)(B) of this section, and that the eligible fund 
owns no United States real property interests other than as described.
    (1) Example 1: No legal entity--(i) Facts. On January 1, 2023, 
Country A establishes Retirement Plan for the sole purpose of providing 
retirement and pension benefits to citizens of Country A aged 65 or 
older. Retirement Plan is composed of Asset Pool and Agency. Asset Pool 
is a group of accounts maintained on the balance sheet of the 
government of Country A. Pursuant to the laws of Country A, income and 
gain earned by Asset Pool is used solely to support the provision of 
retirement and pension benefits by Retirement Plan. Agency is a Country 
A agency that administers the provision of benefits by Retirement Plan 
and manages Asset Pool's investments. Under the laws of Country A, 
investment income earned by Retirement Plan is not subject to Country 
A's income tax. At the end of each calendar year, Retirement Plan 
performs a present valuation of the retirement and pension benefits it 
reasonably expects to provide in the future, and all of the benefits 
that Retirement Plan reasonably expects to provide are retirement and 
pension benefits. On January 1, 2024, Agency purchases Property, which 
is an interest in real property located in the United States owned by 
Asset Pool. On June 1, 2026, Agency sells Property, realizing $100x of 
gain with respect to Property that would be subject to tax under 
section 897(a) unless paragraph (b) of this section applies with 
respect to the gain.
    (ii) Analysis. (A) Retirement Plan, which is composed of Asset Pool 
and Agency, includes one or more governmental units described in 
paragraph (e)(5) of this section. Accordingly, Retirement Plan is an 
organization or arrangement described in paragraph (e)(7) of this 
section. Furthermore, Retirement Plan maintains a qualified segregated 
account in the form of Asset Pool, an identifiable pool of assets 
maintained for the sole purpose of funding retirement and pension 
benefits to beneficiaries of the Retirement Fund (qualified recipients 
as defined in paragraph (e)(12)(i)(A) of this section). Therefore, 
Retirement Plan is an eligible fund within the meaning of paragraph 
(e)(2) of this section.
    (B) Paragraph (c)(3)(i) of this section applies for purposes of 
determining whether Retirement Plan is an eligible fund that satisfies 
the requirements of paragraph (c)(2) of this section and would 
therefore be treated as a qualified foreign pension fund. Accordingly, 
the activities of Asset Pool and Agency are integrated and treated as 
undertaken by a single entity to determine whether the requirements of 
paragraph (c)(2) of this section are met. However, Asset Pool and 
Agency must independently satisfy the requirement of paragraph 
(c)(2)(i) of this section.
    (C) Retirement Plan is composed of Asset Pool and Agency, each of 
which is a governmental unit and treated as created or organized under 
the laws of Country A for purposes of paragraph (c)(2)(i) of this 
section. Accordingly, Retirement Plan satisfies the requirement of 
paragraph (c)(2)(i) of this section.
    (D) Retirement Plan is established by Country A as an eligible fund 
described in paragraph (c)(2)(ii)(A)(1)(i) of this section to provide 
retirement and pension benefits, which are qualified benefits described 
in paragraph (e)(8) of this section, to citizens of Country A, who are 
qualified recipients described in paragraph (e)(12)(i)(A) of this 
section because they are eligible to be participants or beneficiaries 
of Retirement Plan. Accordingly, all of the benefits that Retirement 
Plan provides are qualified benefits provided to qualified recipients. 
In addition, Retirement Plan satisfies the requirements of the present 
valuation test as described in paragraphs (c)(2)(ii)(B) and (C) of this 
section. Accordingly, Retirement Plan satisfies the requirement of 
paragraph (c)(2)(ii) of this section.
    (E) Retirement Plan provides retirement and pension benefits to 
citizens of Country A aged 65 or older, with no citizen entitled to 
more than five percent of Retirement Fund's assets or to more than five 
percent of the income of the eligible fund. Accordingly, Retirement 
Plan satisfies the requirement of paragraph (c)(2)(iii) of this 
section.
    (F) Retirement Plan is composed solely of governmental units within 
the meaning of paragraph (e)(5) of this section. Accordingly, under 
paragraph (c)(2)(iv)(B) of this section, Retirement Plan is treated as 
satisfying the requirements of paragraph (c)(2)(iv)(A) of this section.
    (G) Investment income earned by Retirement Plan is not subject to 
income tax in Country A. Accordingly, Retirement Plan satisfies the 
requirement of paragraph (c)(2)(v) of this section.
    (H) Because Retirement Plan satisfies the requirements of paragraph 
(c)(2) of this section, Retirement Plan is a qualified foreign pension 
fund. Because Retirement Plan held no United States real property 
interests as of January 1, 2023, the earliest date during an 
uninterrupted period ending on June 1, 2026, the date of the 
disposition, in which it satisfied the requirements of paragraph (c)(2) 
of this section, Retirement Plan is a qualified holder under paragraph 
(d)(2) of this section. Retirement Plan's gain with respect to Property 
is attributable solely to Asset Pool, a qualified segregated account 
maintained by Retirement Plan. Accordingly, under paragraph (b) of this 
section, the $100x gain realized by Retirement Plan attributable to the 
disposition of Property is not subject to section 897(a).
    (2) Example 2: Fund established by an employer--(i) Facts. 
Employer, a corporation organized in Country B, establishes Fund to 
provide retirement and pension benefits to current and former employees 
of Employer and S1, a Country B corporation that is wholly owned by 
Employer. On January 1, 2023, Fund is established as a trust under the 
laws of Country B, and Employer retains discretion to invest assets and 
to administer benefits on Fund's behalf. Fund receives contributions 
from Employer and S1 and contributions from employees of Employer and 
S1 who are beneficiaries of Fund. All contributions to Fund and all of 
Fund's earnings are separately accounted for on Fund's books and 
records and are required by Fund's organizational documents to 
exclusively fund the provision of benefits to Fund's beneficiaries, 
except as necessary to satisfy reasonable expenses of Fund. Fund 
currently has over 100 beneficiaries, a number that is reasonably 
expected to grow as Employer expands. Fund will pay benefits to 
employees upon retirement based on years of service and employee 
contributions, but, if a beneficiary dies before retirement, Fund will 
pay an incidental death benefit in addition to payment of any accrued 
retirement and pension benefits to the beneficiary's designee (or 
deemed designee under local laws if the beneficiary fails to identify a 
designee). Fund annually performs a present valuation of the benefits 
it reasonably expects to provide to Fund's beneficiaries, and the 
valuation concludes that more than 85 percent of the present value of 
the total benefits it reasonably expects to pay to its beneficiaries in 
the future are retirement and pension benefits. In addition, it is 
reasonably expected that the incidental death benefits paid by Fund 
will account for less than fifteen percent of the present value of the 
total benefits that Fund expects to provide in the future, and Fund 
does not reasonably expect to pay any other types

