Taxes

Foreign Pension Funds Exempt From Tax On Real Property

Final regs clarify the tax exception in section 897(l) for foreign pension funds that invest in U.S. real property. To qualify for the exception, the foreign pension fund must comply with restrictions on establishment, funding, benefits, and beneficiaries.

Published on December 29, 2022, T.D. 9971 contains final regs on gain or loss of a qualified foreign pension fund (QFPF) attributable to United States real property interests (USRPIs). The final regs also include rules for certifying that a QFPF is not subject to withholding on dispositions and distributions related to USRPIs. The regs affect USRPI holders and withholding agents that are required to withhold tax on dispositions and distributions related to the USRPI.

Proposed regs under sections 897(l), 1441, 1445, and 1446 were published on June 7, 2019 (REG-109826-17). The proposed regs contained rules relating to the qualification for the tax exemption under section 897(l) and rules relating to withholding requirements under sections 1441, 1445, and 1446 for dispositions of USRPIs by foreign pension funds and their subsidiaries and distributions described in section 897(h). T.D. 9971 finalizes the proposed regs.

Section 897(l) was added to the code by the Protecting Americans From Tax Hikes Act of 2015 (P.L. 114-113) and amended by the Tax Technical Corrections Act of 2018 (P.L. 115-141). The provisions were generally effective for USRPI dispositions and distributions occurring after the Protecting Americans From Tax Hikes Act’s enactment date of December 18, 2015.

Section 897ection 897(a)-(l) addresses taxation of foreign persons that earn income from USRPIs. The general rule in section 897(a) provides that gain or loss of a nonresident alien individual or a foreign corporation from the disposition of a USRPI is taken into account as if the taxpayer were engaged in a trade or business within the United States and the gain or loss were effectively connected with the trade or business.

Section 897(h) provides special rules for distributions by qualified investment entities. A distribution by a qualified investment entity to a nonresident alien individual, foreign corporation, or another qualified investment entity is, to the extent attributable to gain from sale or exchange by the qualified investment entity of USRPIs, treated as gain recognized by the recipient from the sale or exchange of a USRPI.

A qualified investment entity is any real estate investment trust, and any regulated investment company that is a United States real property holding corporation (or that would be if the exceptions in section 897(c)(3) and (h)(2) did not apply to interests in REITs or RICs).

Section 897(l)(1)(3) carves out an exception to tax for QFPFs. A QFPF is not treated as a nonresident alien individual or foreign corporation. Moreover, an entity wholly owned by a QFPF (a qualified controlled entity (QCE) in the regs) is treated as a QFPF.

Section 897(l)(2) defines QFPF as any trust, corporation, or other organization or arrangement that has five characteristics listed in section 897(l)(2)(A)(E). The entity or arrangement:

  • is created or organized under the law of a country other than the United States;
  • is established by:
  • the country (or a political subdivision) to provide retirement or pension benefits to participants or beneficiaries that are current or former employees (including self-employed individuals), or persons designated by the employees, because of services rendered by the employees to their employers; or
  • employers to provide retirement or pension benefits to participants or beneficiaries that are current or former employees (including self-employed individuals), or persons designated by the employees, in consideration for services rendered by the employees to the employers;
  • does not have a single participant or beneficiary with a right to more than 5 percent of the entity or organization’s assets or income;
  • is subject to government regulation and provides annual information about its beneficiaries (or the information is otherwise available) to the tax authorities in the country in which it is established or operates; and
  • is subject to tax laws of the country in which it is established or operates providing that:
  • contributions to the entity or arrangement that would otherwise be subject to tax are deductible, excluded from gross income, or taxed at a reduced rate; or
  • taxation of the entity or arrangement’s investment income is deferred, excluded from gross income, or taxed at a reduced rate.

Section 897(l)(3) contains a grant of authority to prescribe regs necessary to carry out section 897(l). T.D. 9971 is an exercise of that authority.

Reg. Section 1.897(l)-1Reg. section 1.897(l)-1(a)-(g) provides guidance on the exception to taxation under section 897 for interests held by foreign pension funds. The overview in reg. section 1.897(l)-1(a) describes the regs as providing rules regarding the exception from tax under section 897 for qualified holders of USRPIs.

