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What is this New Nominee Reporting Obligation under the PTP Withholding Provisions of the Proposed QI Agreement?

7/9/2022

 
Amongst the unexpected and peculiar features of the proposed Qualified Intermediary (QI) Agreement–as expanded to cover withholding on payments from publicly-traded partnerships (PTPs)–the new nominee reporting requirement per §6031 of the Internal Revenue Code (IRC) stands apart.
 
Background to the Revamped Sections of the Proposed QI Agreement
In May 2022, the US Treasury Department released IRS Notice 2022-23, a proposed revision to the QI Agreement. Under the new draft sections, QIs may assume withholding and reporting obligations under §§ 1446(a) and 1446(f) of the US Treasury Regulations for payments connected to PTPs. The new provisions for PTP withholding are needed because a Non-US Person who sells an interest in a partnership that could earn income effectively connected with a US trade or business is subject to US federal income taxation per §864(c)(8) of the 2017 tax legislation. In parallel to this substantive rule, Congress added a new withholding dimension under §1446, imposing on a buyer of an interest subject to §864(c)(8) the obligation to withhold 10% of the amount realized.
 
For further elaboration on these concepts, please refer the MTL blogs on §§ 864(c)(8) and 1446(a) and (f), here.
 
The §1446(f) statutory provision, however, did not explain how that ought to work for PTPs, where the buyer and seller are typically invisible to one another. As such, the US Treasury Department promptly suspended the withholding regime for PTPs via IRS Notice 2018-02 and, via a series of subsequent notifications and the publication of the withholding regulations in late 2020, eventually, pushed the activation date to 1 January 2023. With the revamped QI Agreement, the PTP withholding regime is moving into the implementation phase. As stated in the preamble to Notice 2022-23, the objective of the new PTP sections to the QI Agreement is straightforward: To align the treatment of PTP payments with those of payments traditionally processed by non-US custodial institutions. However, rather than ensuring frictionless continuity from dividend withholding to PTP payment withholding, the proposed QI Agreement introduces a few novel aspects to the QI Regime.
 
Nominee Reporting Requirements under the Proposed QI Agreement for PTP Withholding
Some novel aspects of the proposed QI Agreement for PTP Withholding, such as the new official QI status of the “Disclosing QI” and strict demands for US Taxpayer Identification Numbers (TINs) from non-US Persons, may be disruptive of existing QI operations. Only one new feature, however, obliges parties to set up and maintain a fresh tax reporting mechanism: Nominee reporting.
 
Nominee reporting per §6031(c) of the IRC is not a new provision and it serves an essential role outside the QI Regime. Anytime a nominee holds a partnerships interest (of any partnership, not just a PTP), the nominee is charged with ensuring that the partnership has sufficient information on the beneficial owner to provide an accurate Schedule K-1 to the partner and analogous return to the IRS. Prior to this year’s draft QI Agreement, the §6031(c) concept of a “nominee” was commonly understood to refer to a Person holding the reportable partnership interest during the partnership’s tax year in its own name on behalf of the beneficial owner of the interest (see e.g. Treas. Regs. §1.6031(c)-1T). For this reason and because PTP and other partnership interests were previously held in non-QI accounts, nominee reporting did not concern the QI system. That has now changed.
 
Proposed Section 2.92 of the new draft QI Agreement adds a series of new definitions to accommodate the jargon of PTP withholding and partnership taxation, one of which is a definition of a “Nominee,” which explicitly includes Withholding QIs. Furthermore, proposed Section 8.07 widens the nominee reporting requirement to the other types of QI statuses, as follows–
  • Withholding QIs may EITHER prepare the nominee reporting information set forth in Treas. Regs. §1.6031(c)-1T(a) and deliver it to the PTP or its designated agent OR prepare the nominee reporting information set forth in Treas. Regs. §1.6031(c)-1T(h) and provide it to the PTP interest’s account holder (i.e. the beneficial owner partner or to the next intermediary in the payment chain).
  • Non-withholding QIs must fulfill identical nominee reporting duties as Withholding QIs (despite not being explicitly named in the definition of a “Nominee” in Section 2.92).
  • Disclosing QIs must deliver the information described above for §1.6031(c)-1T(a) to the PTP or its designated agent or to its own nominee (i.e. the intermediary immediately upstream from it in the payment chain), which must formally operate as either an agent of the PTP or of the QI.
 
