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## Record

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- **Document type:** Agency decision

## Text

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Airs%3A690bb931c1e30f58. Public record. Not legal advice.