Part III. — Internal Revenue Bulletin 1999-5

mediary has not attached documentation for all of the persons to whom the Form W-8IMY relates, the nonqualified intermediary must separately identify the amounts allocable to persons for whom a withholding certificate or other appropriate documentation are lacking or unreliable. Further, under §1.1441–1(e)(3)(iv), a nonqualified intermediary must provide information sufficient for a withholding agent to determine the proportion of each payment of reportable amounts, as defined in §1.1441–1(e)(3)(iv), that is allocable to each person to whom the Form W-8IMY relates, including persons for whom the intermediary has not attached a withholding certificate or other appropriate documentation. The information for persons for whom documentation is lacking or unreliable may be provided in the aggregate and need not be provided separately for each such person. Section 1.1441–5(c)(3)(iii) provides similar rules for foreign partnerships. The allocation information required by §§1.1441–1(e)(3)(iv) and 1.1441–5(c)(3)(iii) is necessary so that the withholding agent may file Forms 1042-S for each beneficial owner. See §1.1461–1(c)(1).

Sections 1.1441–1(b)(3)(v)(C) and 1.1441–5(d)(3)(ii) contain reporting and withholding rules that apply if a withholding agent receives from a nonqualified intermediary or a foreign partnership the Forms W-8 or other appropriate documentation from all the beneficial owners or payees in a group of beneficial owners or payees, but the withholding agent does not have information that permits it to allocate a payment of an amount subject to chapter 3 withholding to each beneficial owner or payee. In that case, the payment is presumed to be allocable entirely to the beneficial owner or payee in the group with the highest withholding rate or, if the rates are equal, to the beneficial owner or payee in the group with the highest U.S. tax liability.

Section 1.6049–5(d)(3)(ii) contains similar rules that apply for purposes of Form 1099 reporting of amounts that are not subject to chapter 3 withholding (other than short-term OID and deposit interest). These amounts include foreign source income and broker proceeds.

Proposed Changes to Final Withholding Regulations Under Section 1441; Proposed Model Qualified Intermediary Withholding Agreement

NOTICE 99–8

Background and Scope

On October 14, 1997, the Department of the Treasury (the “Treasury”) and the Internal Revenue Service (the “IRS”) issued final Income Tax Regulations (the “final withholding regulations”) under chapter 3 (sections 1441-1464) and subpart G of subchapter A of chapter 61 (sections 6041-6050S) of the Internal Revenue Code (the “Code”). Those regulations were published in the Federal Register as T.D. 8734 and, as modified by T.D. 8804, will generally be effective for payments made after December 31, 1999.

Section I of this notice announces some of the changes that Treasury and the IRS will make to those regulations. The changes covered by this notice are those that affect a withholding agent or payor’s information systems and the type of beneficial owner or payee documentation that a withholding agent or payor must obtain before January 1, 2000.

Section II of this notice provides a proposed model qualified intermediary (QI) withholding agreement. In Rev. Proc. 98–27, 1998–15 I.R.B. 15, the IRS provided guidance on the provisions to be contained in a QI withholding agreement. In Notice 98–16, 1998–15 I.R.B. 12, issued simultaneously with Rev. Proc. 98– 27, the IRS announced that it intended to issue a series of model agreements of broad applicability to make qualified intermediary agreements as widely available as possible. Under these model agreements, a person would be able to accept, sign, and submit the agreement to the IRS without the need for individual negotiations. Notice 98–16 stated that the IRS contemplated that each model agreement would be specific to a particular country or group of countries with similar laws and practices. The IRS invited submissions of proposed model agreements by groups or associations of potential qualified intermediaries.

The IRS has developed a proposed model QI withholding agreement that appears in Section II of this notice. This model will be adapted to reflect the “know-your-customer” rules applicable to each country. Other specific adaptations may be made if the IRS concludes that they are necessary to implement QI withholding agreements in that country, will not result in a competitive advantage for qualified intermediaries in that country, and do not violate principles that are fundamental to sound tax administration. Once the IRS is satisfied that a particular country’s know-your-customer rules can be relied upon, or adapted, to provide reliable information, a final model QI withholding agreement will be issued for that country.