While the mechanics of nominee reporting under IRC §6031 are markedly less cumbersome than some of the other reporting required of QIs, it constitutes an additional reporting function that must be set up, tested and maintained. First, the QI must be certain it can collect all mandatory information (notably, US TINs) before it opts for a strategy, which may depend upon interchanges of information with third parties, which tend to slow down or complicate tax reporting. Second, PTP interests may need to be shifted across custodial accounts in order to avert duplicative reports to the IRS. Third, if the QI decides to adopt the option under§ 1.6031(c)-1T(h) to intermediate the K-1s from the PTP to the beneficial owner partner, it will need a grasp of US partnership taxation concepts to provide a meaningful review of the information for which it is responsible. Finally, any defect with respect to nominee reporting is a material failure (Section 10.03(B)(1)) which, if left uncorrected, would lead to an event of default and the termination of the entity’s QI status.
 
While any of the above challenges around nominee reporting under IRC §6031 and the new PTP Withholding provisions of the proposed QI Agreement may be softened in the final version of the QI Agreement (the IRS expressly requested comments on Section 8.07 in the preamble), It is a necessary evil. Thus, nominee reporting will likely remain a new and unexpected obligation for most QIs to fulfil.
 
If you wish to discuss the above analysis or any other aspects of the QI Regime in greater detail, please contact us at paul@millentaxandlegal.ch to arrange a conversation.
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Swiss banks, Fund Managers and Investors: What the §1446(f) Proposed Regulations Demand of Each Party

15/8/2019

 
The §1446(f) Proposed Regulations for the withholding tax due on sales of designated partnership interests spreads the compliance burden across multiple Swiss market participants. Swiss banks, fund managers and investors all incur their own separate - but interrelated - duties under the new regulations released on 7 May. Satisfaction of these obligations necessitates a mixture of updated documentation, new withholding awareness and adjusted reporting processes. The following paragraphs examine the provisions and pitfalls for Swiss banks, fund managers and investors, respectively, due to the §1446(f) Proposed Regulations.
 
Background to IRC §1446(f) and the §1446(f) Proposed Regulations
Of the numerous substantive provisions contained in the 2017 tax bill, §864(c)(8) stands out by resolving a specific problem with a direct solution. The statutory provision overruled a US Tax Court decision from summer 2017 called Grecian Magnesite. The ruling had challenged the long-standing IRS interpretation that the sale or other disposition of an interest in a partnership that could earn effectively connected income (ECI) likewise qualifies as ECI. The new statutory provision codified the IRS interpretation: The proceeds from sales of such Specified Partnership interests are treated as effectively connected gain or loss and thus taxable by the IRS.
 
As such, the new provision essentially re-affirmed the substantive status quo. Except that Congress also added a new withholding dimension, imposing on any buyer of an interest subject to §864(c)(8) the obligation to withhold 10% of the gross proceeds paid to any non-US seller. The §1446(f) statutory provision, however, did not explain how that ought to work in practice, least of all for Publicly-traded Partnerships (PTPs), where the buyer and seller are typically invisible to one another. As such, the Treasury Department promptly suspended the withholding regime for PTPs. Shortly thereafter, via Notice 2018-29, the Treasury invoked a pre-existing set of regulations for withholding on US real property income to serve as a temporary bridge until Treasury could conjure an appropriate set of rules for withholding around PTPs, private equity funds and other myriad types of investments captured by the new provisions. The stop-gap rules will remain in effect until the Treasury Department publishes final regulations announcing their expiration dates (see the last section of this blogpost for further elaboration on the timeline for the §1446(f) regulations).
 
Previously, I addressed the preliminary and subsequent developments of §§ 864(c)(8) and 1446(f) in several blogs (available here) and at the Operational Taxes for Banks, Europe Conference in Zurich last November (available here).Prior to last month’s release of the Proposed Regulations, however, material doubts remained as to the final rules, their impact on various affected parties and their manner of implementation. As set out below, with several crucial exceptions, those doubts are now settled.
 