The definitions and requirements apply only to clarify this exception, and taxpayers should not draw any additional inference from the rules, including the meaning of a pension fund. The guidance contains:

  • a general rule excepting qualified holders from section 897;
  • requirements that an eligible fund must satisfy to be treated as a QFPF.
  • requirements that a QFPF or QCE must satisfy to be treated as a qualified holder;
  • 14 definitions;
  • 12 examples; and
  • applicability dates.

For rules applicable to a QFPF or QCE claiming an exemption from withholding under chapter 3, see generally reg. sections 1.1441-3, 1.1445-2, -5, -8, 1.1446-1, and -2.

Tax Exception

The general rule in subparagraph (b)(1) provides that gain or loss of a qualified holder from the disposition of a USRPI, including gain from a distribution described in section 897(h), is not subject to tax under section 897(a).

Subparagraph (b)(2) limits application of the general rule solely to gain or loss attributable to one or more qualified segregated accounts maintained by a qualified holder. Guidance in paragraphs (c)-(e) describes the eligible funds, qualified holders, qualified benefits, qualified recipients, and segregated accounts that must be present to qualify for the tax exception.

QFPF

The tax exception in section 897(l) is available to QFPFs, and reg. section 1.897(l)-2(c)(1)-(3) provides the requirements for QFPF status. Under subparagraph (c)(1), an eligible fund is a QFPF if it satisfies the requirements of paragraph (c).

Subparagraph (c)(2) provides guidance on the application of the requirements of section 897(l)(2) to an eligible fund. An eligible fund is defined in subparagraph (e)(2) as a trust, corporation, or other organization or arrangement that maintains one or more qualified segregated accounts.

Subdivision (c)(2)(i)-(v) tracks the five requirements for QFPF status in section 897(l)(2)(A)(E). An eligible fund that meets these requirements is a QFPF eligible for the tax exception in paragraph (b) if the qualified holder requirements in paragraph (d) are met.

Foreign Jurisdiction

Under subdivision (c)(2)(i) and section 897(l)(2)(A), an eligible fund must be created, organized, or established under the laws of a foreign jurisdiction. A governmental unit is always treated as created or organized in that government’s jurisdiction.

Establishment and Purpose

Subdivision (c)(2)(ii) provides detailed guidance on the requirement in section 897(l)(2)(B) that the fund be established by a government or an employer for the purpose of providing retirement benefits. Subdivision (c)(2)(ii)(A)-(E) includes guidance on:

  • the parties establishing the fund;
  • the fund’s purpose;
  • valuation of the fund’s benefits;
  • treatment of fund distributions as benefits; and
  • treatment of employers and employees.

Establishment. An eligible fund must be established by a governmental unit or a private employer. The fund may be established by, or at the direction of, the foreign jurisdiction in which it is created or organized. Alternatively, the fund may be established by one or more employers (including a governmental unit in its capacity as an employer).

Under a tiebreaker rule in subdivision (c)(2)(ii)(A)(2), an eligible fund that is described in subdivision (c)(2)(ii)(A)(1)(i) and (ii) as established by both a governmental unit and a private employer is treated solely as established by a private employer.

Subdivision (c)(2)(ii)(A)(3) addresses the role of parties other than the foreign jurisdiction or employer that establishes the fund. The determination of whether an eligible fund is established by, or at the direction of, a foreign jurisdiction or an employer is made without regard to whether persons that are not the foreign jurisdiction or employer administer or otherwise provide services to the eligible fund (including holding assets in a qualified segregated account on behalf of the eligible fund).

Purpose. Subdivision (c)(2)(ii)(B) provides that an eligible fund was established for the purpose of providing retirement or pension benefits if three benefit percentage thresholds are met:

  • 100 percent of benefits that the eligible fund actually provides are qualified benefits provided to qualified recipients;
  • 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
  • no more than 5 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.

Present Value. Subdivision (c)(2)(ii)(C) provides guidance on complying with the present value determinations for the 85 and 5 percent thresholds in subdivision (c)(2)(ii)(B).

To satisfy the 85 and 5 percent requirements in subdivision (c)(2)(ii)(B)(2) and (3), 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 the eligible fund is expected to exist. An eligible fund may use any reasonable method for performing the present valuation.

An eligible fund that does not satisfy the 85 and 5 percent requirements of subdivision (c)(2)(ii)(B)(2) or (3) based on the present value determination under subdivision (c)(2)(ii)(C)(1) may satisfy those requirements based on an alternative 48-month calculation described in subdivision (c)(2)(ii)(C)(2). The alternative calculation 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 value determination, satisfies the 85 and 5 percent requirements.