The IRS invites comments on the proposed regulation changes and the model QI withholding agreement set forth in Sections I and II of this notice. Written comments (8 copies) must be received by March 16, 1999. Send submissions to CC:DOM:CORP:R (OGI–118203–98), room 5228, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20004. In the alternative, submissions may be hand delivered between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (OGI–118203–98), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW, Washington, DC.

Section I. Proposed Changes to the Final Withholding Regulations

A. Withholding and Information

Reporting When There Is Unreliable Allocation Information.

Under §1.1441–1(e)(3)(iii), a nonqualified intermediary is required to provide a withholding agent with a withholding certificate (Form W-8IMY) to which it attaches the withholding certificates (Forms W-8) and other appropriate documentation of the beneficial owners and payees for whom it acts. The nonqualified intermediary must also provide a statement that the account holder documentation attached to the Form W-8IMY represents all of the persons to whom the Form W8IMY relates. If the nonqualified inter

February 1, 1999 26 1999–5 I.R.B.

Under §1.6049–5(d)(3)(ii), if a payor pays an amount to a foreign intermediary and has actual knowledge that the foreign intermediary is acting on behalf of a U.S. nonexempt recipient but the payor cannot determine the portion of the payment that is allocable to the U.S. nonexempt recipient, the payor must treat the entire unallocated portion of a payment as allocable to the U.S. nonexempt recipient.

The rules of §§1.1441–1(b)(3)(v)(C), 1.1441–5(d)(3)(ii), and 1.6049–5(d)(3)(ii) permit the account holders of a nonqualified intermediary or partners of a foreign partnership to obtain a reduced rate of withholding under sections 1441 or 1442 (or to avoid imposition of backup withholding) even though the nonqualified intermediary or foreign partnership has not provided a withholding agent with information that allocates the payment to each account holder or partner. For example, a nonqualified intermediary could provide Forms W-8 for all of its beneficial owner account holders and obtain the portfolio interest exemption for those account holders without providing the withholding agent with any allocation information. Similarly, if a nonqualified intermediary provides a payor with a Form W-9 from a U.S. nonexempt payee, the unallocated portion of a payment of an amount not subject to chapter 3 withholding will be reported as if it were made to that U.S. nonexempt recipient, although no backup withholding will be imposed since the U.S. payee has provided a Form W-9.

The Treasury and the IRS have determined that the ability to obtain a reduced rate of withholding, or to avoid imposition of backup withholding, in the absence of information that allocates the payment to each beneficial owner or payee of a nonqualified intermediary or partner of a foreign partnership undermines the general rules of §§1.1441– 1(e)(3)(iii) and (iv), 1.1441–5(c)(3)(iii) and (iv), chapter 61, and section 3406, which require allocation information. Further, allocation information is essential for a withholding agent to do beneficial owner reporting on Form 1042-S and payee reporting on Form 1099. Therefore, the regulations will be amended to require a withholding agent that has insufficient information to allocate a payment to treat that payment as made to an undocumented payee, unless the allocation in

formation is received before the withholding agent is required to file (without regard to extensions) Forms 1042-S or Forms 1099. Therefore, if an unallocated payment paid to a foreign intermediary or foreign partnership (other than a withholding foreign partnership) is an amount subject to chapter 3 withholding, it will be treated as if it were paid to an undocumented foreign payee and will be subject to 30 percent withholding. If the unallocated payment paid to a foreign intermediary or foreign partnership (other than a withholding foreign partnership) is deposit interest under section 871(i)(2)(A) or short-term OID under section 871(g)(1)(B), it will be treated as if paid to a U.S. nonexempt recipient and subject to 31 percent withholding. If the unallocated payment paid to a foreign intermediary or foreign partnership (other than a withholding foreign partnership) is an amount not subject to chapter 3 withholding (other than deposit interest and shortterm OID), and the payor knows that at least one payee of the foreign intermediary or foreign partnership is a U.S. nonexempt recipient, then the unallocated portion of the payment will be treated as paid to a nonexempt recipient and subject to 31 percent withholding. If the withholding agent has no amounts from which to withhold, because, for example, it has already paid the amounts to a payee, the withholding agent must satisfy its liability for the 30 or 31 percent amount either from other amounts it holds on behalf of the payee or from its own funds.

