June 12, 2019 / North America
The Protecting Americans from Tax Hikes Act of 2015 (“PATH Act”) provided a tax exemption from gain or loss on certain dispositions of U.S. real property interests (“USRPIs”) for Qualified Foreign Pension Funds (“QFPFs”) under section 897(l) of the Internal Revenue Code of 1986, as amended (the “Code”).
Since enactment, there has been doubt as to whether certain foreign pension fund systems or structures would qualify for such exemption. On June 6, 2019, the U.S. Treasury Department (“Treasury”) and Internal Revenue Service (“IRS”) released proposed regulations to provide guidance. In general, the Proposed Regulations are taxpayer friendly and express a clear intent to include a broad range of foreign pension funds.
Proposed Regulations – Highlights
Qualified Controlled Entities. Entities that are owned by more than one QFPF and multi-tiered structures may now qualify for benefits through the introduction by the Proposed Regulations of the concept of a “qualified controlled entity” (“QCE”). The statute only allowed for an exemption for an entity that was wholly-owned by a single QFPF. Entities that meet the definition of a QCE can start taking advantage of this exception to FIRPTA immediately and on a retroactive basis.
Ancillary Benefits. Up to 15% of the benefits provided by a QFPF may consist of “ancillary benefits,” which are benefits payable upon the diagnosis of a terminal illness, death benefits, disability benefits, medical benefits, unemployment benefits, or similar benefits.
Definitional Clarification. The Proposed Regulations expand the definition of QFPF and resolve several statutory ambiguities in a taxpayer favorable fashion. This will allow many more foreign pensions to qualify for QFPF treatment.