Foreign pension and charity funds receive treaty and real-property tax exemptions

Plain-English summary

A foreign insurance and investment-management company proposed new segregated funds for tax-exempt pension plans and charitable organizations resident in a treaty country. Under local law, each fund would be treated as a trust, its investors as beneficiaries, and its income as deemed distributed to those investors. Some funds would contain only pension investors that qualified for the section 897(l) foreign-pension exemption. Based on the taxpayer's representations, the IRS ruled that United States-source dividends and interest earned for the pension and charitable investors would be exempt under the treaty's exempt-organization article, except for income covered by the treaty's trade-or-business and related-person exception. It also ruled that the related-person test would be applied in relation to the investors. Finally, gain or loss from United States real property interests held by a qualifying pension-only fund would be exempt under section 897(l) and not subject to section 1445 withholding.

Ruling snapshot

• Question: How will United States dividends, interest, and real-property gains earned through the proposed foreign segregated funds be taxed?
• Outcome: Treaty and section 897(l) exemptions apply under the stated representations
• Key authorities: IRC §§ 897(l) and 1445; Treas. Reg. § 1.897(l)-1; treaty Articles IV, XXI, and XXIX A

Full text (IRS public release)

 Internal Revenue Service                                      Department of the Treasury
                                                               Washington, DC 20224

 Number: 202343003                                             Third Party Communication: None
 Release Date: 10/27/2023                                      Date of Communication: Not Applicable
 Index Number: 897.00-00
                                                               Person To Contact:
 --------------------                                          ----------------, ID No. -----------------
 ---------------------------------------------------           Telephone Number:
 ------------------------------                                --------------------
 ------------------------------------                          Refer Reply To:
 ------------                                                  CC:INTL:B04
                                                               PLR-101526-23
                                                               Date:
                                                               July 19, 2023




                          TY: -------

Legend

Taxpayer         =        ---------------------------------------------------
                          -----------------------------
                          -----------------------
Country A        =        ----------
Date 1           =        ------------------

Dear ----- ----------:

This letter responds to your correspondence dated January 18, 2023, requesting a
private letter ruling regarding the federal income tax consequences of certain
investment arrangements proposed to be established and administered by Taxpayer on
behalf of certain investors. The material information submitted in that request is
summarized below.

The rulings contained in this letter are based upon information and representations
submitted by Taxpayer and accompanied by a penalties of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the request for this ruling, it is subject to verification on examination.
Unless otherwise provided, all Code and section references are to the Internal Revenue
Code of 1986, as amended.

                                             Summary of Facts

Taxpayer is a Country A corporation, the annual accounting period for which ends on
Date 1. Taxpayer’s method of accounting, both for financial accounting purposes and
for purposes of U.S. federal income tax reporting, is the accrual method. Taxpayer
issues a variety of insurance and annuity contracts and provides investment

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management services to many types of investors, including corporate and public
pension funds, endowments and foundations, multi-employer funds, private investors,
and insurance corporations. As part of its business, Taxpayer acts as a manager to
segregated funds established pursuant to specific contracts between such investors and
Taxpayer (“Seg Fund Contracts”). These segregated funds permit funds derived from
premiums paid by the investors under the relevant contracts to be invested for the
benefit of the investors.

The investments held by each segregated fund are acquired and administered by
Taxpayer separate from Taxpayer’s other assets and are not subject to claims by
Taxpayer’s other policyholders or creditors. The assets held in each segregated fund
are legally owned by Taxpayer, although Taxpayer must follow prescribed separate
accounting rules for such assets.

Under the Seg Fund Contracts, investors are issued notional “units,” which track the value
of the investors’ participation in the segregated fund. All income and gains of the
segregated fund allocable to an investor are reinvested for the benefit of the investor or,
in some circumstances at the investor’s request, paid out to the investor (in each case,
less any applicable fees payable by the investor to Taxpayer).

Country A has an income tax treaty in force with the United States (the “Treaty”).

                                 Proposed Transactions

Taxpayer intends to establish and administer contracts for new segregated funds (“New
Seg Funds”), pursuant to which Taxpayer will invest in a portfolio of investments
including stocks, bonds, mortgages, and other types of investments. The investors
entering into the New Seg Fund contracts will be (i) registered pension plans in Country
A (“RPP Investors”) and/or (ii) charitable organizations (including endowments) and/or
charitable foundations (each a “Charitable Investor”). Certain of the RPP Investors
entering into the New Seg Fund contracts will be “qualified holders” as defined in Treas.
Reg. § 1.897(l)-1(e)(11). Those investors will only invest in a segregated fund in which
all other investors are also qualified holders (“897(l) Seg Fund”). The other New Seg
Fund contracts, i.e., contracts for segregated funds other than those in which only
qualified holders invest, may have RPP Investors, Charitable Investors, or a mix of both
types of investors.