[[Page 80060]]

of benefits to its beneficiaries in the future. Fund annually provides 
to the tax authorities of Country B the amount of benefits distributed 
to each participant (or designee). Country B's tax authorities 
prescribe rules and regulations governing Fund's operations. Under the 
laws of Country B, Fund is not taxed on its investment income. On 
January 1, 2024, Fund purchases Property, which is an interest in real 
property located in the United States. On June 1, 2026, Fund sells 
Property, realizing $100x of gain with respect to Property that would 
be subject to tax under section 897(a) unless paragraph (b) of this 
section applies with respect to the gain.
    (ii) Analysis. (A) Fund is a trust that maintains an identifiable 
pool of assets for the sole purpose of funding retirement and pension 
benefits and ancillary benefits to current and former employees of the 
employer group (within the meaning of paragraph (e)(3) of this section) 
that includes Employer and S1 (current and former employees of Employer 
and S1 constitute qualified recipients, as defined in paragraph 
(e)(12)(i)(B) of this section). All assets held by Fund and all income 
earned by Fund are used to provide such benefits. Therefore, Fund is a 
trust that maintains a qualified segregated account within the meaning 
of paragraph (e)(13) of this section. Accordingly, Fund is an eligible 
fund within the meaning of paragraph (e)(2) of this section.
    (B) Because Fund is created or organized under the laws of Country 
B, Fund satisfies the requirement of paragraph (c)(2)(i) of this 
section.
    (C) The only benefits that Fund provides are retirement and pension 
benefits described in paragraph (e)(14) of this section and ancillary 
benefits (that is, the incidental death benefits) described in 
paragraph (e)(1) of this section, both of which constitute qualified 
benefits described in paragraph (e)(8) of this section, to qualified 
recipients, described in paragraph (e)(12)(i)(B) of this section. 
Furthermore, Fund satisfies the requirements of the present valuation 
test as described in paragraphs (c)(2)(ii)(B) and (C) of this section. 
Accordingly, Fund is established by Employer to provide retirement and 
pension benefits to qualified recipients in consideration for services 
rendered by such qualified recipients to Employer and S1, and Fund 
satisfies the requirement of paragraph (c)(2)(ii) of this section.
    (D) No single qualified recipient has a right to more than five 
percent of the assets or income of the eligible fund. Accordingly, Fund 
satisfies the requirement of paragraph (c)(2)(iii) of this section.
    (E) Fund is regulated and annually provides to the relevant tax 
authorities in the foreign jurisdiction in which it is established or 
operates the amount of qualified benefits provided to each qualified 
recipient by the eligible fund. Accordingly, Fund satisfies the 
requirements of paragraph (c)(2)(iv) of this section.
    (F) Fund is not subject to income tax on its investment income. 
Accordingly, Fund satisfies the requirement of paragraph (c)(2)(v) of 
this section.
    (G) Because Fund meets the requirements of paragraph (c)(2) of this 
section, Fund is treated as a qualified foreign pension fund. 
Furthermore, because Fund held no United States real property interests 
as of January 1, 2023, the earliest date during an uninterrupted period 
ending on June 1, 2026, the date of the disposition, in which it 
satisfied the requirements of paragraph (c)(2) of this section, Fund is 
a qualified holder under paragraph (d)(2) of this section. All of 
Fund's assets are held in a qualified segregated account within the 
meaning of paragraph (e)(13) of this section. Accordingly, under 
paragraph (b) of this section, the $100x gain attributable to the 
disposition of Property is not subject to section 897(a).
    (3) Example 3: Fund established by an employer at the direction of 
a foreign jurisdiction--(i) Facts. The facts are the same as in 
paragraph (f)(2) of this section (Example 2), except that Fund was 
established by Employer at the direction of Country B and, in addition 
to being established to provide retirement and pension benefits to 
current and former employees of Employer and S1, Fund was also 
established to provide retirement and pension benefits to other 
employees. All employees that are beneficiaries provide contributions 
to Fund. Fund makes a determination on at least an annual basis using a 
reasonable method to measure the number of participants in the Fund who 
are not current and former employees of Employer and S1. Each time such 
a determination is made, Fund finds that such employees constitute less 
than five percent of Fund's total qualified recipients and do not have 
a right to more than five percent of the assets or income of Fund.
    (ii) Analysis. Fund satisfies the requirements of paragraph 
(c)(2)(ii)(A)(1)(i) of this section because it was established by, or 
at the direction of, Country B to provide retirement and pension 
benefits to participants or beneficiaries that are current or former 
employees or persons designated by such employees as a result of 
services rendered by such employees to their employers. Fund also 
satisfies the requirements of paragraph (c)(2)(ii)(A)(1)(ii) of this 
section because it was established by Employer to provide retirement 
and pension benefits to participants or beneficiaries that are current 
or former employees or persons designated by such employees in 
consideration for services rendered by such employees to Employer and 
S1. Because it satisfies the requirements of both such provisions, 
under paragraph (c)(2)(ii)(A)(2) of this section, Fund will be treated 
solely as an eligible fund under paragraph (c)(2)(ii)(A)(1)(ii) of this 
section. As a result, Fund must meet the reporting requirements 
described in paragraph (c)(2)(iv)(A) of this section and must apply the 
definition of qualified recipient described in paragraphs (e)(12)(i)(B) 
and (C) of this section. Because Fund makes a determination on at least 
an annual basis using a reasonable method to measure the number of 
participants in the Fund who are not current and former employees of 
Employer and S1, finding that such employees constitute less than five 
percent of Fund's total qualified recipients and do not have a right to 
more than five percent of the assets or income of Fund, the requirement 
of paragraph (c)(2)(ii)(B)(1) of this section, requiring that all of 
the benefits that an eligible fund provides are provided to qualified 
recipients, is considered satisfied. Because Fund meets the 
requirements of paragraph (c)(2) of this section, Fund is treated as a 
qualified foreign pension fund under paragraph (b) of this section. 
Accordingly, the $100x gain attributable to the disposition of Property 
is not subject to section 897(a).
    (4) Example 4: Employer controlled organization or arrangement--(i) 
Facts. The facts are the same as in paragraph (f)(2) of this section 
(Example 2), except that S2, a Country B corporation that is wholly 
owned by Employer, performs all tax compliance functions for Employer, 
S1, and S2, including information reporting with respect to Fund 
participants.
    (ii) Analysis. For purposes of the requirements of paragraph (c)(2) 
of this section, Fund and S2 are an organization or arrangement that is 
treated as a single entity under paragraph (c)(3)(i)(A) of this section 
and an eligible fund under paragraph (e)(2) of this section with 
respect to the qualified segregated account held by Fund. Because the 
eligible fund composed of Fund and S2 satisfies the requirements of 
paragraph (c)(2) of this section (including the rule under