The determination of this average must be based on the valuations described in subdivision (c)(2)(ii)(C)(1) 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 must be calculated using a weighted average in which values are adjusted if the valuations apply to different periods (as described in subdivision (c)(2)(ii)(C)(3)) because an eligible fund performs them more often than annually.

If an eligible fund has been in existence for less than 48 months, the alternative valuation is applied to the shorter period that the fund has been in existence.

The alternative calculation may be satisfied based on any reasonable determination of present value for any period that starts before the date that the present value requirements of subdivision (c)(2)(ii)(C) first apply to an organization or arrangement and ends on or before December 29, 2022.

Subdivision (c)(2)(ii)(C)(3) requires use of a recent present valuation when section 897 dispositions or distributions occur. An eligible fund must use the present value determination made as of the most recent valuation under subdivision (c)(2)(ii)(C)(1) or the alternative calculation in subdivision (c)(2)(ii)(C)(2) (to the extent that the eligible fund did not satisfy the 85 and 5 percent requirements in the most recent valuation) to meet the 85 and 5 percent requirements for dispositions of USRPIs or section 897(h) distributions that occur in the 12 months after the most recent valuation, or until a new present value determination is made, whichever comes first.

Distribution Exceptions. Subdivision (c)(2)(ii)(D)(1)-(3) provides that the following distributions from eligible funds are not taken into account to determine whether the fund satisfies the 100, 85, and 5 percent threshold requirements in subdivision (c)(2)(ii)(B):

  • A loan to a qualified recipient under terms set by the eligible fund, other than a loan on 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 the foreign jurisdiction.
  • A distribution permitted by foreign jurisdiction law made before the participant or beneficiary reaches the retirement age (as determined under foreign law), 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 foreign jurisdiction law.
  • A withdrawal of funds before the participant or beneficiary reaches the retirement age (as determined under foreign law) to satisfy a financial need (under principles similar to the U.S. hardship distribution rules in reg. section 1.401(k)-1(d)(3)) as permitted under foreign jurisdiction laws, provided the distribution (or at least the portion of the distribution exceeding basis) is subject to tax and penalty in the foreign jurisdiction.

Employers and Employees. Subdivision (c)(2)(ii)(E)(1)-(3) provides guidance on identifying employers and employees. A self-employed individual is treated as both an employer and an employee. Employees of an individual, trust, corporation, or partnership that is a member of an employer group (as defined in subparagraph (e)(3)) are treated as employees of each member of the group. An eligible fund established by a trade union, professional association, or similar group, either alone or in combination with an employer or group of employers, is treated as established by any employer that funds the eligible fund.

No 5 Percent Beneficiary

Subparagraph (c)(2)(iii) repeats the rule in section 897(l)(2)(C) providing that an eligible fund may not have a single qualified recipient that has a right to more than 5 percent of the fund’s assets or income. An individual is considered to have a right to the same fund assets or income to which any person who bears a relationship to the individual described in section 267(b) or 707(b) has a right.

Regulation and Information Reporting

Subparagraph (c)(2)(iv) requires an eligible fund to be subject to government regulation and information reporting as provided in section 897(l)(2)(D). An eligible fund must be subject to government regulation and must annually provide to the foreign jurisdiction’s relevant tax authorities (or other relevant governmental units) information about qualified benefits provided to qualified recipients, or that information must otherwise be available to the tax authorities (or other governmental units).

An eligible fund is not treated as failing to satisfy the regulation and reporting requirements of subdivision (c)(2)(iv) if the fund is not required to provide information to the tax authorities (or other governmental units) in years in which no qualified benefits are provided to qualified recipients.

An eligible fund that is described in subdivision (c)(2)(ii)(A)(1)(i) as established by a foreign jurisdiction is deemed to satisfy the regulation and information reporting requirements of subdivision (c)(2)(iv).

