These synopses are intended only as aids to the reader in

HIGHLIGHTS

OF THIS ISSUE





Bulletin No. 2023–3

January 17, 2023

These synopses are intended only as aids to the reader in

identifying the subject matter covered. They may not be

relied upon as authoritative interpretations.

ADMINISTRATIVE

Notice 2023-10, page 403.

This notice provides that calendar year 2022 will be regarded

as a transition period for purposes of IRS enforcement and

administration of the modified de minimis exception for third

party settlement organizations (TPSO) and third party network transactions. With respect to calendar years beginning

before January 1, 2023, a TPSO is not required to report

payments in settlement of third party network transactions

with respect to a participating payee unless the amount to be

reported exceeds $20,000 and the number of such transactions with that participating payee exceeds 200.

EXCISE TAX

Notice 2023-2, page 374.

This notice announces forthcoming proposed regulations addressing the application of the stock repurchase excise tax

under section 4501 of the Internal Revenue Code, enacted

as part of Public Law 117-169, 136 Stat. 1818 (August 16,

2022), commonly referred to as the Inflation Reduction Act

of 2022. This notice describes certain rules and procedures

(i) clarifying the application of the excise tax to M&A transactions and corporate liquidations, (ii) dictating when a corporation must take into account “accelerated stock repurchases”

of its stock, (iii) addressing compensatory stock awards and

stock contributions to employer-sponsored plans, (iv) preventing inappropriate avoidance of the excise tax by certain

foreign corporations, and (v) on how to report and pay the

excise tax.

INCOME TAX

Announcement 2023-1, page 422.

This announcement notifies taxpayers of the applicable

reference standard required to be used to determine

Finding Lists begin on page ii.

the amount of the energy efficient commercial building property deduction allowed under § 179D of the

Internal Revenue Code, as amended by § 13303 of

Public Law 117-169, 136 Stat. 1818, 1947 (August

16, 2022), commonly known as the Inflation Reduction

Act of 2022 (IRA). This announcement identifies the

existing reference standard, affirms a new reference

standard, and clarifies when each of the two reference

standards will apply to taxpayers. The effective date of

this announcement is January 1, 2023.

Notice 2023-1, page 373.

This notice informs taxpayers that the Department of

the Treasury and the Internal Revenue Service (IRS) intend to propose regulations addressing the definitions

of certain terms in respect of the credit available under

section 30D of the Code, and lays out the expected

content of those regulations. The proposed regulations

will include definitions of the following terms, which are

relevant for new clean vehicles placed in service after

December 31, 2022:

1. Final Assembly;

2. North America;

3. Manufacturer’s Suggested Retail Price;

4. Classifications for categories of vehicles, including

vans, sport utility vehicles, pickup trucks, and other

vehicles; and

5. Placed in service.

Notice 2023-3, page 388.

This notice provides the optional 2023 standard mileage rates for taxpayers to use in computing the deductible costs of operating an automobile for business,

charitable, medical, or moving expense purposes. This

notice also provides the amount taxpayers must use

in calculating reductions to basis for depreciation taken under the business standard mileage rate, and the

maximum standard automobile cost that may be used

in computing the allowance under a fixed and variable

rate plan. Additionally, this notice provides the maximum fair market value of employer-provided automobiles first made available to employees for personal

use in calendar year 2023 for which employers may

use the fleet-average valuation rule in § 1.61-21(d)(5)

(v) or the vehicle cents-per-mile valuation rule in § 1.6121(e).

Notice 2023-7, page 390.

This notice announces the intention of the Department

of the Treasury and the Internal Revenue Service to issue proposed regulations addressing the application of

the corporate alternate minimum tax (CAMT), as added

to the Code by the Inflation Reduction Act of 2022. This

notice describes the rules intended to be included in

the forthcoming proposed regulations, including rules

relating to certain issues regarding subchapters C and

K of the Code, troubled corporations, groups of corporations filing a consolidated Federal income tax return, the depreciation of section 168 property, and the

treatment of certain Federal income tax credits under

the CAMT. The notice also provides a simplified method

for determining whether a corporation is an “applicable corporation” subject to the CAMT. Finally, the notice

provides a request for comments and the procedure for

submitting such comments.

Notice 2023-9, page 402.