Swiss Banks (see generally, Prop. Regs. §1.1446(f)-4)
Swiss banks will need to renovate their withholding and reporting mechanisms in order to encompass the withholding and reporting required by qualifying brokers on the sale or other disposition of in-scope PTPs by non-US Person investors. A common aim for bank associations in submitting comments to the IRS on 1446(f) was to fold the new PTP withholding regime into the existing Qualified Intermediary (QI) regime. To a large extent, they were successful as the overall structure, documentation and reporting Forms and deposit procedures are lifted from the QI regime.
 
However, they were not completely successful in achieving this common aim and so, major operational and legal issues will arise. The need to withhold on unpredictable sales proceeds, rather than on stable periodic income flows, will complicate the identification of withholdable payments for banks custodying PTPs. Also, and more dramatically for Swiss banks, the Form 1042-S reporting will oblige them to list sellers on a named, individuated basis - rather than on a pooled and anonymized basis - which will collide with Switzerland’s bank confidentiality laws. Several industry groups (e.g. SIFMA, the Swiss Bankers Association) submitted comment letters to the IRS explaining the fallibility of the approach as set forth in the Proposed Regulations. It is scant exaggeration to assert that the on-going viability of the PTP market in Switzerland depends on the malleability of these provisions.
 
Swiss Investors (see generally, Prop. Regs. §§ 1.1446(f)-1, -2)
Swiss investors will face a double-edged sword that cuts at them coming and going. When they buy a Specified Partnership interest, the obligation to withhold and report on the gross amount of sales proceeds applies. When the Swiss investors sell the same or any other Specified Partnership interest, they will need to understand the exceptions to withholding and/or the mechanics of claiming a credit for the amount withheld under 1446(f). The foremost goal for affected Swiss investors is to ensure that they are not taxed needlessly or twice under the regime. The outstanding challenge will be to calculate the correct amount of tax due per the §864(c)(8) regulations and then to navigate the multiple forms and operational pitfalls in their path to preventing inappropriate withholding and/or claiming appropriate tax credits.
 
Swiss Fund Managers (see generally, Prop. Regs. §§ 1.1446(f)-2, -3)
Swiss fund managers will have limited foreground duties. They need to prepare for back-stop withholding in case the buyer neglects the primary duty and to conduct primary withholding duty in the limited circumstance that a distribution from the fund is treated as sales proceeds. On the other hand, their background duties will be considerable.
 
The other parties mentioned above will request certain information from their fund managers and that information must be provided in the timeframe and format mandated by the IRS. Accordingly, fund managers must become fluent in a variety of official IRS Forms and unofficial notifications, statements and certifications and their correct usages. By my count, the Proposed Regulations reference 7 new or amended IRS Forms and 7 new notifications, statements or certifications, each with its own delineated purpose.
 
More strategically, Swiss fund managers will need to consider how and how much of the burdens imposed on the others, notably their investors, they wish to assume on their behalf.  In order to preserve the market for in-scope fund offerings, fund managers may need to disencumber their clients and counterparties at their own expense.
 
Finally, to the extent Swiss fund managers operate over-the-top blocker corporations on behalf of their clients in Cayman, Luxembourg or elsewhere, these will qualify as non-US Persons for purposes of §1446(f) and be subject to the range of compliance duties set forth in the Swiss Investors’ section above.
 
Timeline and Action Items
One more aspect of the §1446(f) Proposed Regulations that has drawn scrutiny from commentators is the implementation schedule. As set out above, Swiss banks and fund managers must adjust or invent processes and procedures in order to cope with novel developments under §1446(f). However, rather than grant these financial institutions ample implementation leeway, the §1446(f) Proposed Regulations declare that the new rules will come into effect only 60 days following publication of the Final Regulations in the Federal Register. With the comment period window already shut, affected parties ought to anticipate Final Regulations – and the subsequent activation of this compliance regime in full - in the near term.
 