[[Page 80061]]

paragraph (c)(3)(i)(A) of this section that each entity satisfy the 
foreign organization requirement of paragraph (c)(2)(i) of this 
section) with respect to the qualified benefits provided to the 
qualified recipients out of the eligible fund's qualified segregated 
account (determined in accordance with paragraph (c)(3)(i)(B) of this 
section), the eligible fund that is composed of Fund and S2 constitutes 
a qualified foreign pension fund. Furthermore, the requirements for 
qualified holder status are satisfied, as described in paragraph (f)(2) 
of this section. Thus, under paragraph (b) of this section, the $100x 
gain attributable to the disposition of Property is not subject to 
section 897(a).
    (5) Example 5: Third-party assumption of pension liabilities--(i) 
Facts. The facts are the same as in paragraph (f)(2) of this section 
(Example 2), except that Fund does not purchase Property on January 1, 
2024. In addition, Fund anticipates $100x of qualified benefits will be 
paid each year beginning on January 1, 2028. Fund enters into an 
agreement with Guarantor, a privately held Country B corporation, which 
provides that Fund will, on January 30, 2023, cede a portion of its 
assets to Guarantor in exchange for annual payments of $100x beginning 
on January 1, 2028 and continuing until one or more previously 
identified participants (and their designees) ceases to be eligible to 
receive benefits. Guarantor has discretion to invest the ceded assets 
as it chooses, subject to certain agreed upon investment restrictions. 
Pursuant to its agreement with Fund, Guarantor must maintain Segregated 
Pool, a pool of assets securing its obligations under its agreement 
with Fund. The value of Segregated Pool must exceed a specified amount 
(determined based on an agreed upon formula) until Guarantor's payment 
obligations are completed, and any remaining assets in Segregated Pool 
(that is, assets exceeding the required payments to Fund) are retained 
by Guarantor. Guarantor bears all investment risk with respect to 
Segregated Pool. Accordingly, Guarantor is required to make annual 
payments of $100x to Fund regardless of the performance of Segregated 
Pool. On January 1, 2024, Guarantor purchases stock in Company A, a 
United States real property holding company that is a United States 
real property interest, and holds the Company A stock in Segregated 
Pool. On June 1, 2027, Guarantor sells the stock in Company A, 
realizing a gain of $100x.
    (ii) Analysis. The Segregated Pool is not a qualified segregated 
account, because it is not maintained for the sole purpose of funding 
qualified benefits to qualified recipients, and because income 
attributable to assets in the Segregated Pool (including the Company A 
stock) may inure to Guarantor, which is not a qualified recipient. 
Accordingly, Fund and Guarantor do not qualify as an organization or 
arrangement that is an eligible fund with respect to the Company A 
stock. Therefore, Guarantor is not exempt under paragraph (b) of this 
section with respect to the $100x of gain realized in connection with 
the sale of its shares in Company A.
    (6) Example 6: Asset manager--(i) Facts. The facts are the same as 
in paragraph (f)(5) of this section (Example 5) except that instead of 
ceding legal ownership of a portion of its assets to Guarantor, Fund 
transfers the assets into Trust with respect to which Fund is the sole 
beneficiary on January 30, 2023, and Trust purchases stock in Company A 
on January 1, 2024. Guarantor has exclusive management authority over 
the Trust assets and is entitled to a reasonable fixed management fee 
which it withdraws annually from Trust's assets. On June 1, 2027, Trust 
sells the stock in Company A, realizing a gain of $100x.
    (ii) Analysis. For purposes of testing the requirements of 
paragraph (c)(2) of this section, Fund and Trust are an organization or 
arrangement that is treated as a single entity under paragraph 
(c)(3)(i)(A) of this section and an eligible fund under paragraph 
(e)(2) of this section. Assets held by Trust are held in a qualified 
segregated account, and those assets are the assets that are relevant 
for purposes of determining whether the eligible fund composed of Fund 
and Trust meets the requirements of paragraph (c)(2) of this section. 
The eligible fund that is composed of Fund and Trust is treated as 
established by Employer notwithstanding that Guarantor provides 
management services. See paragraph (c)(2)(ii)(A)(3) of this section. 
Paragraph (e)(13)(ii) of this section provides that the assets held by 
an eligible fund in a qualified segregated account may be used to 
satisfy reasonable expenses of the eligible fund, such that the 
reasonable fixed management fee paid to Guarantor does not cause the 
assets held in Trust to fail to be treated as held in a qualified 
segregated account. All of the other requirements for qualified foreign 
pension fund status are satisfied by the eligible fund that is composed 
of Fund and Trust, as described in paragraph (f)(2) of this section. 
The eligible fund that is composed of Fund and Trust is a qualified 
holder under paragraph (d)(2) of this section because it held no United 
States real property interests on January 1, 2023, the earliest date 
during an uninterrupted period ending on June 1, 2027, the date of the 
disposition of Company A stock, in which it satisfied the requirements 
of paragraph (c)(2) of this section. The eligible fund that is composed 
of Fund and Trust is therefore exempt under paragraph (b) of this 
section with respect to the $100x of gain realized in connection with 
the sale by Trust of the shares in Company A.
    (7) Example 7: Partnership--(i) Facts. The facts are the same as in 
paragraph (f)(5) of this section (Example 5) except that instead of 
ceding legal ownership of the assets to Guarantor, Fund contributes the 
assets to a partnership (PRS) formed with Guarantor and PRS purchases 
stock in Company A on January 30, 2023. Guarantor receives a profits 
interest in the partnership that is reasonable in light of Guarantor's 
management activity. Guarantor has no direct or indirect ownership in 
PRS assets, and the partnership agreement provides that upon 
dissolution, PRS assets would be distributed to Fund. Guarantor serves 
as the general partner of PRS and has discretionary authority to buy 
and sell PRS assets without approval from Fund. On June 1, 2027, PRS 
sells the stock in Company A, realizing a gain of $100x.
    (ii) Analysis. All of Fund's assets, including the assets held by 
PRS that are treated as held proportionately by Fund under paragraph 
(c)(3)(ii) of this section, are held in a qualified segregated account 
within the meaning of paragraph (e)(13) of this section. See paragraph 
(f)(2)(ii)(A) of this section (Example 2). The eligible fund that is 
composed of Fund is treated as established by Employer notwithstanding 
that Guarantor provides management services to PRS. See paragraphs 
(c)(2)(ii)(A)(3) and (c)(3)(ii) of this section. All of the other 
requirements for qualified foreign pension fund status are satisfied by 
Fund as described in paragraphs (f)(2)(ii)(B) through (F) of this 
section, and Fund is a qualified holder as described in paragraph 
(f)(2)(ii)(G) of this section. Accordingly, Fund is exempt under 
paragraph (b) of this section with respect to its allocable share of 
the $100x of gain realized in connection with the sale by PRS of the 
shares in Company A. Guarantor is not exempt under paragraph (b) of 
this section with respect to its allocable share of the $100x of gain 
realized in connection with the sale by PRS of the shares in Company A 
because Guarantor is neither part of the organization or arrangement 
that forms Fund nor a qualified holder under paragraph (d) of

