On December 18, 2015, then-President Barack Obama signed into law the “Protecting Americans from Tax Hikes (PATH) Act of 2015,” which included the addition of an exemption for qualified foreign pension funds (“QFPFs”) from U.S. tax on the sale of a U.S. real property interest (“USRPI”). Prior to its effective date of December 18, 2015, the sale of a USRPI by a foreign pension fund was on the same footing as a non-resident alien individual or a foreign corporation — meaning that the disposition of a USRPI was tantamount to being engaged in a U.S. trade of business, resulting in an appropriate tax.
The statutory addition of the exception for QFPFs provides that such a foreign fund is not treated as a non-resident individual or foreign corporation, thus allowing QFPFs to escape U.S. taxation on any resultant gain from a disposition of a USRPI, similar to U.S. qualified pension funds.
On June 7, 2019, the U.S. Treasury Department (“Treasury”) and the Internal Revenue Service (“IRS”) released proposed Treasury regulations (the “Proposed Regulations”) regarding the exception for QFPFs from taxation under the Foreign Investment in Real Property Tax Act (“FIRPTA”) provisions of the Code. Treasury, in recently announcing that the final regulations are expected to be released by the end of this year, did not provide any insight as to whether the final regulations would simply track the Proposed Regulations or contain significant changes.
Those final regulations are critical because the 2015 statutory addition to the tax laws left unclear exactly what kind of pension vehicles would satisfy the Congressional intent of what a QFPF is.
What we do know from the Proposed Regulations is that a QFPF is any trust, corporation, or other organization or arrangement (any one of which is referred to in the Preamble of the Proposed Regulations as an “eligible fund”) that satisfies five separate requirements — specifically:
- is crated or organized under the law of a country other than the United States;
- (i) by such country (or one or more political subdivisions thereof) to provide retirement or pension benefits to participants or beneficiaries that are current or former employees (including self-employed individuals) 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 to provide retirement or pension benefits to participants or beneficiaries that are current or former employees (including self-employed individuals) or persons designated by such employees in consideration for services rendered by such employees to such employers;
- does not have a single participant or beneficiary with a right to more than five percent of its assets or income;
- is subject to government regulation and with respect to which annual information about its beneficiaries is provided, or is otherwise available, to the relevant tax authorities in the country in which it is established or operates, and
- with respect to which, under the laws of the country in which it is established or operates,
- (i) contributions to such eligible fund that would otherwise be subject to tax under such laws are deductible or excluded from the gross income of such entity or arrangement or taxed at a reduced rate, or
- (ii) taxation of any investment income of such eligible fund is deferred or such income is excluded from gross income of such entity or arrangement or is taxed at a reduced rate.
It is important to note the exception subject of this article apply specifically for purposes of the FIRPTA rules. These rules do not alter the definition of “pension plan” under any other income tax provision, or income tax treaty between the U.S. or another country.
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Our International Tax Group continues to monitor these regulations as they proceed through the process to finalization and we will keep you updated. In the meantime, feel free to contact your Friedman LLP advisor with any questions.