In December 2022, the U.S. Internal Revenue Service ("IRS") issued Rev. Proc. 2022-43, which provides the final qualified intermediary ("QI") agreement.1 The prior QI agreement2 (the "2017 QI Agreement") expired at the end of 2022. The new QI agreement (the "2023 QI Agreement") came into effect on January 1, 2023, and is set to expire on December 31, 2028.
The 2023 QI Agreement includes significant updates compared to the 2017 QI Agreement. First, and most notably, the 2023 QI Agreement largely adopts the changes proposed by the IRS in 2022 in Notice 2022-23 (commonly referred to as the "QI Rider"), which included proposed modifications relating to a QI's ability to act in such capacity with respect to receiving certain amounts from interests in publicly traded partnerships ("PTPs")3 and the QI's withholding obligations under Code Secs. 1446(a) and 1446(f) of the Internal Revenue Code (the "Code"). In addition, the 2023 QI Agreement incorporates prior IRS guidance, a significant portion of which was published in the form of Frequently Asked Questions ("FAQs"). For example, the 2023 QI Agreement includes additional guidance relating to the requirements for QIs acting as qualified derivatives dealers ("QDDs") or as intermediaries with respect to dividend equivalent payments under Code Sec. 871(m), as well as modifications to a QI's periodic certification requirements. Lastly, the 2023 QI Agreement incorporates new obligations of a QI. Many of these changes are addressed herein.
The IRS also released Notice 2023-8 (the "Notice") in December 2022, which provides additional guidance for brokers to comply with certain Code Sec. 1446 requirements that relate to withholding on the transfer of an interest in a PTP. The Notice provides that a QI applying the provisions of the 2023 QI Agreement may also rely on specified provisions of the Notice.4 This article also discusses the Notice.
The 2023 QI Agreement
"Best Efforts" Standard for Collecting U.S. Taxpayer Identification Numbers for Purposes of Code Secs. 1446(a) and (f)
The 2023 QI Agreement adopts a "best efforts" approach to the collection of U.S. taxpayer identification numbers ("TINs") from non-U.S. persons holding interests in PTPs. (This update was adopted largely in response to comments received by the IRS relating to the practical challenges that QIs may face with respect to the collection of U.S. TINs.) The 2023 QI Agreement provides solicitation requirements that QIs must apply for collecting U.S. TINs from account holders holding PTP interests. Specifically, a QI is treated as having applied its "best efforts" to obtain a U.S. TIN when the QI makes a written solicitation (initial solicitation) for the account holder's U.S. TIN in 2023 or the calendar year in which an account holder acquires a PTP, and if an account holder's U.S. TIN is not provided based on the initial solicitation, the QI is required to make an additional written solicitation for the account holder's U.S. TIN in the calendar year following the calendar year of the initial solicitation, and, if necessary, a further written solicitation in the calendar year following the year of the additional solicitation.5 The 2023 QI Agreement's definition of "material failure" and "event of default" were similarly updated to take into account this "best efforts" standard with respect to the collection of U.S. TINs for purposes of Code Sec. 1446. QIs (and certain entities acting in an NQI capacity) should consider whether it is appropriate to update their policies and procedures to take into account these new U.S. TIN solicitation requirements.
The "best efforts" standard relates to documentation and not withholding. It is important to note that a QI is not permitted to apply a reduced rate of withholding under Code Code Sec. 1446(a) or (f) if the account holder fails to provide a U.S. TIN for any calendar year in which a payment is made.
Requirements for Disclosing QIs
The 2023 QI Agreement incorporates the concept of a "disclosing QI," which is a QI that does not assume primary withholding responsibilities for purposes of Code Secs. 1446(a) and (f), and, instead, provides its custodian/broker with payee-specific documentation (only IRS Forms W-8 and W-9; a disclosing QI cannot provide documentary evidence for its account holders), in addition to a recipient-specific withholding statement (that includes income and proceeds), as well as the requisite Code Sec. 6031 nominee statement. (This new concept was previewed in the preamble to the final regulations for Code Sec. 1446(f) and the QI Rider.)
A disclosing QI is not required to provide the Code Sec. 6031 nominee statement to the QI's nominee if such nominee maintains fully segregated and disclosed accounts for the disclosing QI's account holders that include the information necessary for the PTP (or its agent) to issue a Schedule K-1 to each beneficial owner of the PTP interest. For these purposes, the term "nominee" includes "an entity ... that holds a PTP interest directly or indirectly for another person" and is not limited to nominees permitted to assume withholding on PTP distributions.
In addition, the 2023 QI Agreement incorporates the requirement of the QI Rider that a QI must act as a disclosing QI for the entire amount of a PTP distribution or amount realized from the sale of a PTP interest, commonly referred to as the "all or nothing" approach. The 2023 QI Agreement, however, clarifies that a QI may act as disclosing QI even if the Form W-8 associated with the payee account holder does not include a U.S. TIN. In other words, the lack of a U.S. TIN on a Form W-8 will no longer prevent a QI from acting as a disclosing QI for the entire amount of a payment made to multiple account holders due to any account holder failing to provide a U.S. TIN. The QI must nevertheless use its best efforts, as set forth under the 2023 QI Agreement and described above, to obtain a U.S. TIN for any such account holder.