[[Page 80062]]

this section that maintains qualified segregated accounts.
    (8) Example 8: Not a qualified holder--(i) Facts. Fund is a 
qualified foreign pension fund organized in Country C that meets the 
requirements of paragraph (c)(2) of this section. Fund owns all the 
outstanding stock of OpCo, a manufacturing corporation organized in 
Country C, in a qualified segregated account maintained by Fund. OpCo 
was originally formed by a person other than Fund on January 1, 2023. 
Fund purchased all of the stock of OpCo on November 1, 2023 for the 
purpose of conducting the manufacturing business and utilizing the 
business profits to fund pension liabilities. During the period from 
January 1, 2023, through October 31, 2023, OpCo was not a qualified 
foreign pension fund, a part of a qualified foreign pension fund, or a 
qualified controlled entity. On January 30, 2023, OpCo purchased 
Property A, a United States real property interest, from a third party. 
For all periods after Fund acquired OpCo, OpCo must either retain or 
distribute to Fund all of its net earnings, and upon dissolution, must 
distribute all of its assets to its stockholder (that is, Fund) after 
satisfaction of liabilities to its creditors. On June 1, 2024, OpCo 
realizes $100x of gain on the disposition of Property A.
    (ii) Analysis. (A) A qualified controlled entity described in 
paragraph (e)(9) of this section includes any corporation organized 
under the laws of a foreign jurisdiction all the interests of which are 
owned by one or more qualified foreign pension funds directly or 
indirectly through one or more qualified controlled entities. Fund is a 
qualified foreign pension fund that wholly owns OpCo. Accordingly, OpCo 
is a qualified controlled entity for the period when it is owned by 
Fund beginning on November 1, 2023.
    (B) Under paragraph (d)(1) of this section, a qualified controlled 
entity is a qualified holder only if either, under paragraph (d)(2) of 
this section, the qualified controlled entity owned no United States 
real property interests as of the earliest date during an uninterrupted 
period ending on the date of the disposition or distribution in which 
the qualified controlled entity satisfied the requirements of paragraph 
(e)(9) of this section, or, under paragraph (d)(3) of this section, the 
qualified controlled entity satisfies the requirements of paragraph 
(e)(9) of this section throughout the entire testing period. Because 
OpCo owned a United States real property interest as of November 1, 
2023, the earliest date during an uninterrupted period ending on the 
date of the disposition during which it satisfied the requirements of 
paragraph (e)(9) of this section, OpCo cannot satisfy the requirements 
of paragraph (d)(2) of this section and must instead satisfy the 
requirements of paragraph (d)(3) of this section to be a qualified 
holder. Under paragraph (d)(3) of this section, a qualified holder does 
not include any entity that was not a qualified foreign pension fund, a 
part of a qualified foreign pension fund, or a qualified controlled 
entity at any time during the testing period. The testing period with 
respect to OpCo is the period from January 1, 2023 (the date of OpCo's 
formation), to June 1, 2024 (the date of the disposition). Because OpCo 
was not a qualified foreign pension fund, a part of a qualified foreign 
pension fund, or a qualified controlled entity from January 1, 2023, to 
October 31, 2023, OpCo was not a qualified foreign pension fund, a part 
of a qualified foreign pension fund, or a qualified controlled entity 
at all times during the testing period. Accordingly, OpCo is not a 
qualified holder with respect to the disposition of Property A, and the 
$100x of gain recognized by OpCo is not exempt from tax under section 
897(l), regardless of the amount of unrealized gain in Property A as of 
November 1, 2023.
    (9) Example 9: 48-month alternative test--(i) Facts. Fund is a 
qualified foreign pension fund organized in Country C that, except as 
otherwise noted, meets the requirements of paragraph (c)(2) of this 
section. Fund owns all the outstanding stock of OpCo, a manufacturing 
corporation organized in Country C and formed by Fund on January 1, 
2023, in a qualified segregated account maintained by Fund. On January 
30, 2023, OpCo purchased Property A, a United States real property 
interest, from a third party. OpCo either retains or distributes to 
Fund all of its net earnings, and upon dissolution, must distribute all 
of its assets to its stockholder (that is, Fund) after satisfaction of 
liabilities to its creditors. On June 1, 2027, OpCo realizes $100x of 
gain on the disposition of Property A. Fund reasonably expected to 
provide $90x of retirement and pension benefits and $100x of qualified 
benefits for the valuations that it performed pursuant to paragraph 
(c)(2)(ii)(C)(1) of this section on December 31, 2023, December 31, 
2024, and December 31, 2025. Fund reasonably expected to provide $160x 
of retirement and pension benefits and $200x of qualified benefits for 
the valuation that it performed pursuant to paragraph (c)(2)(ii)(C)(1) 
of this section on December 31, 2026.
    (ii) Analysis. In each of the years ending on December 31, 2023, 
December 31, 2024, and December 31, 2025, the valuation performed 
pursuant to paragraph (c)(2)(ii)(C)(1) of this section demonstrates 
that that the requirements of paragraph (c)(2)(ii)(B)(2) of this 
section have been met because $90x of retirement and pension benefits 
constitutes 90 percent of the total $100x of qualified benefits. For 
the year ending on December 31, 2026, the valuation performed pursuant 
to paragraph (c)(2)(ii)(C)(1) of this section does not demonstrate that 
that the requirements of paragraph (c)(2)(ii)(B)(2) of this section 
have been met because $160x of retirement and pension benefits 
constitutes only 80 percent of the total $200x of qualified benefits. 
Thus, Fund does not meet the requirements of paragraph (c)(2)(ii)(C)(1) 
of this section for the year ending on December 31, 2026. However, 
under the 48-month alternative calculation in paragraph 
(c)(2)(ii)(C)(2) of this section, Fund satisfies the requirement that 
it reasonably expects to provide 85 percent retirement and pension 
benefits to qualified recipients as of December 31, 2026. This is 
because when averaging the values (not percentages) of the qualified 
benefits and retirement and pension benefits that Fund reasonably 
expected to provide from the valuations performed over the preceding 48 
months (including the most recent valuation), Fund divides the total 
retirement and pension benefits of $430x ($90x + $90x + $90x + $160x) 
by the total qualified benefits that it reasonably expected to provide 
of $500x ($100x + $100x + $100x + $200x) for an average of 86 percent. 
Under paragraph (c)(2)(ii)(C)(3) of this section, Fund may rely on 
either the most recent present valuation described in paragraph 
(c)(2)(ii)(C)(1) of this section or the alternative calculation in 
paragraph (c)(2)(ii)(C)(2) of this section, both of which are 
determined as of December 31, 2026. Because Fund satisfies the 
requirements of paragraph (c)(2)(ii)(B)(2) of this section under the 
test in paragraph (c)(2)(ii)(C)(2) of this section, even though it does 
not do so under the test in paragraph (c)(2)(ii)(C)(1) of this section, 
Fund is a qualified foreign pension fund with respect to the 
disposition on June 1, 2027. Because OpCo is held by a qualified 
foreign pension fund as of the date of the disposition, OpCo is a 
qualified controlled entity within the meaning of paragraph (e)(9) of 
this section. Accordingly, the $100x of gain realized by OpCo is exempt 
from tax under section 897(l).