This notice informs taxpayers that based on analysis

by the Department of Energy of representative qualified

commercial clean vehicles and comparable internal combustion engine vehicles, the Department of the Treasury

and the Internal Revenue Service (IRS) have reviewed the

incremental cost for all vehicles manufactured primarily

for use on public streets (street vehicles) in calendar year

2023. This analysis shows that the incremental cost of

all street vehicles that have a gross vehicle weight rating

of less than 14,000 pounds will be greater than $7,500

in calendar year 2023. Accordingly, the incremental cost

will not limit the available credit amount under § 45W for

street vehicles that have a gross vehicle weight rating

of less than 14,000 pounds and are placed in service in

calendar year 2023. In addition, this analysis provides an

incremental cost for several different classes of street

vehicles with a gross vehicle weight rating of 14,000

pounds or more in calendar year 2023. The IRS will accept a taxpayer’s reliance on the incremental cost published by the Department of Energy for the appropriate

class of street vehicle.

Notice 2023-11, page 404.

The Notice is intended to provide FATCA reporting relief

to Model 1 FFIs who have been unable to obtain US

TINs for their pre-existing accounts that are US reportable accounts; as part of the relief, the FFIs will also

provide information that the IRS can analyze to determine why these TINs are missing. The publication has

been coordinated with Treasury and the Service.

REG-100442-22, page 423.

This Notice of Proposed Rule Making contains two

parts. The first part concerns section 892, which provides foreign governments a limited exemption from

taxation. These proposed regulations provide guidance

regarding the treatment of certain foreign government

entities, including qualified foreign pension funds, as

controlled commercial entities for purposes of section

892. The second part concerns section 897, which generally taxes a foreign person’s gain on the sale of real

property located in the United States (“United States

Real Property Interest”). A United States Real Property

Interest includes interests in certain domestic corporations when a large portion of their assets comprise

United States Real Property Interests; however, interests in domestically controlled REITs and certain RICs

(Qualified Investment Entities) are not United States

Real Property Interests. These proposed regulations

describe how to determine when a Qualified Investment

Entity is domestically controlled, particularly when the

foreign person indirectly owns shares of the underlying

Qualified Investment Entity through partnerships or corporations, and when the Qualified Investment Entity’s

shares are held by a qualified foreign pension fund.

REG-146537-06, page 436.

The Department of the Treasury and the IRS are reopening the comment period for REG-146537-06, relating

to the exemption from taxation afforded to foreign governments under section 892.

Rev. Proc. 2023-8, page 407.

This revenue procedure modifies Rev. Proc. 2022-14,

2022-7 I.R.B. 502, to provide procedures under § 446

of the Internal Revenue Code and § 1.446-1(e) of the

Income Tax Regulations to obtain automatic consent of

the Commissioner of Internal Revenue to change methods of accounting for specified research or experimental expenditures to comply with § 174 of the Code, as

amended by § 13206 of Public Law 115-97, 131 Stat.

2054 (December 22, 2017), commonly referred to as

the Tax Cuts and Jobs Act.

Rev. Proc. 2023-10, page 411.

This revenue procedure prescribes the loss payment

patterns for the 2022 determination year and the

discount factors for the 2022 accident year for use

by insurance companies in computing discounted unpaid losses under § 846 of the Internal Revenue Code

and discounted estimated salvage recoverable under

§ 832.

Rev. Proc. 2023-11, page 417.

This revenue procedure modifies and supersedes Rev.

Proc. 2023-8. This revenue procedure contains guidance similar to Rev. Proc. 2023-8, but modifies the audit protection terms to make clear that taxpayers do

not receive audit protection with respect to the treatment of § 174 expenditures incurred prior to making

the change in the method of accounting if the year of

change is the year immediately subsequent to the first

taxable year in which § 174 becomes effective.

TD 9771, page 346.

Generally, a foreign person is taxed on the gain on the

sale of real property located in the United States (“United States Real Property Interests”). In addition, one

who purchases a United States Real Property Interest

from a foreign person is generally required to withhold

on the proceeds of the sale, unless an exception applies. Certain foreign pension funds (“qualified foreign

pension funds”) are not subject to tax on their sale of a

United States Real Property Interest, and similarly, the

purchaser of the real property from such a foreign pension fund is not subject to the withholding requirement.

The final regulation describes which foreign pension

funds are exempt from the tax on the sale of a United States Real Property Interest. The final regulation

also describes how a purchaser of a United States Real

Property Interest may ascertain that the seller is a qualified foreign pension fund, so that the purchaser is not

required to withhold on the proceeds of the sale.

The IRS Mission

Provide America’s taxpayers top-quality service by helping

them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all.

Introduction

The Internal Revenue Bulletin is the authoritative instrument

of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service

and for publishing Treasury Decisions, Executive Orders, Tax

Conventions, legislation, court decisions, and other items of

general interest. It is published weekly.

