Proposed regulations provide comprehensive guidance on qualified foreign pension funds

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June 2019

Overview

Treasury and the IRS released proposed regulations on June 6 addressing qualified foreign pension funds (QFPFs) under Section 897(l).  The proposed regulations relate to legislation enacted in 2015 that effectively provides that ‘qualified foreign pension funds’ and entities wholly owned by a QFPF are exempt from a provision adopted as part of the Foreign Investment in Real Property Tax Act of 1980 (commonly referred to as FIRPTA).  That provision generally treats gains realized by non-US persons from the disposition of US real property interests (USRPIs) as income effectively connected with the conduct of a US trade or business and, therefore, subject to net income taxation.  Section 897(l) treats QFPFs as US persons and, therefore, not subject to Section 897 and related FIRPTA rules.

The proposed regulations provide guidance regarding the definition of a QFPF, the application to entities owned by foreign pension funds, and certain transactions that Treasury and the IRS view as potentially abusive.  In addition, the proposed regulations make changes to the withholding regulations under Sections 1441, 1445, and 1446, generally providing for exemptions from withholding for QFPFs and procedures to certify the eligibility for such exemptions.

The proposed regulations contain 49 pages of preamble – much of it responsive to comments received by Treasury and the IRS – and 26 pages of regulatory text.  The regulations generally are proposed to be effective as of the date of publication of final regulations in the Federal Register (with some exceptions), but the preamble provides that a taxpayer may rely on the proposed regulations prior to finalization provided that the taxpayer applies them consistently and accurately. 

The takeaway

The proposed regulations provide comprehensive guidance under Section 897(l).  They generally provide a flexible and reasoned approach to the definition of a QFPF that is responsive to numerous comments received by Treasury and the IRS.

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Steve Nauheim

Managing Director, PwC US

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