[[Page 80063]]

    (10) Example 10: 48-month alternative test with multiple valuations 
in the same year--(i) Facts. The facts are the same as in paragraph 
(f)(9) of this section (Example 9), except that in the year ending 
December 31, 2023, Fund carried out two valuations pursuant to 
paragraph (c)(2)(ii)(C)(1) of this section, one on June 30, 2023 and 
the second on December 31, 2023. For each valuation, Fund reasonably 
expected to provide $90x of retirement and pension benefits and $100x 
of qualified benefits. In addition, in the year ending on December 31, 
2026, pursuant to a valuation carried out under paragraph 
(c)(2)(ii)(C)(1) of this section, Fund reasonably expected to provide 
$150x retirement and pension benefits and $200x of qualified benefits.
    (ii) Analysis. In each of the years ending on December 31, 2023, 
December 31, 2024, and December 31, 2025 (including the two valuations 
performed in 2023), the valuation performed pursuant to paragraph 
(c)(2)(ii)(C)(1) of this section demonstrates that the requirements of 
paragraph (c)(2)(ii)(B)(2) of this section have been met because $90x 
of retirement and pension benefits constitutes 90 percent of the total 
$100x of qualified benefits. For the year ending on December 31, 2026, 
the valuation performed pursuant to paragraph (c)(2)(ii)(C)(1) of this 
section does not demonstrate that the requirements of paragraph 
(c)(2)(ii)(B)(2) of this section have been met because $150x of 
retirement and pension benefits constitutes 75 percent of the total 
$200x of qualified benefits. Thus, Fund does not meet the requirements 
of paragraph (c)(2)(ii)(C)(1) of this section for the year ending on 
December 31, 2026. Under the 48-month alternative calculation in 
paragraph (c)(2)(ii)(C)(2) of this section, Fund also does not satisfy 
the requirement that it reasonably expects to provide 85 percent 
retirement and pension benefits to qualified recipients as of December 
31, 2026. This is because when averaging the values (not percentages) 
of the qualified benefits and retirement and pension benefits that Fund 
reasonably expected to provide from the valuations performed over the 
preceding 48 months (including the most recent valuation), Fund must 
use a weighted average whereby values are adjusted when the length of 
valuation periods differs. In this case, each of the two valuations in 
2023 must be divided by two for a total weighted average for each 
valuation of $45x retirement and pension benefits and $50x of qualified 
benefits. When Fund then divides the total retirement and pension 
benefits that it reasonably expected to provide of $420x ($45x + $45x + 
$90x + $90x + $150x) by the total qualified benefits that it reasonably 
expected to provide of $500x ($50x + $50x + $100x + $100x + $200x), the 
average is 84 percent. Because Fund does not satisfy the requirements 
of paragraph (c)(2)(ii)(B)(2) of this section under the test in 
paragraph (c)(2)(ii)(C)(2) of this section or the test in paragraph 
(c)(2)(ii)(C)(1) of this section, Fund is not a qualified foreign 
pension fund with respect to the disposition on June 1, 2027. Because 
OpCo is not held by a qualified foreign pension fund as of the date of 
the disposition, OpCo is not a qualified controlled entity within the 
meaning of paragraph (e)(9) of this section. Accordingly, the $100x of 
gain realized by OpCo is not exempt from tax under section 897(l).
    (11) Example 11: Qualified foreign pension fund as qualified 
holder--(i) Facts. The facts are the same as in paragraph (f)(10) of 
this section (Example 10), except that OpCo does not dispose of 
Property A on June 1, 2027 and Fund reasonably expects to provide 85 
percent of retirement and pension benefits to qualified recipients in 
the future in each of the annual present valuations it performs as of 
December 31, 2027 through December 31, 2033. Fund also satisfies the 
other requirements of paragraph (c)(2) of this section during this 
period. On April 1, 2029, Fund purchases Property B, a United States 
real property interest, and holds it in a qualified segregated account. 
On June 1, 2034, Fund realizes $100x of gain on the disposition of 
Property B and OpCo realizes $100x of gain on the disposition of 
Property A. At least 85 percent and no more than five percent of the 
actual value of the aggregate benefits provided by Fund before December 
31, 2033, the most recent present value determination, were retirement 
and pension benefits and non-ancillary benefits, respectively.
    (ii) Analysis. (A) Because Fund reasonably expected to provide 85 
percent of retirement and pension benefits to qualified recipients as 
of the valuation performed on December 31, 2033, and it met the other 
requirements of paragraph (c)(2) of this section, Fund is a qualified 
foreign pension fund under paragraph (c)(2)(ii)(C)(3) of this section 
for the twelve months succeeding the most recent valuation, which 
includes June 1, 2034, the date of the disposition of Property A and 
Property B.
    (B) Fund is a qualified holder under paragraph (d)(2) of this 
section because Fund did not own any United States real property 
interests as of December 31, 2027, the earliest date during the 
uninterrupted period ending on the date of the disposition, June 1, 
2034, during which it satisfied the requirements of paragraph (c)(2) of 
this section and therefore qualified as a qualified foreign pension 
fund. Fund is eligible for the exemption under section 897(l) with 
respect to the disposition of Property B because it held Property B in 
a qualified segregated account. Thus, the $100x of gain realized by 
Fund on the disposition of Property B is exempt from tax under section 
897(l).
    (C) Because OpCo owned Property A, a United States real property 
interest, as of December 31, 2027, the earliest date during an 
uninterrupted period ending on the date of the disposition, June 1, 
2034, during which it was a qualified controlled entity, OpCo cannot 
satisfy the requirements of paragraph (d)(2) of this section and must 
instead satisfy the requirements of paragraph (d)(3) of this section to 
be a qualified holder. The testing period with respect to OpCo, 
determined under paragraph (d)(3)(ii) of this section, ends on June 1, 
2034 (the date of the disposition) and begins on June 1, 2024 (the date 
that is ten years before the disposition date). Because Fund failed to 
qualify as a qualified foreign pension fund as of December 31, 2026, 
OpCo was not continuously owned by a qualified foreign pension fund for 
the duration of the testing period, and thus did not qualify as a 
qualified foreign pension fund, part of a qualified foreign pension 
fund, or a qualified controlled entity for the duration of the testing 
period. As a result, OpCo is not a qualified holder under paragraph 
(d)(3) of this section. Accordingly, the $100x of gain recognized by 
OpCo on the disposition of Property A is not exempt from tax under 
section 897(l).
    (12) Example 12: Qualified controlled entity as qualified holder--
(i) Facts. Fund is a qualified foreign pension fund organized in 
Country C that meets the requirements of paragraph (c)(2) of this 
section as of December 31, 2022 and December 31, 2023. Fund purchases 
an interest in Company A, a United States real property holding 
company, on June 1, 2024. As of December 31, 2024, Fund fails to 
satisfy the present valuation requirement of paragraph (c)(2)(ii)(B)(2) 
of this section and does not satisfy the alternative calculation under 
paragraph (c)(2)(ii)(C)(2) of this section. From December 31, 2025, 
through December 31, 2030, Fund satisfies the present valuation 
requirement of paragraph (c)(2)(ii)(B)(2) of this section and meets all 
other requirements in paragraph (c)(2) of this section to be treated as 
a qualified foreign pension fund. On June

[[Page 80064]]