                                    Representations

Taxpayer has made the following representations:

    1. Each RPP Investor and Charitable Investor will be resident in Country A for
      Country A income tax purposes and will be exempt from Country A income tax.

    2. Each RPP Investor will be a trust, company, organization or other arrangement
      described in paragraph 2 of Article XXI of the Treaty, will be a resident of Country

PLR-101526-23                               3

      A for purposes of Article IV of the Treaty, and will be entitled to Treaty benefits
      pursuant to Article XXIX A of the Treaty.

    3. Each Charitable Investor will be a trust, organization or other arrangement
      described in paragraph 1 of Article XXI of the Treaty, will be a resident of Country
      A for purposes of Article IV of the Treaty, and will be entitled to Treaty benefits
      pursuant to Article XXIX A of the Treaty.

    4. For Country A income tax law purposes, each New Seg Fund will be considered a
      trust resident in Country A, the investors in such fund will be considered the
      beneficiaries of such trust, and the property and income of such fund will be
      considered to be property and income of such trust and not that of any party that
      facilitated the establishment of such fund.

    5. For Country A income tax law purposes, each New Seg Fund will be deemed to
      distribute all of its income for a taxable year to its beneficiaries in the form of
      deductible payments such that such fund will not be subject to Country A income
      tax, and on account of such deemed distributions the income of such fund will be
      considered income of the investors in such fund and not that of any party that
      facilitated the establishment of such fund.

    6. Seg Funds established pursuant to Seg Fund Contracts with Canadian RPP
      Investors and/or Canadian Charitable Investors will be operated exclusively to earn
      income for the benefit of such Canadian RPP Investors and/or Canadian
      Charitable Investors.

    7. Each RPP Investor that invests in an 897(l) Seg Fund will be a qualified holder as
      defined in Treas. Reg. §1.897(l)-1(e)(11).

    8. Each 897(l) Seg Fund will be administered exclusively for the benefit of its RPP
      Investors.

    9. All of the assets of an 897(l) Seg Fund, and all of the income earned with respect
      to such assets, will be held exclusively for the benefit of its RPP Investors, and
      such assets or income will not inure to the benefit of any person other than such
      RPP Investors.

                                          Law

Sections 871(a)(1)(A) and 881(a)(1) impose a 30 percent gross basis tax on U.S.
source dividends, interest and other kinds of fixed or determinable annual or periodical
gains, profits and income received by a nonresident alien individual or foreign
corporation. Sections 1441 and 1442 require a withholding agent to withhold 30 percent
of any payments of such income made to certain non-U.S. persons.

Treas. Reg. §1.1441-6(a) provides that the rate of withholding imposed on a payment of
income subject to non-resident gross basis tax under section 871(a)(1)(A) or 882(a)(1)

PLR-101526-23                                  4

may be reduced to the extent provided under an income tax treaty in effect between the
United States and a foreign country. More generally, section 894(a)(1) states that the
provisions of the Code shall be applied to any taxpayer with due regard to any treaty
obligation of the United States which applies to such taxpayer.

Section 897(a) generally characterizes the gain (or loss) of a nonresident alien and
foreign corporation on the disposition of a United States real property interest (USRPI)
as effectively connected income (or loss).

Section 1445(a) imposes an obligation on the transferee to withhold 15% of the amount
realized on a disposition of a USRPI if the transferor is a foreign person. Section
1445(e) imposes similar withholding obligations on certain distributions.

Section 897(l) states that a qualified foreign pension fund (QFPF), and an entity, all of
the interests of which are owned by a QFPF, is not treated as a nonresident alien or
foreign corporation for purposes of section 897.

Treas. Reg. §1.897(l)-1(b)(1) states that gain or loss of a qualified holder from the
disposition of a USRPI, including gain from a distribution described in section 897(h), is
not subject to section 897(a).

Treas. Reg. §1.897(l)-1(b)(2) states that the rule of Treas. Reg. §1.897(l)-1(b)(1) only
applies with respect to gain or loss that is attributable to one or more qualified
segregated accounts maintained by a qualified holder.

Treas. Reg. §1.897(l)-1(e)(11) defines qualified holder to mean a qualified foreign
pension fund or qualified controlled entity that satisfies the requirements of Treas. Reg.
§1.897(l)-1(d).

Treas. Reg. §1.897(l)-1(e)(9) defines qualified controlled entity to mean a trust or
corporation created or organized under the laws of a foreign jurisdiction all of the
interests of which are held by one or more qualified foreign pension funds directly or
indirectly through one or more qualified controlled entities.