The Treasury and the IRS have also determined that it is inappropriate to report an unallocated payment as if it were made in its entirety to a person who may or may not be entitled to receive the entire amount. Therefore, the regulations will also be amended so that an unallocated payment will be reported on a Form 1042S or Form 1099, as appropriate, sent to the nonqualified intermediary or foreign partnership in the name of an unknown recipient. Further, §§1.1441–1(b)(6) and 1.1441–5(c)(3)(v) of the regulations will be amended so that an intermediary or partnership that fails to provide allocation information is not relieved of its responsibility to file Forms 1042-S even if it has provided a withholding agent with a Form W-8IMY that has documentation from all of its account holders or partners attached

and the withholding agent has withheld the appropriate amount. An intermediary or partnership that fails to provide allocation information for a U.S. nonexempt recipient that receives a reportable amount will also be required to file a Form 1099 with regard to reportable payments made to that U.S. nonexempt recipient.

B. Accrued Interest and Original Issue

Discount

Under §1.1441–3(b)(2) of the final withholding regulations, a withholding agent is not required to withhold on interest that has accrued up to the date of a sale of a debt obligation when the sale occurs between two interest payment dates. This exception to withholding applies even if the amount is taxable under sections 871 or 881 because, for example, it does not qualify as portfolio interest. Moreover, the exception applies even though there is no documentation establishing that the beneficial owner of the obligation is a foreign person. Documentation may be required, however, for Form 1099 reporting or backup withholding under sections 6045, 6049, and 3406. The exception from withholding does not relieve the withholding agent from reporting on Form 1042-S under section 1.1461–1(c). Withholding is required, however, under §1.1441–3(b)(1) on the gross amount of interest payable on an interest payment date, regardless of whether the payment constitutes a return of capital or the payment of income, unless an exception to withholding, such as the portfolio interest exemption, applies.

By contrast, under §1.1441–2(b)(3), the accrued amount of original issue discount is subject to withholding when a foreign person sells, exchanges, or receives a payment on an original issue discount obligation unless an exemption from withholding applies. A withholding agent is required to withhold on OID, however, only if it has actual knowledge of the proportion of the payment that is taxable to the beneficial owner of the OID obligation. A withholding agent has actual knowledge of the taxable portion of the OID if it knows how long the beneficial owner has held the obligation, the terms of the obligation, and the extent to which the beneficial owner purchased the obligation at a premium. A withholding

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agent is treated as having knowledge if such information is reasonably available. The information is considered to be reasonably available to a withholding agent if the withholding agent maintains a direct account relationship with the beneficial owner of the obligation. However, a withholding agent must withhold, notwithstanding lack of knowledge, if the withholding agent must treat the payment as made to a foreign payee under the applicable presumption rules because the withholding agent cannot reliably associate the payment with documentation and the amount would qualify as portfolio interest if the withholding agent held such documentation.

Because of the similarities between OID and accrued interest on an obligation sold between interest payment dates, the IRS and Treasury believe that they should be treated similarly. Further, the IRS and Treasury are concerned that a withholding exemption for the sale of debt obligations between interest payment dates even in the absence of a beneficial owner Form W-8 provides an easy avenue for the avoidance of the documentation requirements imposed under the portfolio interest provisions of sections 871(h) and 881(c). As a result, the IRS and Treasury issued proposed regulation §1.1441– 3(b)(2) (REG–114000–97, 62 F.R. 53503) which would change the accrued interest rule to conform to the OID rule. Under the proposed regulation, a withholding agent would be required to withhold on the accrued interest portion of the purchase price if it knows the amount of accrued interest. A withholding agent would be deemed to have knowledge of the amount of accrued interest if it had a direct account relationship with the holder of the security. Further, withholding would be required on accrued interest if the interest would qualify as portfolio interest but the withholding agent does not have the beneficial owner documentation required under the portfolio interest rules.

Commentors have raised objections to both the proposed accrued interest rules and to the final OID rules. Regarding the proposed accrued interest rules, they note that most sales of debt obligations of U.S. issuers occur as delivery versus payment (DVP) transactions. DVP transactions are settled quickly and the need to obtain documentation would prohibit quick settle

ment of transactions. Moreover, sales of debt obligations often take place through several tiers of intermediaries. Since the portfolio interest rules require beneficial owner documentation, each intermediary involved in a transaction, including those with no direct relationship to the beneficial owner, would need to obtain beneficial owner documentation.