1, 2026, Fund purchases all of the stock of Company B, a Country C 
corporation that owns no United States real property interests and is 
not a qualified foreign pension fund, a part of a qualified foreign 
pension fund, or a qualified controlled entity. On January 1, 2027, 
Company B purchases Property D, a United States real property interest. 
Company B retains or distributes to Fund all of its net earnings, and 
upon dissolution, must distribute all of its assets to its stockholders 
(that is, Fund) after satisfaction of liabilities to its creditors. On 
June 1, 2031, Fund realizes $100x of gain on the disposition of stock 
in Company A, and Company B realizes $100x of gain on the disposition 
of Property D.
    (ii) Analysis. (A) Fund owned Company A, a United States real 
property holding company, as of December 31, 2025, the earliest date 
during an uninterrupted period ending on the date of the disposition, 
June 1, 2031, during which Fund satisfied the requirements of paragraph 
(c)(2) of this section. Accordingly, to be a qualified holder, Fund 
must satisfy the requirements of paragraph (d)(3) of this section. The 
testing period with respect to Fund, determined under paragraph (d)(3) 
of this section, ends on June 1, 2031 (the date of disposition) and 
begins on June 1, 2021 (the date that is ten years before the 
disposition date). Fund is not a qualified holder because it failed to 
satisfy the requirements of paragraph (c)(2) of this section as of 
December 31, 2024 and, thus, has not satisfied the requirements of 
paragraph (c)(2) of this section continuously for the duration of the 
testing period. Accordingly, the $100x of gain realized by Fund on the 
disposition of the stock of Company A is not exempt from tax under 
section 897(l).
    (B) Although Fund is not a qualified holder as of June 1, 2031, the 
date of Company B's disposition of Property D, Fund is still a 
qualified foreign pension fund because it satisfies the requirements of 
paragraph (c)(2) of this section. Company B is therefore a qualified 
controlled entity within the meaning of paragraph (e)(9) of this 
section as of June 1, 2031, because it is wholly owned by Fund, a 
qualified foreign pension fund. Notwithstanding that Fund is not a 
qualified holder under either paragraph (d)(2) or (3) of this section, 
Company B is a qualified holder under paragraph (d)(2) of this section 
because Company B did not own a United States real property interest as 
of June 1, 2026, the earliest date during an uninterrupted period 
ending on June 1, 2031 (the date of the disposition) during which 
Company B was a qualified controlled entity. Lastly, all of Company B's 
assets constitute a qualified segregated account. Accordingly, the 
$100x of gain realized by Company B on the disposition of Property D is 
exempt from tax under section 897(l).
    (g) Applicability date--(1) In general. Except as otherwise 
provided in paragraph (g)(2) of this section, this section applies to 
dispositions of United States real property interests and distributions 
described in section 897(h) occurring on or after December 29, 2022.
    (2) Certain provisions. Paragraphs (b)(1), (d), (e)(5) and (e)(9) 
of this section apply with respect to dispositions of United States 
real property interests and distributions described in section 897(h) 
occurring on or after June 6, 2019.
    (3) Early application. An eligible fund may choose to apply this 
section with respect to dispositions and distributions occurring on or 
after December 18, 2015, and before December 29, 2022, provided that 
the eligible fund, and all persons bearing a relationship to the 
eligible fund described in section 267(b) or 707(b), consistently apply 
the rules in this section for all relevant years. An eligible fund that 
chooses to apply this section pursuant to this paragraph (g)(3) must 
apply the principles of paragraph (d)(4)(i) of this section to any 
valuation requirements with respect to dates preceding December 18, 
2015.

0
Par. 3. Section 1.1441-3 is amended by revising paragraphs (c)(4)(i) 
introductory text, (c)(4)(i)(B)(2), and (c)(4)(i)(C) and adding 
paragraph (c)(4)(iii) to read as follows:


Sec.  1.1441-3  Determination of amounts to be withheld.

* * * * *
    (c) * * *
    (4) * * *
    (i) In general. A distribution from a U.S. Real Property Holding 
Corporation (USRPHC) (or from a corporation that was a USRPHC at any 
time during the five-year period ending on the date of distribution) 
with respect to stock that is a U.S. real property interest under 
section 897(c) or from a Real Estate Investment Trust (REIT) or other 
entity that is a qualified investment entity (QIE) under section 
897(h)(4) with respect to its stock is subject to the withholding 
provisions under section 1441 (or section 1442 or 1443) and section 
1445. A USRPHC (other than a REIT or other entity that is a QIE) making 
a distribution shall be treated as satisfying its withholding 
obligations under both sections if it withholds in accordance with one 
of the procedures described in either paragraph (c)(4)(i)(A) or (B) of 
this section. A USRPHC must apply the same withholding procedure to all 
the distributions made during the taxable year. However, the USRPHC may 
change the applicable withholding procedure from year to year. For 
rules regarding distributions by REITs and other entities that are 
QIEs, see paragraph (c)(4)(i)(C) of this section. To the extent 
withholding under sections 1441, 1442, or 1443 applies under this 
paragraph (c)(4)(i) to any portion of a distribution that is a 
withholdable payment, see paragraph (a)(2) of this section for rules 
coordinating withholding under chapter 4.
* * * * *
    (B) * * *
    (2) Withhold under section 1445(e)(3) and Sec.  1.1445-5(e) on the 
remainder of the distribution (except for any portion paid to a 
withholding qualified holder (as defined in Sec.  1.1445-1(g)(11)) or 
on such smaller portion based on a withholding certificate obtained in 
accordance with Sec.  1.1445-5(e)(3)(iv).
    (C) Coordination with REIT/QIE withholding. In the case of a 
distribution from a REIT or other entity that is a QIE, withholding is 
required as described in paragraph (c)(4)(i)(C)(1) and (2) of this 
section.
    (1) Withholding is required under section 1441 (or 1442 or 1443) 
on--
    (i) The portion of the distribution that is not designated (for 
REITs) or reported (for regulated investment companies that are QIEs) 
as a capital gain dividend, a return of basis, or a distribution in 
excess of a shareholder's adjusted basis in the stock of the REIT or 
QIE that is treated as a capital gain under section 301(c)(3); and
    (ii) Any portion of a capital gain dividend from a REIT or other 
entity that is a QIE that is not treated as gain attributable to the 
sale or exchange of a U.S. real property interest pursuant to the 
second sentence of section 897(h)(1)).
    (2) Withholding is required under section 1445 with respect to--
    (i) A distribution in excess of a shareholder's adjusted basis in 
the stock of the REIT or QIE is, unless the interest in the REIT or QIE 
is not a U.S. real property interest (for example, an interest in a 
domestically controlled REIT or QIE under section 897(h)(2)) or the 
distribution is paid to a withholding qualified holder (as defined in 
Sec.  1.1445-1(g)(11)); and
    (ii) Any portion of a capital gain dividend that is attributable to 
the sale or exchange of a U.S. real property interest under section 
897(h)(1), unless it is paid to a withholding qualified holder (as 
defined in Sec.  1.1445-1(g)(11)). See Sec.  1.1445-8.
* * * * *

[[Page 80065]]

    (iii) Applicability date. Paragraphs (c)(4)(i), (c)(4)(i)(B)(2), 
and (c)(4)(i)(C) of this section apply to distributions made by a 
USRPHC or a QIE occurring on or after December 29, 2022. For 
distributions made by a USRPHC or a QIE occurring before December 29, 
2022, see Sec.  1.1441-3(c)(4)(i), (c)(4)(i)(B)(2), and (c)(4)(i)(C), 
as contained in 26 CFR part 1, revised as of April 1, 2021.
* * * * *

0
Par. 4. Section 1.1445-1 is amended by adding paragraph (g)(11) to read 
as follows:


Sec.  1.1445-1  Withholding on dispositions of U.S. real property 
interests by foreign persons: In general.

* * * * *
    (g) * * *
    (11) Withholding qualified holder. A withholding qualified holder 
means a qualified holder (under Sec.  1.897(l)-1(d)), and a foreign 
partnership all of the interests of which are held by qualified holders 
(under Sec.  1.897(l)-1(d)), including through one or more 
partnerships.
* * * * *

0
Par. 5. Section 1.1445-2 is amended by:
0
1. Revising paragraph (b)(2)(i);
0
2. Adding paragraph (b)(2)(vi); and
0
3. Adding two sentences at the end of paragraph (e).
    The revisions and addition read as follows:


Sec.  1.1445-2  Situations in which withholding is not required under 
section 1445(a).

