The Internal Revenue Service (IRS) has issued a friendly reminder to Taxpayers that the deadline for all Qualified Intermediary (QI) (including Qualified Derivatives Dealer (QDD)), Withholding Foreign Partnership (WP) and Withholding Foreign Trust (WT) applications for the 2019 year is Nov. 15, 2019. See IRS Bulletin 2019-08. Companies seeking QI, WP or WT status for 2019 should therefore apply now to ensure that there is sufficient time for processing their applications this year.
Applications must be submitted through the IRS’ Qualified Intermediary, Withholding Foreign Partnership, Withholding Foreign Trust Application & Account Management System (QAAMS). In order to apply, applicants must already have a global intermediary identification number (GIIN), which can be obtained in a few days on the IRS’ FFI registration site. Applicants will be required to enter into a QI, WP or WT agreement as set forth in Rev. Proc. 2017-15 and Rev. Proc. 2017-21.
What is a QI, WP, or WT and who is eligible to apply?
A WP or WT is a foreign partnership or a foreign simple or grantor trust that has entered into an agreement with the IRS under Reg. section 1.1441–5(c)(2)(i) to assume primary withholding responsibility for reporting and withholding under chapter three sections 1441 and 1442 and chapter four of the code for all payments that are made to its partners, beneficiaries or owners except as otherwise provided in the withholding agreement. A WP also includes a foreign reverse hybrid entity that has entered into a withholding agreement.
Taxpayers who fit the following profile are most likely eligible to apply for WP or WT status:
- A foreign (non-U.S.) partnership
- A foreign simple trust or grantor trust
A QI is a foreign intermediary (or foreign branch of a U.S. intermediary) that has entered into an agreement with the IRS under Reg. section 1.1441-1(e)(5) to simplify their obligations as withholding agents under chapters three and four and as payors under chapter 61 and section 3406 for amounts paid to their account holders. The QI agreement also allows certain foreign persons to enter into an agreement with the IRS to act as qualified derivatives dealers (QDDs) and to assume primary withholding and reporting responsibilities on all dividend equivalent payments that they make.
Taxpayers who fit the following profile are most likely eligible to apply for QI status:
- A foreign financial institution (FFI) that is a participating FFI (including a reporting Model 2 FFI), a registered deemed-compliant FFI (including a reporting Model 1 FFI), or an FFI treated as a deemed-compliant FFI under an applicable intergovernmental agreement that is subject to due diligence and reporting requirements with respect to its U.S. accounts similar to those applicable to a registered deemed-compliant FFI under section 1.1471-5(f)(1), excluding a U.S. branch of any of the foregoing entities, or any other category of FFI identified in the qualified intermediary withholding agreement as eligible to act as a qualified intermediary;
- A foreign branch or office of a U.S. financial institution or a foreign branch or office of a U.S. clearing organization that is either a reporting Model 1 FFI or agrees to the reporting requirements applicable to a participating FFI with respect to its U.S. accounts;
- A foreign person that is a home office or has a branch that is an eligible entity as described in Reg. section 1.1441-1(e)(6)(ii), without regard to the requirement that the person be a qualified intermediary; or
- Any other foreign person not described above that the IRS accepts as a qualified intermediary
What are the advantages and disadvantages of applying for QI/WP/WT Status?
There are many benefits associated with QI, WP or WT status. Most notably, QIs benefit from a more simplified tax documentation process and can certify information about the status of its direct customers/investors without revealing their identities to upstream custodians or to the IRS, whereas nonwithholding foreign partnerships and nonqualified intermediaries must provide documentation disclosing the identity of their underlying customers/investors. Additionally, QIs benefit from pooled rates of withholding, an additional QDD designation, and exemption from certain withholding tax provisions that do not apply to non-withholding foreign partnerships and nonqualified intermediaries.
Despite these advantages, however, perhaps the most important disadvantage for QIs, WPs and WTs is that they must enter into agreements with the IRS governing their documentation, reporting, and withholding obligations. Additionally, there can be significant costs associated with maintaining the status and the rules are quite complex, which often makes it unattractive for smaller companies. Finally, QIs, WPs and WTs must undergo periodic reviews of their compliance with the agreements, which is not required for nonqualified intermediaries and nonwithholding foreign partnerships. For more details on the terms of the QI, WP and WT agreement, see Rev. Proc. 2017-15 and Rev. Proc. 2017-21.
Whether QI, WP or WT status is right for your organization depends on a number of factors. Make time to evaluate them now so that you can submit your QI, WP or WT application on time or you may be subject to withholding on certain transactions that you had not planned for in 2019.
For more information on RSM US LLP’s FATCA and Global Information Services for QIs, WP, and WTs, refer to our Global Informantion Reporting Consulting and Compliance page.