Commentors also criticized the presumption that a withholding agent has the information to determine the amount of OID or accrued interest if it has a direct account relationship with the beneficial owner of an obligation. They contend that a direct account relationship does not ensure that a withholding agent will have the information necessary to determine the amount of withholding. For example, if securities were not acquired by the withholding agent for the beneficial owner but were transferred by the beneficial owner to an account with the withholding agent, the withholding agent may not know the holding period of the security or whether it was acquired at a premium.

In response to these comments, the IRS and Treasury intend to revise the regulations governing the treatment of OID and accrued interest on obligations sold between interest payment dates. Under the revised regulations, only a withholding agent that is required to obtain Form W-8 or other documentary evidence will be required to withhold and report on OID or accrued interest on obligations sold between interest payment dates. No withholding or reporting of OID and accrued interest will be required, however, provided that (1) a withholding agent that is required to obtain a Form W-8 or other documentary evidence obtains the Form W-8 or other documentary evidence and (2) the interest qualifies as portfolio interest or qualifies for a complete exemption from taxation under an income tax treaty. Further, if a withholding agent that is required to obtain Form W-8 or other documentary evidence obtains the Form W-8 or other documentary evidence, but the interest or OID does not qualify for the portfolio interest exemption or a complete exemption from taxation under an income tax treaty, withholding and reporting on accrued interest or OID will be required, but only if the withholding agent knows the amount of accrued interest or OID paid or the withholding agent knows, or

has reason to know, that the person selling the obligation has a principal purpose to avoid U.S. tax.

A withholding agent will be required to obtain a Form W-8 or other documentation from a beneficial owner only if the withholding agent is the person who receives the proceeds from the sale or exchange of the obligation against delivery of the obligation or, if the obligation is being retired, the withholding agent is the person responsible for paying the holder, or crediting the holder’s account, with the proceeds from the retirement. Notwithstanding the preceding sentence, a withholding agent will not be required to obtain a Form W-8 or other documentation if it is effecting the sale of an obligation for a broker, as defined in §1.6045–1(a)(1), and the withholding agent does not know, and does not have reason to know, that the broker is the beneficial owner of the obligation. In that case, only the broker will be required to obtain a Form W-8 or other documentary evidence.

A withholding agent will be treated as knowing the amount of accrued interest or OID only if it actually knows the seller’s holding period of the obligation, the terms of the obligation, and the extent to which the obligation was acquired by the seller at a premium. A withholding agent will not be treated as having knowledge of these facts merely because it has a direct account relationship with the beneficial owner.

If a withholding agent that is required to obtain a Form W-8 or other documentation fails to do so or the withholding agent knows, or has reason to know, that the sale of an obligation is part of a plan to avoid withholding, it must withhold on the amount of accrued interest or OID determined under the following rules. If the amount subject to withholding is accrued interest, the amount of income subject to withholding is determined as if the seller’s income is equal to the amount of interest due as of the next interest payment date pro rated to the date of sale. If the obligation is an original issue discount obligation, the amount of OID is determined by assuming that the seller has held the instrument since its original issuance. A withholding agent may rely on the most recently published “List of Original Issue Discount Instruments” (IRS Publication 1212) to determine the amount of OID in

February 1, 1999 28 1999–5 I.R.B.

any particular transaction. If a withholding agent cannot determine the amount of OID subject to withholding under these rules, it must withhold an amount, based on the entire amount paid, that is necessary to assure that the tax withheld is not less than 30 percent of the amount that will subsequently be determined to be income subject to tax. See §1.1441– 3(c)(4)(i)(A). Finally, no change will be made to the rule under §1.1441–3(b)(1) that requires withholding on the gross amount of interest payable on an interest payment date, regardless of whether the payment constitutes a return of capital or the payment of income.