It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application

of the tax laws, including all rulings that supersede, revoke,

modify, or amend any of those previously published in the

Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements of

internal practices and procedures that affect the rights and

duties of taxpayers are published.

Revenue rulings represent the conclusions of the Service

on the application of the law to the pivotal facts stated in

the revenue ruling. In those based on positions taken in rulings to taxpayers or technical advice to Service field offices,

identifying details and information of a confidential nature are

deleted to prevent unwarranted invasions of privacy and to

comply with statutory requirements.

Rulings and procedures reported in the Bulletin do not have the

force and effect of Treasury Department Regulations, but they

may be used as precedents. Unpublished rulings will not be

relied on, used, or cited as precedents by Service personnel in

the disposition of other cases. In applying published rulings and

procedures, the effect of subsequent legislation, regulations,

court decisions, rulings, and procedures must be considered,

and Service personnel and others concerned are cautioned

against reaching the same conclusions in other cases unless

the facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.

This part includes rulings and decisions based on provisions

of the Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.

This part is divided into two subparts as follows: Subpart A,

Tax Conventions and Other Related Items, and Subpart B,

Legislation and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.

To the extent practicable, pertinent cross references to these

subjects are contained in the other Parts and Subparts. Also

included in this part are Bank Secrecy Act Administrative

Rulings. Bank Secrecy Act Administrative Rulings are issued

by the Department of the Treasury’s Office of the Assistant

Secretary (Enforcement).

Part IV.—Items of General Interest.

This part includes notices of proposed rulemakings, disbarment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative index

for the matters published during the preceding months. These

monthly indexes are cumulated on a semiannual basis, and are

published in the last Bulletin of each semiannual period.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

January 17, 2023 

Bulletin No. 2023–3

Part I

26 CFR 1.897(l)-1, 26 CFR 1.1441-3,

26 CFR 1.1445-2, 26 CFR 1.1445-5, 26

CFR 1.1445-8, 26 CFR 1.1446-7

SUPPLEMENTARY INFORMATION:

T.D. 9971

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, Pub. L. 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.

DEPARTMENT OF THE

TREASURY

Internal Revenue Service

26 CFR Part 1

Exception for Interests Held

by Foreign Pension Funds

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final regulations.

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 §§1.897(l)-1(g), 1.1441-3(c)(4)

(iii), 1.1445-2(e), 1.1445-5(h), 1.14458(j), 1.1446-7.

FOR FURTHER INFORMATION CONTACT: Arielle M. Borsos or Milton

Cahn at (202) 317-6937 (not a toll-free

­number).

Background

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. §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.

§1.897(l)-1(d)(9).

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

1

For consistency with other guidance, the final regulations adopt the term “foreign jurisdiction” instead of “foreign country.” See §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.

January 17, 2023

346

Bulletin No. 2023–3

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 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

Bulletin No. 2023–3

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 §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

347

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

January 17, 2023

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 §301.77012(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 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

§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 part-

January 17, 2023

nership 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 §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 §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 §1.897-1(d)(3). Whether

an interest in an entity constitutes one of

the interests listed under §1.897-1(d)(3) or

is instead disregarded is determined based

on the facts, taking into account general

tax principles.

348

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.

§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.

§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

Bulletin No. 2023–3

fails to meet the requirements in proposed

§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 §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 requirement to qualify for the

section 897(l) exemption rather than as

part of the definitions. §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). §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 ear-

Bulletin No. 2023–3

liest date during an uninterrupted period

ending on the date of the disposition or

distribution during which it qualified as a

QFPF or a QCE. §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. §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”). §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

349

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 §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 §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

January 17, 2023

the qualified holder rule for any failure to

meet the requirements in §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 taxfree 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);

§§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-tomarket 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

January 17, 2023

that is attributable to one or more qualified segregated accounts maintained by

the qualified holder. Prop. §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. §1.897(l)-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. §1.897(l)-1(d)(13)(ii); Prop.

§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

350

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.

§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

§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

Bulletin No. 2023–3

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 §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.

§1.897(l)-1(c)(2)(ii)(A). The language in

proposed §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 gov-

Bulletin No. 2023–3

ernment-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,

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. Ac-

351

cordingly, 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. §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. §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. §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. §1.897(l)1(c)(2)(ii)(A).

2. Purpose of Eligible Fund

Proposed §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

January 17, 2023

pension benefits (the “85 percent threshold”). For this purpose, qualified benefits

were defined as retirement, pension, or

ancillary benefits. Prop. §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 propor-

January 17, 2023

tionate 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. §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 II.A.2.c. and II.A.2.d. of this

352

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. §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 §1.897(l)-1(c)(3)(iii)

for the requirement that an eligible fund

maintain records to show it meets the requirements of §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

Bulletin No. 2023–3

basis. §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. §1.897(l)-1(c)(2)(ii)(C)(3).