This aggressive timeline compels affected parties to initiate their compliance plans in advance of the publication of the Final Regulations. In so doing, they ought to consider the following concrete steps towards readiness:
  • Examine operations to identify and isolate Specified Partnership interests subject to the §1446(f) withholding regime;
  • Determine whether – and under what conditions – the business case justifies remaining in the market, an action item of especial relevance to banks holding PTPs;
  • Institute contingency plans in case the conditions for remaining in the market are unmet, such as the prospect of forced divestment;
  • Review and revise terms and conditions, prospectuses, offering memoranda and so forth in order to reflect §1446(f) withholding risks;
  • Familiarize the compliance team with the new and revised IRS Forms – some of which are already available in draft format – and the parameters for valid notifications, statements and certifications; and
  • Be prepared to press forward swiftly in case the IRS retains the onerous 60-day activation timeline in the Final Regulations.
 
If you wish to discuss this topic in further detail please contact us at: info@millentaxandlegal.ch
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A Feast for the Tax Lawyers: The Proposed §864(c)(8) Regulations

15/1/2019

 
Over the holiday season, the US Treasury Department released the Proposed Regulations to IRC §864(c)(8), governing the sale, transfer or other disposition of certain partnership interests (mainly, private equity fund investments) by non-resident aliens (NRAs). The Proposed Regulations resolve the inconsistencies between the statute and existing US tax principles by incorporating heaps of existing federal tax provisions by reference. This deference molds the new statute to existing rules covering partnership interest sales by NRAs, but, as a result, this topic demands exhaustive prior exposure to multiple areas of US federal tax law. Alone, Example Three of the illustrative examples at the end of the Proposed Regulations implicates multiple tricky concepts from the partnership rules under subchapter K, such as the scope of §704 allocation discretion, the calculation of outside basis and the recharacterization of sales proceeds per §751, plus various international and corporate tax concepts, such as ECI, USRPIs and sourcing rules. Moreover, these concepts merely serve as the background landscape to the Proposed §864(c)(8) Regulations, which then apply their own special mustard to the topic. In sum, those with a taste for the diverse provisions referenced in this regulatory hot pot, will delight in savoring each one. The rest though may feel quite queasy when a single reference (even one from inside a parenthetical) leads to a hundred pages of extra regulations.
 
Content of Proposed §864(c)(8) Regulations
For those with the stomach to digest all these background prerequisites, the Proposed Regulations effectively settle many statutory ambiguities attendant to the sale, transfer or other disposition by NRAs of partnership interests earning potential ECI. Foremost, it informs the taxpayer how to calculate the amounts of gain or loss taxable as ECI. First, it instructs the NRA taxpayer to calculate effectively connected gain or loss and to characterize portions of the gain or loss as capital gain or ordinary income under the prevailing principles of subchapter K. Then, it sets forth a three-step process in order to cap this amount: Calculate the amount of gain or loss by means of a hypothetical sale scenario of all the partnership’s assets; determine the portion of such amounts qualifying as ECI; and identify the distributive share of such ECI attributable to the NRA transferor (consistent with §704). These two calculations, heavily reliant on themes from subchapter K, are the essence of the Proposed Regulations.
 
However, other topics are addressed as well in an effort to ensure that the core aim of taxation of such interests as ECI is reached, but not overreached. In order to accomplish this purpose, the regulations contemplate the following items:
  • Multi-tier structures and the calculation of the taxable amount of ECI from sales of interests in the uppermost partnerships (e.g. a funds of funds’ scenario), which, regrettably, offers no de minimis relief and depends on information that may not be readily accessible;
  • The treatment of transactions that permit deferred taxation (i.e. non-recognition events);
  • The interaction of §864(c)(8) with §897, governing the dispositions of US Real Property Interests (USRPIs), the proceeds from which are also treated as ECI for NRA sellers;
  • The application of §864(c)(8) where the activity falls under a tax treaty, rather than under the Treasury Regulations (which may, if taken to logical ends, result in treaty disputes and/or double taxation);
  • The treatment of §707 distributions in excess of an NRA partner’s outside basis in the partnership;
  • A sui generis sourcing rule, applicable solely to this provision and positing the anomaly in which non-US source income is characterized as ECI; and
  • Anti-abuse rules (called “anti-stuffing” rules here), which seek to prevent any re-structuring of partnership allocations in order to reduce ECI exposure for NRA partners.
 