C. Delayed Implementation of IRS-

Certified TIN

Under §1.1441–6(b), a withholding agent may rely on a claim that a beneficial owner is entitled to a reduced rate of withholding based on an income tax treaty only if the withholding agent can reliably associate the payment with a valid withholding certificate (Form W-8BEN). A withholding certificate is valid only if it contains a taxpayer identification number (“TIN”). Further, a TIN is valid to establish proof of residence in a treaty country only if the TIN is certified by the IRS. Under §1.1441–6(b)(2), a TIN is not required to appear on a withholding certificate if treaty benefits are claimed with respect to income from certain types of instruments, which, generally, are publicly traded. The procedures for obtaining a certified TIN are set forth in §1.1441– 6(c)(2)(ii). The IRS will not implement the procedure for obtaining certified TINs under §1.1441–6(c)(2)(ii) until January 1, 2002. Until the IRS begins to issue certified TINs, a withholding agent may treat a beneficial owner as a resident of a treaty country in situations in which a certified TIN would otherwise be required if the withholding agent has a Form W-8BEN from the beneficial owner that contains a TIN, the form contains a statement that the beneficial owner is a resident of a particular treaty country, the beneficial owner’s permanent residence address on the form is in that treaty country, and the form is otherwise valid. If a beneficial owner provides a permanent residence address on the Form W-8BEN that is outside

the applicable treaty country, the withholding agent may rely on the beneficial owner’s claim for benefits under a particular treaty only if the withholding agent obtains, and may rely on, either a certificate of residence as described in §1.1441– 6(c)(3) or the documentary evidence as described in §1.1441–6(c)(4) that establishes the beneficial owner’s residence in the particular treaty country.

D. Trusts and Estates.

Sections 1.1441–1(c)(6)(i) and (ii)(A) generally treat the beneficial owner of income as the person that is the owner of the income under U.S. tax principles. For flow-through entities, which are defined to be partnerships, trusts, and estates, the beneficial owners are the persons who, under U.S. tax principles, are the owners of the income in their separate or individual capacities. Section 1.1441–1(e)(3)(i) states that a trust or estate is required to use a flow-through certificate, as defined in §1.1441–5(e), to provide the certificates or documentation on the status of the beneficiaries of a trust or estate. Section 1.1441–5(e), however, is reserved. These rules imply that, at least in some cases, the beneficial owners of income paid to a trust or estate are the beneficiaries of the trust or estate. Section 1.1441– 1(c)(6)(ii)(B), however, states that the provisions of §1.1441–1(c)(6)(i) and (ii)(A) shall not apply to trusts or estates. Instead, the beneficial owner of income paid to a trust or estate is determined under §1.1441–3(f) and (g) of the regulations in effect prior to January 1, 1999 (see those sections as contained in 26 CFR part 1, revised April 1, 1997). Sections 1.1441–3(f) and (g), however, do not make beneficial owner determinations. Rather, they generally require withholding under section 1441 if the fiduciary of a trust or estate is a foreign person or, in the case of income taxable to a grantor under sections 671 through 679 of the Code, the trust is created by a nonresident alien individual.

Treasury and the IRS intend to issue regulations that will clarify the withholding obligations of income paid to trusts and estates. Under these rules, a foreign trustee or foreign executor of a U.S. or foreign trust or estate must furnish a withholding agent with a Form W-8IMY (Certificate of Foreign Intermediary, Foreign

Partnership, or Certain U.S. Branches for United States Tax Withholding). If the foreign person is considered a nonqualified intermediary and is the trustee of a trust described in section 651(a) or a trust, all or a portion of which is treated as owned by the grantor or other persons under sections 671 through 679, the trustee must attach the Forms W-8BEN, Forms W-8EXP, or, if required, Forms W9, of the beneficiaries or grantors of the trust. In all other cases, the foreign trustee or executor must attach a Form W8BEN, Form W-8EXP, or if required, Form W-9, completed on behalf of the trust or estate.

E. Application of Negative Confirmation

Rules to Existing Accounts.

Section 1.6049–5(c)(4)(i) provides an exception from the normal documentation requirements for payments of amounts not subject to chapter 3 withholding (other than U.S. source OID on certain short-term obligations or U.S. source deposit interest) to an offshore account by a bank or other financial institution. Under that exception, if it is not customary to obtain documentary evidence, a payor may, instead of obtaining a withholding certificate or documentary evidence, rely on an account holder’s declaration of foreign status made on an account opening statement if certain conditions are met. Under §1.6049–5(c)(4)(iv), if it is customary to obtain documentary evidence but it is not customary to renew it, then a payor must request such documentary evidence in lieu of a declaration of foreign status. For both the §§1.6049–5(c)(4)(i) and (iv) exceptions, the bank or financial institution must include a “negative confirmation” in a year-end statement mailed to the payee in which the bank or financial institution states that the payee is being treated as a non-U.S. person and that the payee has an obligation to notify the bank or financial institution if the payee becomes a U.S. citizen or resident.