Treas. Reg. §1.897(l)-1(e)(13)(i) defines a qualified segregated account as an
identifiable pool of assets maintained by an eligible fund or qualified controlled entity for
the sole purpose of funding and providing qualified benefits to qualified recipients.

Treas. Reg. §1.897(l)-1(e)(2) defines an eligible fund as a trust, corporation, or other
organization or arrangement that maintains one or more qualified segregated accounts.

Article XXI (Exempt Organizations) of the Treaty provides benefits to certain
organizations that are tax-exempt in their state of residence. Paragraph 1 of Article XXI
of the Treaty provides that income derived by a religious, scientific, literary, educational
or charitable organization is exempt from tax in a contracting state if it is resident in the

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other Contracting State, but only to the extent that such income is exempt from tax in
that other Contracting State.

Paragraph 2 of Article XXI of the Treaty provides that income referred to in Articles X
(Dividends) and XI (Interest) derived by a trust, company, organization or other
arrangement that is a resident of a Contracting State, generally exempt from income
taxation in a taxable year in that State and operated exclusively to administer or provide
pension, retirement or employee benefits shall be exempt from income taxation in that
taxable year in the other Contracting State.

Paragraph 3 of Article XXI of the Treaty provides that dividend and interest income can
also be exempt from income taxation in a Contracting State for a taxable year if derived
by a trust, company, organization or other arrangement that is (1) a resident of the other
Contracting State, (2) generally exempt from income taxation in a taxable year in that
state, and (3) operated exclusively to earn income for the benefit of one or more of the
entities described in paragraphs 1 or 2.

Paragraph 4 of Article XXI of the Treaty provides an exception whereby the benefits set
forth in paragraphs 1, 2, and 3 do not apply to income of a trust, company, organization
or other arrangement from carrying on a trade or business or from a related person
other than a person referred to in paragraph 1, 2 or 3.

Paragraph 1 of Article IV (Residence) of the Treaty provides that the term “resident” of a
Contracting State means any person that, under the laws of that State, is liable to tax
therein by reason of that person's domicile, residence, citizenship, place of
management, place of incorporation or any other criterion of a similar nature. However,
an estate or trust is considered a resident of a Contracting State only to the extent that
income derived by the estate or trust is liable to tax in that State, either in its hands or in
the hands of its beneficiaries. Paragraph 1 further provides that the term “resident” of a
Contracting State is understood to include (1) a trust, organization or other arrangement
that is operated exclusively to administer or provide pension, retirement or employee
benefits, and (2) a not-for-profit organization that was constituted in that State and that
is, by reason of its nature as such, generally exempt from income taxation in that State.

In order to qualify for benefits under the Treaty, a person generally must be considered
a “qualifying person” under Article XXIX A (Limitation on Benefits). Paragraph 2 of
Article XXIX A (Limitation on Benefits) provides in relevant part:

       For the purposes of this Article, a qualifying person is a resident of a
       Contracting State that is:

                                          ***

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               (g) A not-for-profit organization, provided that more than half
       of the beneficiaries, members or participants of the organization are
       qualifying persons;

               (h) A trust, company, organization or other arrangement
       described in paragraph 2 of Article XXI (Exempt Organizations) and
       established for the purposes of providing benefits primarily to
       individuals who are qualifying persons, or persons who were
       qualifying persons within the five preceding years; or

              (i) A trust, company, organization or other arrangement
       described in paragraph 3 of Article XXI (Exempt Organizations)
       provided that the beneficiaries of the trust, company, organization or
       other arrangement are described in subparagraph (g) or (h).

                                      Rulings

Based solely on the information submitted, we rule as follows regarding the Proposed
Transactions:

Any U.S.-source dividends and interest (other than any income described in Article
XXI(4) of the Treaty) derived by a New Seg Fund for the benefit of RPP Investors or
Charitable Investors will be exempt from U.S. income taxation pursuant to Article
XXI(3) of the Treaty.

For purposes of Article XXI(4) of the Treaty, the phrase “related person” in Article XXI(4)
of the Treaty will be applied in relation to the RPP Investors and the Charitable
Investors.

Gain or loss realized by an 897(l) Seg Fund from any disposition of USRPIs will be
exempt from U.S. income taxation pursuant to section 897(l) and will not be subject to
withholding under section 1445.

                                          Caveats

No opinion is expressed regarding the tax treatment of any matters that are not
specifically covered by this ruling.

                                 Procedural Statements

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

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A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of the
letter ruling.

                                                Sincerely,

                                                /s/ Kenneth Jeruchim

                                                Kenneth Jeruchim
                                                Senior Technical Reviewer, Branch 4
                                                Associate Chief Counsel (International)



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