QI Alert 2021-02

Deferral of section 1446(f) regulations and publication of draft W-8 Forms and Instructions

Deferral of section 1446(f) regulations and publication of draft W-8 Forms and Instruction

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Jean Kizito

Partner, Financial Services Tax

KPMG in Luxembourg

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Deferral of section 1446(f) regulations

On October 8, 2020, the Department of Treasury (“Treasury”) and the Internal Revenue Service (“IRS”) released final regulations (“Final Regulations”) regarding withholding and reporting obligations with respect to dispositions of certain partnership interests under Internal Revenue Code (“IRC”) section 1446 and related sections of the code. Section 1446(f) provides withholding and reporting rules applicable to the transfer of partnership interests if a portion of the gain must be treated as effectively connected gain, unless an exception applies. Two different rules apply depending on whether the partnership is publicly traded (“PTP”) or not (“non-PTP”).

The withholding agent can be the transferee (for non-PTP interest or PTP interest without a broker), the broker (for PTP interest), or a Qualified Intermediary (“QI”). With an initial implementation date of January 1, 2022, QIs had less than 5 months to prepare. However, the IRS released end of August an advance version of Notice 2021-51 announcing that the Treasury and IRS intend to amend the regulations under sections 1446(a) and 1446(f) to defer the applicability date to January 1st, 2023.

This notice is welcome news to impacted taxpayers and the industry as a whole, as the original effective date was only four months away. The IRS also intends to update the QI Agreement to include section 1446(f). However, the wait continues for the rider to the QI Agreement (with respect to 1446(f)), updated Form 1042-S, and clarification on nominee reporting obligations for QIs. 

Draft Forms W8-IMY, W-8ECI, W-8BEN, W8BEN-E and related instructions

As previously mentioned, following the release of the Final Regulations under IRC section 1446, several updates are necessary in terms of documentation and guidance, including an updated QI Agreement. Over the past weeks, the IRS has issued draft versions for its W-8IMY, W-8ECI, W-8BEN, W-8BEN-E Forms and related instructions. Those drafts include, but are not limited to, a number of changes related to the new section 1446(f) regulations.

Form W-8ECI

  • Part I, Line 4: The Type of Entity “government” has been split into two boxes, one for integral parts of foreign governments and one for controlled entities of foreign governments.
  • Part I, Lines 8a and 8b: The Foreign Tax Identification Number (“FTIN”) line has been split into two lines to allow taxpayers to certify when a FTIN is not legally required.
  • Part I, Line 12: New section 1446(f) checkbox for dealers in securities who are transferring an interest in a PTP and claiming an exemption from withholding under section 1446(f). The box should be used to certify its status.
  • Instructions: Some updates have been made related to life insurance contracts and electronic signatures.

Form W-8IMY

  • Part I, Lines 9b: The draft form now includes a line to provide a FTIN, if required.
  • Part III: QI Certifications:
    • The QI Certification language on the form needed to be updated to reference section 1446.
    • Under the new section 1446(f) rules, a QI will have three options:
      • assume withholding responsibility with respect to section 1446(f);
      • not assume withholding responsibility and provide pooled information to an upstream custodian; or
      • not assume primary withholding responsibility and provide partner-specific information to an upstream custodian.
  • Part IV: NQI Certifications:
    • Line 17e has been added to make the required certification when providing an alternative withholding statement.
  • Part V (Territory FI Certifications), Part VI (U.S. Branch Certifications) and Part VIII (Non Withholding Partnership Certifications) have also been updated.
  • Instructions: Some updates have been made related to life insurance contracts and electronic signatures.

Form W-8BEN

  • Part I, Lines 6a and 6b: The FTIN line has been split into two lines to allow taxpayers to certify when a FTIN is not legally required.
  • Signature: The draft form eliminated the write-in box and now includes a checkbox for the authorized individual signing the form to certify that the individual has the legal capacity to sign on behalf of the beneficial owner.
  • Instructions: Some updates have been made related to Line 10, Claim of Tax Treaty Benefits and electronic signatures.

Form W-8BEN-E

  • Section 1446(f): The draft form Part XXX Certification references Section 1446(f) to account for use of Form W-8BEN-E, when the partner’s amount realized from the transfer of a partnership interest is subject to withholding under section 1446(f). Likewise, the draft instructions have been updated to incorporate the use of this form by certain entities that are transferors of an interest in a partnership subject to withholding on the amount realized from the transfer.
  • Part I, Line 4: The Type of Entity “government” has been split into two boxes, one for integral parts of foreign governments and one for controlled entities of foreign governments.
  • Part I,  New Line 9c, FTIN not legally required: The draft form includes a checkbox for entities that are required to provide a FTIN for U.S. tax purposes but not legally required to obtain a FTIN from their jurisdiction of residence.
  • Part III, Line 14b: The draft form includes a new limitation on benefits (LOB) provision covering income tax treaties that do not include a LOB article. To the extent that a beneficial owner seeks to claim treaty benefits pursuant to such treaty, the beneficial owner should check “No LOB article in treaty” at Line 14b. This was done to address the issue that some income tax treaties do not include LOB articles. One notable example includes the US-South Korea income tax treaty. 
  • Part III, Line 15 Instructions: The draft instructions contain guidance regarding the completion of Line 15 for treaty claims pursuant to a business profits treaty article. In general, treaty claims pursuant to a business profits treaty article must certify that the applicable payment is not attributable to a permanent establishment in the United States. The updated instructions for business profits claims do not represent a substantive change to the rules, but rather provide a confirmation that Line 15 must be completed for all entities making business profits claims, including those made for section 1446(f) purposes. 
  • Instructions: Some updates have been made related to life insurance contracts and electronic signatures.

As a reminder, a QI may accept a prior version of a form until the later of either (i) six full months after the revision date shown on the form; or (ii) the end of the calendar year that the form is issued. After that date, QIs would be required to use the new forms. As a consequence, if the updates are finalized by October this year, as per the draft Forms published, QIs would be permitted to collect the current version of Forms W-8 through April 2022. 

For your reference

The draft Forms and Instructions can be found on the website of the IRS:

Jean Kizito

Associate Partner
+352 22 51 51 5492 
jean.kizito@kpmg.lu 

Ulrike Menn

Director
+352 22 51 51 5538
ulrike.menn@kpmg.lu