United States

IRS updates withholding foreign partnership and trust agreements

TAX ALERT  | 

On Jan. 19, 2017, the IRS released Rev. Proc. 2017-21, which updates and extends agreements for withholding foreign partnerships (WP) and withholding foreign trusts (WT) that were set to expire on Dec. 31, 2016, but were temporarily extended until Rev. Proc. 2017-21 could be issued. The agreement was updated to conform to the new qualified intermediary (QI) agreement recently released and to incorporate guidance from recently published final and temporary regulations. (See TD 9808 and TD 9809 and our previously issued alert covering both). 

Generally, WP and WT agreements allow a foreign partnership or foreign trust to assume the withholding and reporting obligations under chapters 3 and 4 of the Internal Revenue Code for certain payments of U.S. source income (such as interest, dividends and royalties) made to its direct partners, beneficiaries or owners, and in some cases, persons holding interests in the partnership or trust through one or more foreign intermediaries or flow-through entities (indirect partners). The new agreement is long-awaited guidance for partnerships and trusts who are currently evaluating whether or not to renew existing agreements or to enter into new agreements, particularly in light of new terms related to Foreign Account Tax Compliance Act obligations. The revenue procedure also provides guidance on how to enter into or renew the WP or WT agreement. The new agreements have more relaxed compliance review requirements for WPs and WTs and allow for consolidated periodic reviews and certifications as well as management of compliance by a separate compliance entity.

Key changes include:

  • Updated compliance procedures including allowing the responsible officer to make a certification based on reasonable processes or certifications made by others
  • Certain WPs and WTs may now use the statistical sampling procedures set forth in the new QI agreement
  • The WP agreement now provides an option for a consolidated compliance program to be managed by a ‘Compliance Entity’
  • The WP agreement has been revised to include requirements for a WP that is a foreign reverse hybrid entity
  • The WP and WT agreements now require a WP or WT to obtain information regarding a beneficial owner’s qualification under the limitation of benefits clause when claiming treaty benefits

Partnerships and trusts will need to review the agreements and to modify their procedures to ensure compliance with new terms going forward. Rev. Proc. 2017-21 applies to WP and WT agreements effective on or after Jan. 19, 2017.

Organizations considering entering these agreements or who currently have agreements in place should consult with their tax advisors to understand requirements and to assess potential gaps in existing processes.  

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