SECTION 2. SCOPE

.01 Foreign Partnerships and Foreign Simple and Grantor Trusts . This Notice applies to a foreign partnership seeking to qualify as a withholding foreign partnership under Treas. Reg. §1.1441– 5(c)(2)(ii). ² The proposed withholding foreign partnership agreement applies to amounts subject to NRA withholding that the partnership distributes to, or includes in the distributive shares of, its direct partners.

This Notice also applies to a foreign trust seeking to qualify as a withholding foreign trust under Treas. Reg. §1.1441– 5(e)(5)(v). The proposed withholding foreign trust agreement applies to amounts subject to NRA withholding that are required to be distributed to the beneficiaries of a simple trust or that are includ

able in the income of the owners of a grantor trust (“distributive shares” of beneficiaries or owners).

The IRS intends that the WP and WT agreements will be available in all circumstances in which a foreign entity acting on behalf of its partners, beneficiaries or owners provides Form W-8IMY as proper documentation. For example, a WP or WT agreement would be available for an entity that is properly claiming treaty benefits for its owners under section 894 of the Code (notwithstanding that the entity may be treated as a corporation for U.S. tax purposes).

This Notice does not apply to intermediaries seeking to become QIs. Instead, see Rev. Proc. 2000–12, 2000–1 C.B. 387. The QI agreement applies to amounts subject to NRA withholding that are collected by an intermediary and paid to its account holders.

The QI agreement is not available to foreign partnerships or foreign trusts. As outlined below, the relationship of an intermediary and its account holders addressed in the QI agreement differs fundamentally from the relationship of a partnership and its partners and the relationship of a trust and its beneficiaries or owners.

.02 Notice 2001–4 . Pending the development of these agreements, Notice 2001–4, 2001–1 C.B. 267, provided a transition rule for foreign partnerships for calendar year 2001. Under the transition rule, for calendar year 2001, partnerships were permitted to provide to withholding agents Form W-8IMY with partner documentation attached together with a withholding statement that furnished payment information on the basis of withholding rate pools. Because that relief is unavailable for payments after December 31, 2001, the IRS intends that subscribing partnerships will apply the WP agreement for calendar years after 2001.

Notice 2001–4 also permitted a QI to treat the beneficiaries of a foreign simple trust or the owners of a foreign grantor trust as direct account holders for purposes of the QI agreement if certain criteria were met. This rule will continue in effect after the WT agreement becomes available. Alternatively, foreign simple

2All citations to income tax regulations in this revenue procedure are to the regulations as amended by T.D. 8734, 1997–2 C.B. 109 [62 FR 53387], T.D. 8804, 1999–1 C.B. 793 [63 FR 72183], and T.D. 8856, 2000–1 C.B. 298 [64 FR 73408].

June 17, 2002 1154 2002–24 I.R.B.

attempt to minimize the difficulties unique to partnerships and trusts by adopting procedures that reduce the administrative and audit cost for the WP and WT, as well as the risk of error in performing under the agreements.

(i) Limitation to direct partners, ben- eficiaries, or owners . The WP and WT agreements apply only to payments from a WP or WT to its direct partners, beneficiaries, or owners. This limitation eliminates the need (1) for the WP or WT to apply the presumption rules on payments it makes to indirect partners, beneficiaries, or owners who failed to provide adequate documentation; (2) for the WP or WT to gather and review documentation and withholding information for indirect partners, beneficiaries, and owners; and (3) for the WP or WT to bear the expense of having an auditor review such documentation and withholding information for indirect partners. The presumption rules generally require a withholding agent to withhold at the highest rate, which often requires subsequent reimbursements or refunds, and also results in duplicative reporting. A WP or WT, nevertheless, may act as a WP or WT for payments it makes to a partner, beneficiary, or owner that is, itself, a WP or WT because, for payments to such entities, it is never necessary to apply the presumption rules, or review documentation for the partners, beneficiaries, or owners of such entities. Because the IRS and Treasury expect that many foreign partnerships and trusts will enter into WP and WT agreements with the IRS, it is expected that the number of WPs and WTs that have partners, beneficiaries, or owners that are nonwithholding foreign partnerships and nonwithholding foreign trusts will be relatively small.

(ii) Documentation . The agreements require a WT and WP to obtain Forms W-8 and W-9 from its direct partners, beneficiaries, or owners. Obtaining documentary evidence in lieu of Forms W-8 and W-9 is not permitted. Although this requirement is imposed primarily for simplicity, it is also necessary because a WP or WT generally is not subject to the know-your-customer (KYC) rules in its jurisdiction. Therefore, the IRS is unable

In general, the beneficial owners or payees of a payment to a person that is treated as a nonwithholding foreign partnership are the partners (looking through partners that are foreign intermediaries or flow-through entities). However, a payment to a withholding foreign partnership is treated as a payment to the partnership and not to the partners. See Treas. Reg. § 1.1441–5(c). Similarly, the beneficial owners of a payment to a nonwithholding foreign simple or grantor trust are the beneficiaries or owners of the trust (looking through beneficiaries or owners that are foreign intermediaries or flowthrough entities). However, a payment to a withholding foreign trust is treated as a payment to the trust and not to its beneficiaries or owners. See Treas. Reg. § 1.1441–5(e).

A nonwithholding foreign partnership or nonwithholding foreign simple or grantor trust must forward documentation for each of its partners, beneficiaries or owners to each withholding agent making a payment to the partnership or trust so that the withholding agent can correctly withhold and report on Forms 1042-S and 1099, as appropriate. If a withholding agent does not receive that documentation, the withholding agent generally will withhold and report based on presumptions provided in the regulations. See Treas. Reg. §§ 1.1441–1, 1.1441–5 and 1.6049–5. A foreign partnership or foreign trust is a withholding agent under sections 1441 and 1442 of the Code for amounts subject to withholding that it pays to foreign persons, including partners, beneficiaries and owners, and therefore must file Forms 1042 and 1042-S in the same manner as a U.S. withholding agent. However, a foreign partnership or foreign trust is not required to file Forms 1042 and 1042-S if another withholding agent has reported the same amount to the same recipient for which the foreign partnership or foreign trust would be required to file a return and the proper amount has been withheld. See Treas. Reg. § 1.1461– 1(b) and (c)(4). Under section 6031 of the Code, a foreign partnership that has gross income that is effectively connected with the conduct of a trade or business within the United States (ECI) is required to file a partnership return on Form 1065 with

Schedules K-1 ( Statement of Partner’s Share of Income, Credit, Deduction, Etc. ) for each partner. Also, a foreign partnership that has U.S. source gross income that is not ECI and that has U.S. partners is generally required to file Form 1065 and Schedules K-1 for each of its direct U.S. partners and for its passthrough partners through which U.S. partners hold an interest in the foreign partnership. See Treas. Reg. § 1.6031(a)–1(b). A foreign trust generally is not engaged in any trade or business. However, if it has gross income that is treated as effectively connected with the conduct of a U.S. trade or business, it must file a return on Form 1040NR. Under section 6048(b), a foreign trust that has a U.S. owner must file Form 3520-A, Annual Information Return of a Foreign Trust with a U.S. Owner . Under section 6048(c), a U.S. person that receives a distribution from a foreign trust must file Form 3520. The trust must provide an information statement to the U.S. distributee. See Form 3520, Annual Return to Report Transactions With For- eign Trusts and Receipt of Certain For- eign Gifts .