Section 1.6049–5(c)(4)(v) states that the exceptions of §§1.6049–5(c)(4)(i) and (iv) do not apply to an account opened before January 1, 2000. Prior to January 1, 2000, the rules in §§35a.9999–3(ii) Q&A 34 and 35a.9999–4 Q&A 1 and 5 apply. Under those rules certain foreign payors may treat a payee as a foreign person if the payor has evidence in its records that

1999–5 I.R.B 29 February 1, 1999

the payee is a foreign person, including a written indication from the payee that the payee is not a U.S. person. By stating that the rules of §§1.6049–5(c)(4)(i) and (iv) do not apply to accounts opened before January 1, 2000, the regulations inadvertently exclude banks or financial institutions with accounts that have declarations of foreign status, or other documentary evidence of foreign status, from continuing to rely on those statements or documentation provided the bank or financial institution sends the negative confirmation required under §1.6049–5(c)(4)(iii). The rule of §1.6049–5(c)(4)(v) will be changed so that payors who relied on the rules contained in §§35a.9999–3(ii) Q&A 34 and 35a.9999–4 Q&A 1 and 5, as in effect prior to January 1, 2000, with regard to payments of foreign source interest or broker proceeds from sales effected outside the United States may continue to treat the payee as a foreign person under the rules of §1.6049–5(c)(4), provided that the payor sends a negative confirmation to the payee each year as required under §1.6049–5(c)(4)(iii) and does not know, or have reason to know, that the payee is a U.S. person. F. Expansion of Master Agreement/ Con- firmation Exception for Notional Princi- pal Contracts. Under §1.1441– 4(a)(3) a withholding agent must treat a payment of income on a notional principal contract made to a foreign person as income effectively connected with the conduct of a trade or business within the United States unless the withholding agent can reliably associate the payment with a withholding certificate (Form W-8BEN) on which it can rely to treat the payment as an amount that is not effectively connected. An exception to the Form W-8BEN requirement is provided under §1.1441–4(a)(3)(ii). Under that section, a payment to a financial institution is not treated as effectively connected with the conduct of a trade or business within the United States if the foreign financial institution provides a representation in a master agreement that governs transactions in notional principal contracts between the parties (for example an International Swaps and Derivatives Association (ISDA) Agreement) or in the confirmation the particular notional principal contract transaction that the counterparty is a U.S. person or a non

U.S. branch of a foreign person.

Commentors have asked that the master agreement and confirmation exceptions be expanded to apply to persons other than financial institutions. The regulations will be changed so that persons other than financial institutions can use the master agreement and confirmation exceptions.

G. Use of Documentary Evidence by

Foreign Partnerships with U.S. Accounts.

Under §1.6049–5(c)(1) a withholding agent or payor may generally rely on documentary evidence instead of a beneficial owner withholding certificate if an amount is paid outside the United States to an offshore account. An offshore account is an account maintained at an office or branch of a U.S. or foreign bank or other financial institution at any location outside the United States and outside of a U.S. possession. Under §1.6049-5(e), an amount is considered paid outside the United States if the payor completes the acts necessary to effect payment outside the United States.

The regulations do not specifically address whether partners of a foreign partnership that has an account in the United States can use documentary evidence to establish their foreign status. Under §1.1441–5(c)(1) it is the partners, and not the partnership, that are considered to be the payees on the amounts credited to an account. Thus, the regulations as currently drafted appear to preclude the use of documentary evidence by the foreign partners of a foreign partnership.

The regulations will be amended to permit foreign partners of a foreign partnership that has an account in the United States to use documentary evidence. As a result, such partners will be treated the same as foreign account holders of a financial institution that has an account in the United States.

H. Withholding on Capital Gain

Distributions of a Domestic Real Estate Investment Trust (“REIT”).

Section 1.1441–3(c)(4)(i)(C) requires withholding under section 1441 on the portion of a distribution from a REIT that is not designated as a capital gain divi

dend or a return of basis. Under section 1.1445–8(c), withholding is required under section 1445 on the portion of the distribution designated by a REIT as a capital gain dividend.

