On May 15, 2000, the IRS issued extensive amendments to the final 1997 regulations under §1441 and related provisions governing payments to foreign persons and to persons whose status is unknown to a withholding agent. (T.D. 8881) (65 Fed. Reg. 32152 (5/22/00)). While many of the amendments implement changes to the regulations previously announced by Notice 99-25, 1999-20 I.R.B. 75, important new regulations applicable to estates and trusts and foreign financial institutions also were provided. The withholding regulations affect almost every financial transaction, in particular those transactions involving investment income. The most important provisions of the amendments are as follows.
7 Presumption Rules. The heart of the §1441/1442 regulations are the presumption rules contained in §1.1441-1(b)(3). These rules govern how a withholding agent must classify a recipient of a payment for status purposes (i.e., whether the recipient is an individual, partnership, corporation or other entity and whether the recipient is a U.S. or foreign person) when required documentation is not provided or is incomplete. The amendments both revise existing presumption rules and add new presumption rules.
These presumption rules can place significant obligations on withholding agents. For example, if a withholding agent cannot identify a payee by its name as an individual, trust, estate, corporation or specialized entity such as a state or a foreign government from the Form W-8 or W-9 furnished by the payee to the withholding agent, the payee is presumed to be a partnership. Depending on the presence or absence of certain indicia, the withholding agent must presume that the payee is a U.S. person, in which case 31% backup withholding is required, or a foreign partnership with all foreign partners, in which case 30% withholding is required.
7 Qualified Intermediaries. The regulations applicable to a qualified intermediary ("QI") generally follow the procedures announced by Rev. Proc. 98-27 and Rev. Proc. 2000-12, which set forth the requirements for a QI withholding agreement, that permit a foreign financial institution that receives U.S. source payments on behalf of its account holders to enter into an agreement with the IRS concerning its tax withholding and reporting requirements relating to such payments. Under a QI withholding agreement, a foreign financial institution is exempt from the general requirement to disclose the identity of its account holders if it assumes certain tax withholding and reporting obligations and responsibilities. The QI withholding agreements are keyed to the "know your customer" rules of the country in which the QI is located.
7 Nonqualified Intermediary Withholding Certificates. The IRS has revised certain of the rules applicable to nonqualified intermediary ("NQI") withholding certificates to accommodate a number of practical concerns raised by commentators. A nonqualified intermediary is a foreign financial institution that receives U.S. source payments on behalf of its account holders but has not entered into a QI withholding agreement with the IRS. These rules also are made applicable to U.S. branches of foreign banks and insurance companies that have not elected to be treated as U.S. persons, to nonwithholding partnerships, and to simple trusts and grantor trusts in order to ensure similar treatment for these entities that are functionally equivalent. Generally, the amended rules relax a number of requirements imposed by the 1997 regulations.
7 Estates and Trusts. The 1997 regulations did not provide new rules for payments to estates and trusts, but instead incorporated the rules from the pre-1997 regulations. The amendments issued in May 2000 provide a new set of comprehensive rules for estates and trusts. For U.S. estates and trusts, the amendments apply the rules for payments made to U.S. partnerships. If the estate or trust provides a Form W-9 (Claim of U.S. Status) to a withholding agent, no withholding under §1441 is required. However, if the U.S. trust or estate makes a payment to a foreign beneficiary or owner, it must withhold and report on that payment. A foreign complex trust or foreign estate is treated as the beneficial owner of income, while a foreign simple trust or foreign grantor trust is treated as a flow-through entity or intermediary. In addition to these new rules, presumption rules are provided to determine the classification of an entity as a trust or estate and to determine the status (i.e., U.S. or foreign) of the trust or estate.
Carol P. Tello is Special Tax Counsel in the Washington, D.C. office of Silverstein and Mullens, a division of Buchanan Ingersoll. She is a member of the Business and International Group and the Tax Management Group of the firm's Tax Section. She may be reached at 202-452-7925 or by email at cpt@silvmul.com.
Buchanan Ingersoll's Tax Group advises publicly held and private business entities, affluent individuals and families, and key executives in a full range of tax, employee benefits and dispute resolution matters at federal, state and local levels. We also counsel clients in the areas of wealth preservation and business succession planning. For more information, contact Tax Group Chairman Francis A. Muracca, II, at 412-562-3950 or by email at muraccafa@bipc.com.