Preferential Tax Treatment

Subdivision (c)(2)(v)(A)-(E) addresses the requirement in section 897(l)(2)(E) related to foreign jurisdiction tax treatment of an eligible fund’s contributions and investment income. Under subdivision (c)(2)(v)(A), the tax laws of the foreign jurisdiction in which the eligible fund is established or operates generally must provide that, because of the fund’s status as a retirement or pension fund, either:

  • contributions to the fund that would otherwise be subject to tax are deductible, excluded from gross income, or taxed at a reduced rate; or
  • the fund’s investment income is tax-deferred, excluded from gross income, or taxed at a reduced rate.

Under subdivision (c)(2)(v)(B), an eligible fund is treated as satisfying the preferential tax treatment requirement of subdivision (c)(2)(v)(A) in a tax year if, under the tax laws of the foreign jurisdiction in which the eligible fund is established or operates:

  • at least 85 percent of contributions to the fund are subject to the tax treatment described in subdivision (c)(2)(v)(A)(1); or
  • at least 85 percent of the fund’s investment income is subject to the tax treatment described in subdivision (c)(2)(v)(A)(2).

Under subdivision (c)(2)(v)(C), an eligible fund is treated as satisfying the preferential tax treatment requirements if it is exempt from the foreign jurisdiction’s income tax or if the foreign jurisdiction has no income tax.

Under subdivision (c)(2)(v)(D), an eligible fund that does not receive the tax treatment described in either subdivision (c)(2)(v)(A)(1) or (2) is nonetheless treated as satisfying the requirement of subdivision (c)(2)(v)(A) if it establishes that each of the following conditions described in subdivision (c)(2)(v)(D)(1) and (2) are satisfied:

  • 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 because of its status as a retirement or pension fund; and
  • the preferential tax regime has a substantially similar effect as the tax treatment described in paragraphs (c)(2)(v)(A)(1) or (2).

Under subdivision (c)(2)(v)(E), 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.

Operating Rules

Subparagraph (c)(3) provides operating rules for applying the QFPF requirements in subparagraph (c)(2).

An organization or arrangement is treated as a single entity in determining whether the requirements of subparagraph (c)(2) are satisfied, except that each person or governmental unit that is part of, or party to, the organization or arrangement must independently satisfy the foreign jurisdiction establishment requirements of subdivision (c)(2)(i).

The determination of whether an eligible fund satisfies the requirements of subparagraph (c)(2) is made solely based on:

  • 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.

All assets held by an eligible fund in qualified segregated accounts (as defined in subdivision (e)(13)(ii)) are treated as a single qualified segregated account.

Assets held by a partnership are treated as held proportionately by its partners; and activities conducted by a partnership are treated as conducted by its partners.

An eligible fund that claims the exemption under section 897(l) must have records sufficient to establish that it satisfies the requirements of subparagraph (c)(2) (see section 6001 and reg. section 1.6001-1 for record maintenance requirements).

Qualified Holder

Paragraph (d) provides requirements for a QFPF and a QCE to be considered a qualified holder of a USRPI. A QCE is defined in subparagraph (e)(9) as a trust or corporation created or organized under the laws of a foreign jurisdiction all the interests of which are held by one or more QFPFs directly, or indirectly through one or more QCEs. Subparagraph (e)(10) defines a QFPF as an eligible fund that satisfies the requirements of paragraph (c). Subparagraph (e)(11) defines qualified holder as a QFPF or QCE that satisfies the requirements of paragraph (d).

Under the general rule in subparagraph (d)(1), in the event of a section 897(a) disposition or section 897(h) distribution, a QFPF or QCE is a qualified holder of a USRPI only if it satisfies the requirement of subparagraph (d)(2) or (3).

Alternative Tests

The requirement in subparagraph (d)(2) is satisfied if the QFPF or QCE owned no USRPIs as of the earliest date in an uninterrupted period ending on the date of the disposition or distribution during which the QFPF or QCE satisfied the QFPF requirements of subparagraph (c)(2) or QCE requirements of subparagraph (e)(9).

Alternatively, the requirements of subparagraph (d)(3) are satisfied if the QFPF or QCE continuously satisfies the requirements of subparagraphs (c)(2) or (e)(9) for the duration of a testing period that ends on the date of the disposition or distribution. The testing period is whichever of the following periods is the shortest:

  • the period beginning on December 18, 2015, and ending on the date of the disposition or the distribution;
  • the 10-year period ending on the date of the disposition or the distribution; and
  • the period beginning on the date the entity (or its predecessor) was created or organized and ending on the date of the disposition or distribution.

