SECTION 2. BACKGROUND

.01 Section 1446(f) Final Regulations. Sections 864(c)(8) and 1446(f) were added to the Internal Revenue Code (the Code) by the Tax Cuts and Jobs Act, Pub. L. 115-97 on December 22, 2017. Section 864(c)(8) generally provides that gain or loss derived by a foreign person on the sale or exchange of an interest in a partnership engaged in a trade or business within the United States is treated as effectively connected gain or loss to the extent provided in that section. Section 1446(f)(1) generally provides that if any portion of the gain on any disposition of an interest in a partnership would be treated under section 864(c)(8) as effectively connected with the conduct of a trade or business within the United States, then the transferee of the interest must withhold a tax equal to 10 percent of the amount realized on the disposition.

On November 30, 2020, final regulations (TD 9926) were published in the Federal Register (85 FR 76910) to implement the withholding requirements of section 1446(f) (the final regulations). The final regulations include withholding and reporting requirements applicable to brokers that pay amounts realized on transfers made by foreign partners of interests in PTPs that are publicly traded on an established securities market or readily tradable on a secondary market (or the substantial equivalent thereof) (PTP interests). The final regulations allow brokers an exception from withholding on amounts realized paid to QIs that assume primary withholding responsibility for these amounts

and provide guidance for brokers paying amounts realized to QIs that do not assume primary withholding responsibility (generally allowing the broker to accept from the QI either payee specific or withholding rate pool information). The final regulations provide brokers other exceptions to the withholding requirements, including for a foreign partner’s valid claim for exemption based on an income tax treaty or partner’s claim of status as a U.S. person. The final regulations also allow an exception to withholding (applicable to any partner) when the PTP publishes a qualified notice stating the applicability of a “10-percent exception.” A 10-percent exception applies when either (i) a PTP’s net gain from a deemed sale of its assets under section 864(c)(8) that would be effectively connected with a trade or business in the United States is less than 10% of the total net gain as of a designation date applicable to a partner’s transfer of an interest in the PTP, or (ii) the PTP is not engaged in a trade or business in the United States. See §1.1446(f)-4(b) for these exceptions to withholding. The final regulations generally define an amount realized as the gross proceeds (as defined in §1.6045-1(d)(5)) from a sale of a PTP interest and the amount of a PTP distribution that is in excess of the cumulative net income of the PTP. They also allow a broker to rely on a certification of a modified amount realized when a transferor that is a foreign partnership provides certain information with respect to its partners that are allocated gain from the transfer of a PTP interest. See §1.1446(f)-4(c)(2)(ii).

The final regulations also amend regulations under section 1446(a) relating to distributions by PTPs, which include an allowance for a QI to act as a nominee for purposes of assuming primary withholding responsibilities on a distribution from a PTP for purposes of section 1446(a) by assuming primary withholding responsibility for the entire distribution. Similar to an amount realized paid to a QI that does not assume primary withholding responsibility, the final regulations generally permit a PTP or a nominee to rely on either withholding rate pool information or specific payee information from a QI for purposes of section 1446(a) when the QI does not act as a nominee for a PTP distribution. The final regulations further

provide a withholding default rule that applies to a nominee when a PTP either does not issue a qualified notice for a distribution or issues a qualified notice that lacks information necessary to determine all withholding required on the distribution. Under Notice 2021-51, 2021-36 IRB 1, the provisions of the final regulations related to withholding on transfers of PTP interests and withholding on PTP distributions apply to transfers and distributions that occur on or after January 1, 2023.

As a result of the allowances in the final regulations for QIs to assume withholding and reporting responsibilities for purposes of sections 1446(a) and (f), this Notice proposes modifications to the QI agreement to incorporate the requirements for QIs with respect to sections 1446(a) and 1446(f). Highlights of the proposed modifications to the QI agreement are described in Section 3 of this Notice.

.02 Overview of QI Agreement. The QI agreement provides that a QI may assume primary withholding responsibility under chapters 3 and 4 for certain payments of U.S. source FDAP income made to its foreign account holders or the foreign account holders of another intermediary by providing a valid qualified intermediary withholding certificate to its withholding agent and designating the account(s) for which the QI assumes primary withholding responsibility. A QI is not required to assume primary chapter 3 and chapter 4 withholding responsibility for all accounts it holds with a withholding agent. A QI that does not assume primary chapter 3 and chapter 4 withholding responsibility for an account provides to its withholding agent a valid QI withholding certificate that indicates that the QI does not assume primary withholding responsibilities under chapters 3 and 4 and attaches a withholding statement that includes withholding rate pool information (i.e., aggregate information about the account holders and the withholding rate applicable to each pool). Notwithstanding a QI’s allowance not to assume primary withholding responsibilities, a QI is still required to withhold if it knows that the appropriate amount has not been withheld by another withholding agent or if the QI made an error that results in withholding at less than the correct amount. For determining the amount to withhold, a QI may

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generally document account holders by obtaining either withholding certificates or documentary evidence under a country’s approved “know your customer” rules. In a case in which overwithholding is applied on a payment, a QI is generally permitted to file a collective refund on behalf of its foreign account holders that are entitled to a refund of the tax withheld. Finally, a QI is generally permitted to report on Forms 1042-S on a pooled basis rather than file and furnish a Form 1042-S with respect to each account holder.

Withholding under section 1446(a) is not currently within the scope of a QI’s requirements under the QI agreement. As a result, a QI is not currently permitted to act as a QI with respect to an amount subject to withholding under section 1446(a) on a PTP distribution received on behalf of an account holder. The proposed modifications set forth in Section 4 of this Notice would extend the scope of the QI agreement to include sections 1446(a) and 1446(f).