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January 5, 2023

Final rules for qualified foreign pension funds bring changes that withholding agents will need to operationalize

  • The final regulations give qualified foreign pension funds (QFPFs) and other entities exempt from IRC Section 1445 withholding two options for certifying themselves as exempt.
  • The final regulations also update the rules coordinating withholding under IRC Sections 1441 and 1445, though some entities may remain subject to withholding under one provision but not the other.

In final regulations (TD 9971) released December 29, 2022, the IRS and Treasury addressed the treatment of QFPFs under the Foreign Investment in Real Property Tax Act (FIRPTA) rules of IRC Section 897, and related withholding requirements under IRC Sections 1441, 1445 and 1446.

IRC section 897(l) provides that a QFPF (as well as an entity wholly owned by a QFPF) is not treated as a non-resident alien individual or foreign corporation and therefore is generally exempt from tax on the disposition of a US real property interest (USRPI) and withholding under IRC Section 1445. This treatment extends to "look-through" dividends of capital gains from the disposition of USRPIs by real estate investment trusts (REITs) and other qualified investment entities (QIEs), to which 21% withholding under IRC Sections 897(h) and 1445(e)(6) would otherwise generally apply.

The final regulations clarify the definition of a QFPF and treat foreign-organized trusts or corporations wholly owned by one or more QFPFs as "qualified controlled entities" (QCEs) that are also entitled to the exemption under IRC Section 897(l). QFPFs, QCEs and foreign partnerships wholly owned by these entities (which are also treated as exempt) are collectively referenced as "withholding qualified holders" (WQHs) in the regulations.

Withholding issues

Revised Form W-8EXP. In the Preamble to the proposed IRC Section 897(l) regulations (84 FR 26605), the IRS stated that it would revise Form W-8EXP, Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding or Reporting, to allow a QFPF or QCE to certify its status for IRC Section 897(l) purposes. The revised form also would allow a foreign partnership that is a WQH to certify its status. Accordingly, no withholding would be required on dispositions of USRPIs by, or on distributions of look-through dividends to, a WQH. When a WQH provides a valid certification to a partnership, no section 1446(a) withholding would apply to USRPI gains or look-through dividends allocated to that WQH. The revised Form W-8EXP has not yet been issued.

The final regulations provide two alternatives for making the relevant certifications — either on Form W-8EXP, once it is revised, or by using the certifications of non-foreign status described in the final regulations as amended (Treas. Reg. Section 1.1445-2(b)(2)(i) or 1.1445-5(b)(3)(ii)). Until Form W-8EXP is revised, the latter option should be used. Form W-9 should not be used for this purpose.

EY observes: In some cases, it may be necessary for a WQH to provide two Forms W-8 to a withholding agent — for example, a Form W-8EXP to establish QFPF treatment to prevent IRC Section 1445 withholding, and a Form W-8BEN-E to obtain a reduction in, or exemption from, withholding under a treaty. A WQH partnership may provide both Form W-8EXP for IRC Section 1445 purposes and a Form W-8IMY package that includes the Forms W-8 of its partners and a withholding statement for purposes of Chapters 3 and 4. Withholding agents should consider whether changes to systems or procedures are necessary to maintain documentation and withhold at the proper rates.

Taxpayer-identification-number (TIN) requirement. The final regulations generally remove the requirement for a WQH to obtain a US TIN. A WQH must provide its US TIN only if it has one; otherwise, it may provide a foreign TIN. If the WQH does not have a foreign TIN, it appears that the WQH may be required to apply for an employer identification number (EIN) using Form SS-4 and to provide the EIN on its certification of non-foreign status. The instructions to the revised Form W-8EXP may provide more clarity.

Coordination of IRC Sections 1441 and 1445 for REIT/QIE Distributions. TD 9971 restructures, clarifies, and updates the rules that coordinate withholding under IRC Section 1441 with withholding under IRC Section 1445, as they apply to distributions from REITs and other QIEs. In substance, however, the rules are unchanged except for incorporating the principle that WQHs are exempt from IRC Section 1445 withholding. The amended rule, in Treas. Reg. Section 1.1441-1(c)(4)(i)(C), requires IRC Section 1441 withholding on regular REIT/QIE dividends and look-through dividends that are exempt from IRC Section 1445 withholding because the holder owns less than 10% of the REIT or 5% of the QIE, as the case may be. On the other hand, IRC Section 1445 withholding is required on a REIT/QIE distribution exceeding the holder's adjusted basis (unless the interest in the REIT/QIE is not treated as a USRPI, e.g., because the REIT/QIE is domestically controlled). Withholding is also required on look-through dividends paid to foreign investors (other than WQHs) that do not qualify for this exemption from IRC Section 1445 withholding.

EY observes: For purposes other than IRC Section 1445, WQHs are treated as foreign persons and remain subject to withholding, even when they provide Form W-8EXP. They would be subject to withholding on US-source income under Chapter 3 and under the Foreign Account Tax Compliance Act (FATCA), on effectively connected taxable income allocated to them by a partnership under IRC Section 1446(a), and on the sale of a partnership interest under IRC Section 1446(f). Historically, providers of Form W-8EXP have been generally exempt from US tax withholding, so this repurposing of the form may require withholding agents to adopt more precise methods for determining the extent of withholding tax exemptions allowed to a Form W-8EXP provider.

Treatment of partnerships. Partnerships are given "aggregated" treatment under the regulations, meaning that their assets are treated as owned proportionately by the partners and the activities of the partnership are treated as conducted by its partners. Thus, USRPI gains and look-through dividends allocated to a QFPF or QCE through a partnership are exempt from tax even if the partnership is not a WQH. However, IRC Section 1445 withholding would generally apply to a transferor that is a foreign partnership that is not a WQH because it is not wholly owned by QFPFs or QCEs. Such a foreign partnership may apply to the IRS for a "withholding certificate" to reduce the withholding.

EY observes: Unlike the rules for withholding under IRC Section 1446(f), the partnership cannot self-certify, for IRC Section 1445 withholding, a "modified amount realized" to the withholding agent so that withholding only applies to its taxable partners. Rather, a non-WQH foreign partnership must request relief from the IRS. Moreover, it appears that a non-WQH foreign partnership that receives a look-through dividend is subject to IRC Section 1445 withholding at the partnership level as a "holder" of the REIT/QIE interest, while a regular dividend paid to the same partnership would be treated under Chapters 3 and 4 as paid to the partners.

Applicability dates

The final regulations became effective December 29, 2022, the date they were published in the Federal Register. The changes to Treas. Reg. Section 1.1441-3(c)(4) are effective for REIT/QIE distributions on or after that date.


Contact Information
For additional information concerning this Alert, please contact:
Financial Services Office
   • Tara Ferris (
   • Jonathan Jackel (

Published by NTD’s Tax Technical Knowledge Services group; Maureen Sanelli, legal editor