By stating that withholding is required on amounts not designated as a capital gain dividend or a return of basis, §1.1441–3(c)(4)(i)(C) requires withholding on a distribution in excess of basis, which under section 301(c)(3) is treated as capital gain from the sale or exchange of stock. The final withholding regulations will be amended to state that withholding under section 1441 is not required on a distribution in excess of basis (which under section 301(c)(3) is treated as a capital gain). However, a distribution in excess of basis is subject to withholding under section 1445 unless the interest in the REIT is not a U.S. real property interest (e.g. an interest in a domestically controlled REIT under section 897(h)(2)).

I. Validity period for documentary

evidence.

Under §1.1441–1(e)(4)(ii), the documentary evidence that may be provided under §§1.1441–6(c)(4) and 1.6049– 5(c)(1) remains valid until “the earlier of the last day of the third calendar year following the year in which the documentary evidence is created. . . .” Commentors have stated that it is not clear when documentary evidence is created. To clarify the rule, §1.1441–1(e)(4)(ii) will be amended to permit the validity period to be measured from the date documentation is provided to a withholding agent.

Section II. Model Qualified Intermediary Withholding Agreement.

A. Submission of Know-Your-Customer Information. Before a model QI withholding agreement will be concluded for any country, the Internal Revenue Service must receive certain information regarding that country’s “know-your-customer” rules. This information is necessary to evaluate whether those rules are sufficient to establish an account holder’s status as a beneficial owner or intermediary and the account holder’s nationality and residence. If the “know-your-customer” rules are sufficient for these purposes, they will be incorporated, with any necessary mod

February 1, 1999 30 1999–5 I.R.B.

A list of all the exceptions, if any, to the documentation requirements under the know-your-customer rules.
A statement regarding whether the know-your-customer rules do not require documentation from an account holder if a payment to or from that account holder is cleared by another financial institution. ¹
A statement regarding how long the documentation remains valid under the know-your customer rules.
A statement regarding how long the documentation obtained under the know-your-customer rules must be retained and the manner for maintaining that documentation.
Specify whether the rules require the maintenance of wire transfer records, the form of the wire transfer records and how long those records must be maintained. State whether the wire transfer records require information as to both the original source of the funds and the final destination of the funds.
A list of any payments or types of accounts that are not subject to the know-your-customer rules.
Specify whether there are special rules that apply for purposes of private banking activities.

1The IRS will not permit a QI to establish the identity of an account holder without obtaining documentation directly from the account holder.

ifications, into the Attachments to the qualified intermediary agreement. The information the IRS must receive is the following:

An English translation of the laws and regulations (“know-your-customer” rules) governing the requirements of QI to obtain documentation confirming the identity of QI’s account holders. The translation must include the name of the law, and the appropriate citations to the law and regulations.
The name of the organization (whether a governmental entity or private association) responsible for enforcing the know-your customer rules. Specify how those rules are enforced (e.g., through audit) and the frequency of compliance checks.
The penalties that apply for failure to obtain, or evaluate, documentation under the know-your-customer rules.
The definition of customer or account holder that is used under the know-your-customer rules. Specify whether the definition encompasses direct and indirect beneficiaries of an account if the activity in the account involves the receipt or disbursal of funds. Specify whether the definition of customer or account holder includes a trust beneficiary, a company whose assets are managed by an asset manager, a controlling

shareholder of a closely held corporation or the grantor of a trust. 5. A statement regarding whether the documentation required under the know-your-customer rules requires QI to determine if its account holder is acting as an intermediary for another person. 6. A statement regarding whether the documentation required under the know-your-customer rules requires QI to identify the account holder as a beneficial owner of income credited to an account. 7. A list of the specific documentation required to be used under the knowyour-customer rules, or if those rules do not require use of specific documentation, the documentation that is generally accepted by the authorities responsible for enforcing those rules. 8. A statement regarding whether the know-your-customer rules require that an account holder provide a permanent residence address. 9. A summary of the rules that apply if an account is not opened in person (e.g., correspondence, telephone, Internet). 10. Whether an account holder’s identity may be established, in whole or in part, by introductions or referrals. 11. The circumstances under which new documentation must be obtained, or existing documentation verified, under the know-your-customer rules.

B. Proposed Qualified Intermediary Agreement