* * * * *
    (b) * * *
    (2) * * *
    (i) In general. The rules in this paragraph (b)(2)(i) apply for 
purposes of the transferor's certification of non-foreign status 
(including a certification of non-foreign status provided by a 
withholding qualified holder (as defined in Sec.  1.1445-1(g)(11)).
    (A) A transferee of a U.S. real property interest is not required 
to withhold under section 1445(a) if, before or at the time of the 
transfer, the transferor furnishes to the transferee a certification 
that is signed under penalties of perjury and--
    (1) States that the transferor is not a foreign person; and
    (2) Sets forth the transferor's name, identifying number and home 
address (in the case of an individual) or office address (in the case 
of an entity).
    (B) For purposes of paragraph (b)(2)(i)(A) of this section, a 
foreign person is a nonresident alien individual, foreign corporation, 
foreign partnership, foreign trust, or foreign estate, except that a 
withholding qualified holder (as defined in Sec.  1.1445-1(g)(11)) is 
not a foreign person. Additionally, a foreign corporation that has made 
a valid election under section 897(i) is generally not treated as a 
foreign person for purposes of section 1445. In this regard, see Sec.  
1.1445-7. Pursuant to Sec.  1.897-1(p), an individual's identifying 
number is the individual's Social Security number and any other 
person's identifying number is its U.S. employer identification number 
(EIN), or, if the transferor is a withholding qualified holder (as 
defined in Sec.  1.1445-1(g)(11)) that does not have a U.S. taxpayer 
identification number, a foreign tax identification number issued by 
its jurisdiction of residence. A certification pursuant to this 
paragraph (b) must be verified as true and signed under penalties of 
perjury by a responsible officer in the case of a corporation, by a 
general partner in the case of a partnership, and by a trustee, 
executor, or equivalent fiduciary in the case of a trust or estate. No 
particular form is needed for a certification pursuant to this 
paragraph (b), nor is any particular language required, so long as the 
document meets the requirements of this paragraph (b)(2)(i), except 
that, with respect to a certification submitted by a withholding 
qualified holder (as defined in Sec.  1.1445-1(g)(11)), the transferor 
must state on the certification that it is treated as a non-foreign 
person because it is a withholding qualified holder and must further 
specify whether it qualifies as a withholding qualified holder because 
it is a qualified holder under Sec.  1.897(l)-1(d) or a foreign 
partnership that satisfies the requirements of Sec.  1.1445-1(g)(11). 
Samples of acceptable certifications are provided in paragraph 
(b)(2)(iv) of this section.
* * * * *
    (vi) Form W-8EXP. A certification of non-foreign status may be made 
by a withholding qualified holder (as defined under Sec.  1.1445-
1(g)(11)) as provided in paragraph (b)(2)(i) of this section to certify 
its qualified holder status. A certification of non-foreign status 
under paragraph (b)(2)(i) of this section also includes a certification 
made on a Form W-8EXP (or its successor) that states that the 
transferor is treated as a non-foreign person because it is a 
withholding qualified holder and must further specify whether it 
qualifies as a withholding qualified holder because it is a qualified 
holder under Sec.  1.897(l)-1(d) or a foreign partnership that 
satisfies the requirements of Sec.  1.1445-1(g)(11). The certification 
must also meet all of the other requirements for a valid Form W-8EXP 
(or its successor) as provided on the form and the instructions to the 
form. A qualified holder may not provide a certification of non-foreign 
status on a Form W-9 (or its successor) as permitted in paragraph 
(b)(2)(v) of this section.
* * * * *
    (e) * * * Paragraphs (b)(2)(i) and (b)(2)(vi) of this section, 
apply with respect to dispositions of U.S. real property interests and 
distributions described in section 897(h) occurring on or after 
December 29, 2022. For dispositions of U.S. real property interests and 
distributions described in section 897(h) occurring before December 29, 
2022, see Sec.  1.1445-2(b)(2)(i) and (b)(2)(vi), as contained in 26 
CFR part 1, revised as of April 1, 2021.

0
Par. 6. Section 1.1445-5 is amended by revising paragraphs 
(b)(3)(ii)(A), (B), and (D) and adding two sentences at the end of 
paragraph (h) to read as follows:


Sec.  1.1445-5  Special rules concerning distributions and other 
transactions by corporations, partnerships, trusts, and estates.

* * * * *
    (b) * * *
    (3) * * *
    (ii) * * *
    (A) In general. For purposes of this section, an entity or 
fiduciary may treat any holder of an interest in the entity as a U.S. 
person if that interest-holder furnishes to the entity or fiduciary a 
certification stating that the interest-holder is not a foreign person, 
in accordance with the provisions of paragraph (b)(3)(ii)(B) of this 
section. In general, a foreign person is a nonresident alien 
individual, foreign corporation, foreign partnership, foreign trust, or 
foreign estate, except that a withholding qualified holder (as defined 
in Sec.  1.1445-1(g)(11)) is not a foreign person for purposes of this 
section.
    (B) Procedural rules. The rules in this paragraph (b)(3)(ii)(B) 
apply for purposes of the interest-holder's certification of non-
foreign status (including a certification of non-foreign status 
provided by a withholding qualified holder (as defined in Sec.  1.1445-
1(g)(11)).
    (1) An interest-holder's certification of non-foreign status must 
be signed under penalties of perjury and must state--
    (i) That the interest-holder is not a foreign person; and
    (ii) The interest-holder's name, identifying number, home address 
(in the case of an individual), or office address (in the case of an 
entity), and place of incorporation (in the case of a corporation).

[[Page 80066]]