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.

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.

d. 48-month average alternative

a. Retirement and pension benefits

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.

§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

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

3. Qualified Benefits

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 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. §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 §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

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.

2

Bulletin No. 2023–3

353

January 17, 2023

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 lumpsum).

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. §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

January 17, 2023

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

354

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

§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 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. §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

Bulletin No. 2023–3

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.

§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. §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. §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. §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.

§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

Bulletin No. 2023–3

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. §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. §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 mak-

355

ing 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 §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

§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

January 17, 2023

status as a current or former employee.

With respect to an employer fund, proposed §1.897(l)-1(d)(12)(i)(B) defined a

qualified recipient as a current 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

§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. §1.897(l)-1(c)(2)(ii)(C). The comment requested that proposed §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

January 17, 2023

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). §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.

§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 §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

356

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 §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 §1.897(l)-1(c)(2)(ii)(E)

(1) (previously at proposed §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 §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. §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 §1.897(l)-1(c)

(iv)(B), or such information is otherwise

available, to one or more governmental

units. Prop. §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 (satis-

Bulletin No. 2023–3

fying proposed §1.897(l)-1(c)(iv)(C)), but

does not actually provide such information (not fulfilling proposed §1.897(l)-1(c)

(iv)(B)), and requested that the final regulations clarify how these provisions are

intended to work.

Proposed §1.897(l)-1(c)(iv)(B) and

proposed §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 (§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

is otherwise available to the relevant tax

authorities or other relevant governmental

units. §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

Bulletin No. 2023–3

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 §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 §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

357

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

§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). §1.14451(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 §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. §§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 §1.1445-2(b)(2)(i), with certain modifications. Specifically, the requirements

under §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

January 17, 2023

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 §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 §1.14452(b)(3) and the rules pertaining to liability

of agents in §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

§1.1445-2(b)(2)(vi). Before the release of

revised Form W-8EXP, a certification of

non-foreign status described in §1.14452(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

§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 §§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 §1.1441-3(c)(4)

and are instead subject only to the requirements of section 1441. Prop. §1.14413(c)(4)(iii). Because a qualified holder is

treated as a foreign person for purposes

of section 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,

January 17, 2023

certain changes should be made to proposed §1.1441-3(c)(4) to reach the result

intended by the proposed regulations.

Rather than provide that the coordination

rules under §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. §1.1441-3(c)(4)(i)

(B)(2), §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. §1.1441-3(c)

(4)(i)(A), §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 §1.1441-3(c)(4)(i)(A) or §1.14413(c)(4)(i)(B), but a USRPHC that is a

REIT or other QIE must follow the coordination provision in §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);

§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

358

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 §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, §1.897(l)-1(a) provides that the

definitions and requirements in §1.897(l)-

Bulletin No. 2023–3

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 §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 §1.897(l)-1(g)(2),

the rule in §1.897(l)-1(b)(1), the qualified

holder rule in §1.897(l)-1(d) (previously proposed §1.897(l)-1(d)(11)), as well

as the definitions of governmental unit

(§1.897(l)-1(e)(5)) and QCE (§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 §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.

Bulletin No. 2023–3

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 §§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

§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 §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 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

§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. §1.1441-3(c)

(4)(i), §1.1441-3(c)(4)(i)(B)(2), §1.14413(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.

§1.1441-3(c)(4)(i)(B)(2), §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 For-

359

eign 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 §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 §§1.1445-2,

1.1445-5, 1.1445-8, and 1.1446-1

Sections 1.1445-2, 1.1445-5, 1.14458, 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 §§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

January 17, 2023

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-10982617) 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

January 17, 2023

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.

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:

360

PART 1—INCOME TAXES

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).

*****

Par. 2. Section 1.897(l)-1 is added to

read as follows:

§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 §§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

Bulletin No. 2023–3

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

Bulletin No. 2023–3

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

361

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 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 deter-

January 17, 2023

mining 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 §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.

January 17, 2023

(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—

362

(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

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

Bulletin No. 2023–3

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 §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)

Bulletin No. 2023–3

(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 cor-

363

poration 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 that

are neither ancillary benefits (within the

January 17, 2023

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,

January 17, 2023

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

364

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

Bulletin No. 2023–3

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 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

Bulletin No. 2023–3

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 employ-

365

ees 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 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,

January 17, 2023

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

January 17, 2023

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 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,

366

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

Bulletin No. 2023–3

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, 2

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