Proposed Regs Provide Requirements for Foreign QOF Investors

Proposed Regs Provide Requirements for Foreign QOF Investors

Internal Revenue Service

The IRS has published proposed regulations (REG-121095-19) that provide requirements for some foreign persons and some foreign-owned partnerships investing in qualified opportunity funds and flexibility for working capital safe harbor plans. Comments and public hearing requests are due by June 11.  Treasury and the IRS determined that coordination between section 1400Z-2 and sections 1445, 1446(a), and 1446(f) is needed to address the risk of noncompliance by some foreign persons regarding their U.S. tax obligations for deferred gain under section 1400Z-2(a). Thus, the proposed regs provide that security-required persons (specified foreign persons and foreign-owned partnerships) investing gain that is a security-required gain (generally, gain from a transfer subject to withholding under section 1445, 1446(a), or 1446(f)) may not make a deferral election under section 1400Z–2(a) unless an eligibility certificate is obtained for that gain. At the same time, the regs eliminate or reduce withholding under section 1445, 1446(a), or 1446(f) on security-required persons that obtain an eligibility certificate and provide security to the IRS before the transaction giving rise to the gain. That exemption was provided in response to comments requesting withholding relief so that foreign persons have funds available to invest the entire amount of eligible gain into a QOF. A security-required person that does not obtain an eligibility certificate before the transfer, and thus is withheld upon, must still obtain an eligibility certificate to make a deferral election under section 1400Z-2(a). The security-required person may also claim a credit or refund for the amount withheld on the deferred gain when filing its return. The IRS will require any claim for credit or refund for amounts withheld under section 1445, 1446(a), or 1446(f) on deferred gain under section 1400Z-2(a) to include a copy of the eligibility certificate for the covered transfer (or a statement providing that the transfer was not a covered transfer). The proposed regs provide that a security-required person is either a foreign person or a specified partnership. To minimize burden, Treasury and the IRS have decided not to require that all partnerships electing to defer gain under section 1400Z-2(a) obtain an eligibility certificate. The rules for specified partnerships impose that requirement only on partnerships that pose a compliance risk for the collection of tax on any deferred gain and that either hold a significant amount of U.S. real property interests or assets used in a U.S. trade or business or that generate a significant amount of gain that the partnership elects to defer. An abusive avoidance of the rules regarding specified partnerships is subject to a current antiabuse rule. A specified partnership is a partnership, foreign or domestic, that meets three tests described in the regs for a transfer that produces a security-required gain: an ownership test, a closely held test, and a gain or asset test. The regs also define a covered transfer and a security-required gain. To obtain an eligibility certificate for any security-required gain, a security-required person must submit to the IRS an application that provides information specified in the proposed regs, including a deferral agreement and acceptable security. The IRS is considering requiring electronic submission of the application. The regs define what is considered acceptable security, the requirements under a deferral agreement, and a default event under a deferral agreement. An eligibility certificate will be issued for a permitted deferral amount, as calculated under the regs. The regs are proposed to apply to any covered transfer that occurs after the date they are published as final regs in the Federal Register. Taxpayers should not submit applications for eligibility certificates before that date. In response to comments, the proposed regs also provide additional guidance regarding the 24-month extension of the working capital safe harbor for federally declared disasters. Those reg provisions are proposed to apply to tax years beginning after the date the regs are finalized. Taxpayers may also rely on those provisions for tax years beginning after December 31, 2019.

The IRS has published proposed regulations (REG-121095-19) that provide requirements for some foreign persons and some foreign-owned partnerships investing in qualified opportunity funds and flexibility for working capital safe harbor plans.

The IRS has published proposed regulations (REG-121095-19) that provide requirements for some foreign persons and some foreign-owned partnerships investing in qualified opportunity funds and flexibility for working capital safe harbor plans. Comments and public hearing requests are due by June 11.  Treasury and the IRS determined that coordination between section 1400Z-2 and sections 1445, 1446(a), and 1446(f) is needed to address the risk of noncompliance by some foreign persons regarding their U.S. tax obligations for deferred gain under section 1400Z-2(a). Thus, the proposed regs provide that security-required persons (specified foreign persons and foreign-owned partnerships) investing gain that is a security-required gain (generally, gain from a transfer subject to withholding under section 1445, 1446(a), or 1446(f)) may not make a deferral election under section 1400Z–2(a) unless an eligibility certificate is obtained for that gain. At the same time, the regs eliminate or reduce withholding under section 1445, 1446(a), or 1446(f) on security-required persons that obtain an eligibility certificate and provide security to the IRS before the transaction giving rise to the gain. That exemption was provided in response to comments requesting withholding relief so that foreign persons have funds available to invest the entire amount of eligible gain into a QOF. A security-required person that does not obtain an eligibility certificate before the transfer, and thus is withheld upon, must still obtain an eligibility certificate to make a deferral election under section 1400Z-2(a). The security-required person may also claim a credit or refund for the amount withheld on the deferred gain when filing its return. The IRS will require any claim for credit or refund for amounts withheld under section 1445, 1446(a), or 1446(f) on deferred gain under section 1400Z-2(a) to include a copy of the eligibility certificate for the covered transfer (or a statement providing that the transfer was not a covered transfer). The proposed regs provide that a security-required person is either a foreign person or a specified partnership. To minimize burden, Treasury and the IRS have decided not to require that all partnerships electing to defer gain under section 1400Z-2(a) obtain an eligibility certificate. The rules for specified partnerships impose that requirement only on partnerships that pose a compliance risk for the collection of tax on any deferred gain and that either hold a significant amount of U.S. real property interests or assets used in a U.S. trade or business or that generate a significant amount of gain that the partnership elects to defer. An abusive avoidance of the rules regarding specified partnerships is subject to a current antiabuse rule. A specified partnership is a partnership, foreign or domestic, that meets three tests described in the regs for a transfer that produces a security-required gain: an ownership test, a closely held test, and a gain or asset test. The regs also define a covered transfer and a security-required gain. To obtain an eligibility certificate for any security-required gain, a security-required person must submit to the IRS an application that provides information specified in the proposed regs, including a deferral agreement and acceptable security. The IRS is considering requiring electronic submission of the application. The regs define what is considered acceptable security, the requirements under a deferral agreement, and a default event under a deferral agreement. An eligibility certificate will be issued for a permitted deferral amount, as calculated under the regs. The regs are proposed to apply to any covered transfer that occurs after the date they are published as final regs in the Federal Register. Taxpayers should not submit applications for eligibility certificates before that date. In response to comments, the proposed regs also provide additional guidance regarding the 24-month extension of the working capital safe harbor for federally declared disasters. Those reg provisions are proposed to apply to tax years beginning after the date the regs are finalized. Taxpayers may also rely on those provisions for tax years beginning after December 31, 2019.

Sec. 1400Z-2 Special rules for capital gains invested in opportunity zones.

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Proposed Regs Provide Requirements for Foreign QOF Investors