In addition, the 2023 QI Agreement makes clear that a disclosing QI must disclose both its U.S. and non-U.S. account holders.
The 2023 QI Agreement retains the requirement that a disclosing QI provides a valid withholding certificate for each account holder (aside from the U.S. TIN requirement, discussed above). A disclosing QI may wish to discuss this requirement with its custodian/broker so that there is an understanding between the parties to promptly remediate any withholding certificate or withholding statement that is considered to be invalid by the custodian/broker.
Certification Regarding Code Secs. 1446(a) and (f)
The 2023 QI Agreement adds a new certification regarding a QI's procedures for complying with Code Secs. 1446(a) and (f) and (more generally) that the QI has acted only to the extent permitted under the QI agreement. Thus, for example, a QI would not be able to make this certification if it represents its status as a QI with respect to an amount realized paid to an account holder for an interest in a partnership that is not a PTP.
To the extent an entity makes the decision to act as a QI with respect to Code Secs. 1446(a) and (f), it should carefully consider this new certification and ensure that it is not acting in a QI capacity with respect to an interest in a non-PTP. This may involve discussions with a QI's custodian/broker to ensure PTPs and non-PTPs are not held in the same account and are documented separately.
Collective Refund Procedure for Purposes of Code Secs. 1446(a) and (f)
The 2023 QI Agreement provides that a QI is unable to apply the collective refund procedures for overwithholding under Code Secs. 1446(a) and (f). This is because account holders receiving payments subject to withholding under Code Sec. 1446(a) or (f) are required to file U.S. income tax returns to report these payments and should claim any associated credits or refunds of the withholding on such returns.
The presumption rules that apply where a QI has undocumented account holders have been updated for purposes of Code Sec. 1446(a) by including a reference to the presumption rule of Reg. §1.1446-1(c)(3) for a QI to determine the status of a partner as a foreign individual or corporation (and, thus, the rate of withholding) when the QI cannot reliably associate a payment subject to Code Sec. 1446(a) withholding with valid documentation from a partner in cases that were not previously covered under the 2017 QI Agreement.
QDDs and Qualified Security Lenders
The 2023 QI Agreement also describes the requirements for QIs acting as QDDs and the requirements of QIs regarding payments of dividend equivalents they receive in an intermediary capacity for purposes of regulations issued under Code Secs. 871(m), 1441, 1461, and 1473.
The QDD provisions in the 2023 QI Agreement are generally retained from the 2017 QI Agreement, with some added guidance for QDDs that are partnerships or a branch of a partnership and incorporate portions of prior FAQs that supplement the 2017 QI Agreement, as well as certain transitional relief provided by Notice 2022-37.
A QDD must assume primary chapter 3 and chapter 4 withholding and reporting responsibility and primary Form 1099 reporting and backup withholding responsibility under Code Sec. 3406 for payments made as a QDD regarding potential Code Sec. 871(m) transactions.
A QI acting as a QDD generally remains liable for its QDD tax liability and must report that liability on the appropriate U.S. tax returns. While a QDD is not required to perform a periodic review for calendar years 2023 and 2024 regarding its QDD activities, the 2023 QI Agreement requires a QDD to certify, as part of its periodic certification, that it made a good-faith effort to comply with Code Sec. 871(m) regulations and the relevant provisions of the 2023 QI Agreement. The 2023 QI Agreement clarifies that in order to rely on the goodfaith effort standard, a QI must provide the information previously specified by FAQ #19—Certifications and Periodic Reviews for the 2017 QI Agreement.6 The requirements for QDD periodic certification reporting and a sample of QDD accounts are expected to be released in the future in the form of a rider to the 2023 QI Agreement.
For qualified security lenders ("QSLs"), a withholding agent may not act as a QSL for payments made after 2024. Until December 31, 2024, if a QI that is not acting as a QDD acts as a QSL, it must act as a QSL and assume primary withholding responsibility (including Form 1099 reporting) for all substitute dividends received and paid by the QI when acting as an intermediary or dealer regarding securities lending and similar transactions.
Validity Standards for Documentation
FAQs# 1 and 2—Provisions for 2017 QI Agreement, which provide additional guidance on the standard certain QIs must apply when treating documentation provided by a direct account holder as unreliable, have been incorporated in the 2023 QI Agreement. First, a QI may treat a direct account holder's claim of non-U.S. status on a Form W-8 as unreliable only if the QI had a U.S. mailing or permanent address for the account holder (as opposed to having a U.S. mailing or permanent address in the account file). Second, with respect to a claim of treaty benefits, a QI is not required to redocument a direct account holder claiming treaty benefits if the QI had documented such an account holder before January 1, 2018, in accordance with the prior applicable guidance. For those direct account holders documented on or after January 1, 2018, a QI should have a permanent residence address for the direct account holder in the jurisdiction associated with the documentation being relied upon.
1. Pursuant to Reg. §1.1441-1(e)(5).
2. Rev. Proc. 2017-15, IRB 2017-3, 437.
3. The term "publicly traded partnership interest" means "an interest in a publicly traded partnership if the interest is publicly traded on an established securities market or is readily tradable on a secondary market (or the substantial equivalent thereof)." Reg. §1.1446(f)-1(b)(5).
4. Notice 2023-8, IRB 2023-2, 341, Section VI
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