    (2) For purposes of paragraph (b)(3)(ii)(B)(1) of this section, an 
individual's identifying number is the individual's Social Security 
number and any other person's identifying number is its U.S. employer 
identification number (see Sec.  1.897-1(p)), or, if the interest-
holder is a withholding qualified holder (as defined in Sec.  1.1445-
1(g)(11)) that does not have a U.S. taxpayer identification number, a 
foreign tax identification number issued by its jurisdiction of 
residence. The certification must be signed by a responsible officer in 
the case of a corporation, by a general partner in the case of a 
partnership, and by a trustee, executor, or equivalent fiduciary in the 
case of a trust or estate. No particular form is needed for a 
certification pursuant to this paragraph (b)(3)(ii), nor is any 
particular language required, so long as the document meets the 
requirements of this paragraph, except that, with respect to 
certification submitted by a withholding qualified holder (as defined 
in Sec.  1.1445-1(g)(11)), the transferor must state on the 
certification that it is treated as a non-foreign person because it is 
a withholding qualified holder and must further specify whether it 
qualifies as a withholding qualified holder because it is a qualified 
holder under Sec.  1.897(l)-1(d) or a foreign partnership that 
satisfies the requirements of Sec.  1.1445-1(g)(11). Samples of 
acceptable certifications are provided in paragraph (b)(3)(ii)(E) of 
this section.
    (3) An entity may rely upon a certification pursuant to this 
paragraph (b)(3)(ii)(B) for a period of two calendar years following 
the close of the calendar year in which the certification was given. If 
an interest holder becomes a foreign person (or no longer is treated as 
a withholding qualified holder (as defined in Sec.  1.1445-1(g)(11)) 
and therefore is no longer treated as a non-foreign person for purposes 
of withholding under section 1445 within the period described in the 
preceding sentence, the interest-holder must notify the entity before 
any further dispositions or distributions and upon receipt of such 
notice (or any other notification of the foreign status of the 
interest-holder) the entity may no longer rely upon the prior 
certification. An entity that obtains and relies upon a certification 
must retain that certification with its books and records for a period 
of three calendar years following the close of the last calendar year 
in which the entity relied upon the certification.
* * * * *
    (D) Form W-8EXP. A certification of non-foreign status can be made 
by a withholding qualified holder (as defined in Sec.  1.1445-1(g)(11)) 
as provided in this paragraph (b)(3)(ii) to certify its qualified 
holder status. A certification of non-foreign status under this 
paragraph (b)(3)(ii) also includes a certification made on a Form W-
8EXP that states that the interest-holder is treated as a non-foreign 
person because it is a withholding qualified holder and must further 
specify whether it qualifies as a withholding qualified holder because 
it is a qualified holder under Sec.  1.897(l)-1(d) or a foreign 
partnership that satisfies the requirements of Sec.  1.1445-1(g)(11). 
The certification must also meet all of the other requirements for a 
valid Form W-8EXP as provided on the form and the instructions to the 
form. A qualified holder may not provide a certification of non-foreign 
status on a Form W-9, as described in paragraph (b)(3)(iv) of this 
section.
* * * * *
    (h) * * * Paragraph (b)(3)(ii)(A) of this section applies with 
respect to dispositions of U.S. real property interests and 
distributions described in section 897(h) occurring on or after 
December 29, 2022. For dispositions of U.S. real property interests and 
distributions described in section 897(h) occurring before December 29, 
2022, see Sec.  1.1445-5(b)(3)(ii)(A), as contained in 26 CFR part 1, 
revised as of April 1, 2021.

0
Par. 7. Section 1.1445-8 is amended by revising paragraph (e) and 
adding two sentences after the first sentence in paragraph (j) to read 
as follows:


Sec.  1.1445-8  Special rules regarding publicly traded partnerships, 
publicly traded trusts and real estate investment trusts (REITs).

* * * * *
    (e) Determination of non-foreign status by withholding agent. A 
withholding agent may rely on a certification of non-foreign status 
pursuant to Sec.  1.1445-5(b)(3)(ii) to determine whether an interest 
holder is not a foreign person. Reliance on these documents will excuse 
the withholding agent from liability imposed under section 1445(e)(1) 
in the absence of actual knowledge that the interest holder is a 
foreign person. A withholding agent may also employ other means to 
determine the status of an interest holder, but, if the agent relies on 
such other means and the interest holder proves, in fact, to be a 
foreign person (or, is not a withholding qualified holder (as defined 
in Sec.  1.1445-1(g)(11)) and therefore is not treated as a non-foreign 
person for purposes of withholding under section 1445), then the 
withholding agent is subject to any liability imposed pursuant to 
section 1445 and the regulations thereunder for failure to withhold. 
See also Sec.  1.1445-5(b)(3)(ii)(B)(3) for the period during which a 
withholding agent may rely on a certification of non-foreign status 
submitted by a withholding qualified holder (as defined in Sec.  
1.1445-1(g)(11)), which applies under this paragraph (e).
* * * * *
    (j) * * * Paragraph (e) of this section applies with respect to 
distributions made on or after December 29, 2022. For distributions 
made before December 29, 2022, see Sec.  1.1445-8(e) as contained in 26 
CFR part 1, as revised April 1, 2021. * * *

0
Par. 8. Section 1.1446-1 is amended by revising the second sentence of 
paragraph (c)(2)(ii)(G) and by revising paragraph (c)(2)(ii)(H) to read 
as follows:


Sec.  1.1446-1  Withholding tax on foreign partners' share of 
effectively connected taxable income.

* * * * *
    (c) * * *
    (2) * * *
    (ii) * * *
    (G) * * * However, except as set forth in Sec.  1.1446-2(b)(4)(iii) 
(regarding withholding qualified holders (as defined in Sec.  1.1445-
1(g)(11)) and Sec.  1.1446-3(c)(3) (regarding certain tax-exempt 
organizations described in section 501(c)), the submission of Form W-
8EXP (or successor) will have no effect on whether there is a 1446 tax 
due with respect to such partner's allocable share of partnership ECTI. 
* * *
    (H) Foreign corporations, certain foreign trusts, and foreign 
estates. Consistent with the rules of this paragraph (c)(2) and 
paragraph (c)(3) of this section, a foreign corporation, a foreign 
trust (other than a foreign grantor trust described in paragraph 
(c)(2)(ii)(E) of this section), or a foreign estate may generally 
submit any appropriate Form W-8 (for example, Form W-8BEN-E or Form W-
8IMY) to the partnership to establish its foreign status for purposes 
of section 1446. In addition, a foreign entity may also submit a 
certification of non-foreign status (including a Form W-8EXP) described 
in Sec.  1.1445-5(b)(3)(ii) for purposes of documenting itself as a 
withholding qualified holder (as defined in Sec.  1.1445-1(g)(11)).
* * * * *

0
Par. 9. Section 1.1446-2 is amended by adding paragraph (b)(4)(iii) to 
read as follows:

[[Page 80067]]

Sec.  1.1446-2  Determining a partnership's effectively connected 
taxable income allocable to foreign partners under section 704.

* * * * *
    (b) * * *
    (4) * * *
    (iii) Special rule for qualified holders. With respect to a foreign 
partner that is a withholding qualified holder (as defined in Sec.  
1.1445-1(g)(11)), the foreign partner's allocable share of partnership 
ECTI does not include gain or loss that is not taken into account under 
Sec.  1.897(l)-1(b) and that is not otherwise treated as effectively 
connected with a trade or business in the United States. The 
partnership must have received from the partner a valid certificate of 
non-foreign status (including a Form W-8EXP) described in Sec.  1.1445-
2(b)(2)(i) or Sec.  1.1445-5(b)(3)(ii). See Sec.  1.1446-1(c)(2)(ii)(G) 
and (H) regarding documentation of withholding qualified holders.
* * * * *

0
Par. 10. Section 1.1446-7 is amended by adding two sentences at the end 
to read as follows


Sec.  1.1446-7  Applicability dates.

    * * * Sections 1.1446-1(c)(2)(ii)(G) and (H) and 1.1446-
2(b)(4)(iii) apply with respect to dispositions of U.S. real property 
interests and distributions described in section 897(h) occurring on or 
after December 29, 2022. For dispositions of U.S. real property 
interests and distributions described in section 897(h) occurring 
before December 29, 2022, see Sec. Sec.  1.1446-1(c)(2)(ii)(G) and (H), 
as contained in 26 CFR part 1, revised as of April 1, 2021.

Melanie R. Krause,
Acting Deputy Commissioner for Services and Enforcement.
    Approved: December 9, 2022

Lily Batchelder,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2022-27978 Filed 12-28-22; 8:45 am]
BILLING CODE 4830-01-P