The qualified holder requirement is intended to prevent avoidance of section 897(a) by having QFPFs indirectly acquire USRPIs held by foreign corporations that would not have qualified for the section 897(l) exception. To be a qualified holder, a QFPF or QCE must satisfy one of two alternative tests at the time of the USRPI disposition or section 897(h) distribution.

Under the first test in subparagraph (d)(2), a QFPF or QCE is a qualified holder if it owns no USRPIs as of the earliest date of a period ending on the disposition or distribution date during which it qualified as a QFPF or QCE. Alternatively, if a QFPF or QCE held USRPIs as of the earliest date of that period, it is a qualified holder if it satisfies the testing period requirement in subparagraph (d)(3).

Transition Rules

Subparagraph (d)(4) provides two transition rules for satisfying the qualified holder requirements in subparagraphs (d)(2) and (3).

Under subdivision (d)(4)(i), for any period from December 18, 2015, to the date on which the requirements of subparagraph (c)(2) or (e)(9) first apply to a QFPF or QCE under the applicability dates in paragraph (g) (but no later than December 29, 2022, for subparagraph (c)(2), and no later than June 6, 2019, for subparagraph (e)(9)), the QFPF or QCE is deemed to satisfy the requirements of subparagraphs (c)(2) and (e)(9) under subparagraphs (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 using a consistent method for valuations).

Under subdivision (d)(4)(ii), the determination of whether a corporation or trust is a QCE meeting the qualified holder tests in subparagraphs (d)(2) and (3) will not include stock or interests held directly or indirectly by any person that provides services to the corporation or trust, provided that the stock or interests are, in the aggregate, no more than 5 percent (by vote or value) of the stock or interests of the corporation or trust. This rule applies to interests held during a transition period from December 18, 2015, to February 27, 2023.

The second transition rule does not apply to determine QCE status under subparagraph (e)(9) at the time of a USRPI-related disposition or distribution. Its application is limited to cases in which a trust or corporation failed to qualify as a QCE during the transition period solely because of a de minimis interest owned by a person that provides services to the QCE, like a manager or director.

The transition rule allows the trust or corporation to eliminate the service provider’s ownership within the transition period and avoid having to apply the qualified holder tests in subparagraph (d)(2) or (3) by reference to the date the service provider’s interest is eliminated. Any disposition of USRPIs during the period in which the trust or corporation had the service provider as an interest holder will not qualify for the section 897(l) exception.

Definitions

Paragraph (e) provides 14 definitions.

Subparagraph (e)(1) defines ancillary benefits to include:

  • 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;
  • 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
  • other health-related or unemployment benefits that are similar to the benefits described above.

Ancillary benefits do not include any benefits that could also be defined as retirement and pension benefits within the meaning of subparagraph (e)(14).

As noted, subparagraph (e)(2) defines an eligible fund as a trust, corporation, or other organization or arrangement that maintains one or more qualified segregated accounts.

Subparagraph (e)(3) defines employer group as all individuals, trusts, partnerships, and corporations with a relationship to each other specified in sections 267(b) or 707(b).

Subparagraph (e)(4) defines foreign jurisdiction as a jurisdiction other than the United States, including a country, state, province, political subdivision of a foreign country, or a territory of the United States.

Subparagraph (e)(5) defines governmental unit as 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.

Subparagraph (e)(6) defines non-ancillary benefits as benefits that are neither ancillary benefits (within the meaning of subparagraph (e)(1)) nor retirement and pension benefits (within the meaning of subparagraph (e)(14)) 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.

Subparagraph (e)(7) defines organization or arrangement as one or more trusts, corporations, governmental units, or employers.

Subparagraph (e)(8) defines qualified benefits as 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 QFPF are limited by the thresholds in subdivision (c)(2)(ii)(B).

As noted, subparagraph (e)(9) defines a QCE as a trust or corporation created or organized under the laws of a foreign jurisdiction all the interests of which are held by one or more QFPFs directly or indirectly through one or more QCEs; subparagraph (e)(10) defines a QFPF as an eligible fund that satisfies the requirements of paragraph (c); and subparagraph (e)(11) defines qualified holder as a QFPF or QCE that satisfies the requirements of paragraph (d).

Subparagraph (e)(12) provides a definition of qualified recipient that varies depending on whether the eligible fund was established by a foreign government or an employer.

