Final Section 897(l) regulations address qualified foreign pension funds

In brief

Treasury and the IRS published final regulations (TD 9971) on December 29, 2022, addressing qualified foreign pension funds (QFPFs) under Section 897(l) and exemptions from withholding tax for QFPFs. Section 897(l) provides that QFPFs and entities wholly owned by a QFPF—qualified controlled entities (QCEs) as defined in the regulations—are exempt from the application of Section 897(a) under the Foreign Investment in Real Property Tax Act (commonly referred to as FIRPTA), provided the QFPF or QCE meets the ‘qualified holder’ requirements as detailed in the regulations. FIRPTA generally treats gains realized by non-US persons from the disposition of US real property interests (USRPIs) as income effectively connected with the conduct of a US trade or business and, therefore, subject to US net income taxation.  

The final regulations finalize the proposed regulations published on June 7, 2019 (‘2019 proposed regulations’) and retain the general approach and structure of the 2019 proposed regulations with certain modifications. The final regulations generally apply to dispositions occurring on or after December 29, 2022. 

The takeaway: The final regulations generally provide helpful modifications for foreign pension funds and their subsidiaries to qualify for the FIRPTA exemption under Section 897(l). While certain recommendations by commentators in response to the 2019 proposed regulations are not adopted in the final regulations, the added clarifications and alternatives should help alleviate certain restrictions and clarify certain ambiguity under previously proposed regulatory rules.