For a government-established eligible fund described in subdivision (c)(2)(ii)(A)(1)(i), a qualified recipient is any person eligible to be treated as a participant or beneficiary of the eligible fund and any person designated by that participant or beneficiary to receive qualified benefits.

For an employer-established eligible fund described in subdivision (c)(2)(ii)(A)(1)(ii), a qualified recipient is a current or former employee, a spouse of a current or former employee, and any person designated by those participants or beneficiaries to receive qualified benefits.

To the extent not already described in subdivision (e)(12)(i)(B) as an employer-established eligible fund described in subdivision (c)(2)(ii)(A)(1)(ii), a qualified recipient is also any person eligible to be treated as a participant or beneficiary of the fund and any person designated by that participant or beneficiary to receive qualified benefits, so long as those recipients do not exceed 5 percent of the eligible fund’s total qualified recipients or have a right to more than 5 percent of the assets or income of the eligible fund.

An eligible fund must make this 5 percent determination at least annually using any reasonable method. A fund must use its most recent determination for dispositions of USRPIs or section 897(h) distributions occurring in the 12 months after that determination, or until a new determination is made, whichever comes first.

A person is treated as designating another person to receive qualified benefits if the second person is, by reason of a relationship or other status with the first person, entitled to receive benefits under the fund’s terms or the laws of the foreign jurisdiction, whether or not the first person expressly designated the second person as a beneficiary.

Subparagraph (e)(13) defines a qualified segregated account generally as an identifiable pool of assets maintained by an eligible fund or a QCE for the sole purpose of funding and providing qualified benefits to qualified recipients. The sole purpose test for eligible funds is slightly different than for QCEs.

Eligible Fund Assets. 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 fund’s terms or the laws of the foreign jurisdiction require that all assets in the pool, and all income earned from the assets, be used exclusively to provide qualified benefits to qualified recipients or to satisfy fund expenses, and that fund assets or income may not inure to the benefit of a person other than a qualified recipient.

However, 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 (upon plan termination or dissolution after all obligations to qualified recipients and creditors have been satisfied, or because the qualified recipients’ benefits fail to vest) to the governmental unit or employer in accordance with applicable foreign law, is ignored as long as contributions to the plan are not more than necessary to fund qualified benefits provided to qualified recipients.

QCE Assets. Assets of a QCE are treated as an identifiable pool of assets maintained for the sole purpose of funding qualified benefits to qualified recipients if both of the following requirements related to net earnings and dissolution are satisfied.

All net earnings of the QCE must be credited to its own account or to the qualified segregated account of a QFPF or another QCE, and no portion of the QCE’s net earnings may inure to the benefit of a person other than a qualified recipient. Upon dissolution, all QCE assets, after satisfaction of liabilities to persons having interests in the entity solely as creditors, must vest in a qualified segregated account of a QFPF or another QCE.

Subparagraph (e)(14) defines retirement and pension benefits as distributions to qualified recipients that are made:

  • after the qualified recipient reaches retirement age as determined under the laws in the foreign jurisdiction (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, including any distribution 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.

Examples

Reg. section 1.897(l)-1(f) provides 12 examples that illustrate the treatment of a QFPF that disposes of a USRPI, operation of the qualified holder requirements, and calculation of benefit present values. The examples will be covered in a future article.

Applicability Dates

Reg. section 1.897(l)-1(g) provides applicability dates. The general rule in subparagraph (g)(1) provides that reg. section 1.897(l)-1 applies to dispositions of USRPIs and distributions described in section 897(h) occurring on or after December 29, 2022. Under subparagraph (g)(2), subparagraph (b)(1) (tax exception), paragraph (d) (qualified holder rules), subparagraph (e)(5) (definition of governmental unit), and subparagraph(e)(9) (definition of QCE) apply to dispositions of USRPIs and section 897(h) distributions occurring on or after June 6, 2019 (the date the proposed regs were filed with the Federal Register).

An early application rule in subparagraph (g)(3) provides that an eligible fund may choose to apply these regs to dispositions and distributions occurring between December 18, 2015, and December 29, 2022, provided that the eligible fund, and all persons bearing a relationship to it described in section 267(b) or 707(b), consistently apply the rules for all relevant years. An eligible fund that chooses to apply the early application rule must apply the transition rule principles of subdivision (d)(4)(i) to any valuation requirements on dates before December 18, 2015.

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