Implications for Swiss Taxpayers, PE Funds and other Swiss Financial Institutions
These Proposed Regulations set out the method of calculation for taxable income from the sale or other disposition of qualifying partnership interests by NRAs. Such information is crucial to NRA taxpayers who must calculate their taxable income following the sale of such an interest. Furthermore, private equity funds ought to rely on these Proposed Regulations in order to determine which information their NRA investors will expect to receive in order to calculate their §864(c)(8) tax liabilities.
 
But there are other party-goers at this banquet and several corollary topics remain unaddressed, two of which will play significant roles for Swiss private equity funds and financial institution, as follows:
  • The §1446(f) withholding regulations will set the scope and application of the withholding obligations, which fall primarily on the buyer of an in-scope partnership interest and, residually, on the partnership itself (please find my blog on the current state of the withholding rules at http://millentaxandlegal.ch/blogs/private-equity-withholding-regulations-released). Once final, these regulations will determine the withholding and reporting mechanisms that private equity fund managers will need to establish. The  §864(c)(8) Proposed Regulations aid in that determination by calculating the baseline value of the total taxable amount, but complicate it materially in other ways and, thus, the final withholding regulations may set out some further limitations.
  • The treatment of the sale, transfer or other disposition of interests in qualifying Publicly-Traded Partnerships (PTPs), which have been necessarily severed from their non-PTP brethren. This treatment will determine whether custodial banks can comfortably fold such PTP interests into their current QI positions or need to consider alternatives, including potentially forced divestment of qualifying PTP interests by their account holders.
 
Through the release of the Proposed §864(c)(8) Regulations, the regime governing the sale or other disposition of certain partnership interests by NRAs advances, but it does so fitfully and through resort to daunting preparatory knowledge. The incorporation of so many provisions from other sections of the US tax code and regulations, however, while helping ensure consistent flavor, may deter newcomers from taking a first bite.
 
Timelines and Other Sources of Information
As Proposed Regulations, these rules are not in force until released in final form. If finalized by 22 June 2019 the §864(c)(8) Regulations will be retroactive to 27 November 2017 (or, if not finalized until after 22 June 2019, to 20 December 2018).
 
Previously, I addressed §864(c)(8), along with §1446(f)’s associated withholding rules, in several blogs (http://millentaxandlegal.ch/blogs.html) and at the Operational Taxes for Banks, Europe Conference in Zurich last November (http://millentaxandlegal.ch/speaking-engagements.html). In the latter case, however, I concentrated on the treatment of PTP interests, as the audience consisted primarily of bankers, rather than investors or fund managers.
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Private Equity withholding regulations released

27/8/2018

 
Here's the good news: The IRS referenced well-known regulations in order to implement the new withholding provision applicable to dispositions of certain partnership interests.​

Here’s the bad news: Those well-known regulations are the not very well-loved FIRPTA regulations for withholding on dispositions of US real property interests.

This blog will set out and review the following related matters:
  • The background to the new statutory withholding provision;
  • The questions emerging from it;
  • The contents of IRS Notice 2018-29, addressing those questions; and
  • The consequences for affected funds and investors in the Swiss marketplace.

Background to §§ 864(c)(8) and 1446(f)
Amongst the strategic transformations and pork barrel addenda that collectively define the 2017 tax bill, the US Congress enacted one provision, §864(c)(8) that stood out in by squarely addressing a specific problem with a mainly uncontroversial solution (see my earlier review of the new provision). In summary, the provision overruled a Tax Court decision from last summer called Grecian Magnesite. The ruling had challenged the IRS interpretation that the sale or other disposition of an interest in partnership that could earn effectively connected income (ECI) likewise qualifies as ECI. The new statutory provision codified the IRS interpretation.

In addition to affirming the IRS position, Congress added a new withholding dimension, §1446(f), obliging the buyer of an interest (referred to as the “transferee”) to withhold 10% (a seemingly arbitrary percentage) of the acquisition price from any non-US seller (referred to as the “transferor”). The amount realized is calculated via a deemed sale hypothetical - i.e. as if the partnership had sold all its assets at current FMV - in order to determine the amount, if any, of ECI it would have earned. If such withholding is not conducted by the transferee/buyer at the time of the acquisition, then the fund itself must withhold on subsequent distributions to the transferee/buyer.

The Practical Issues Arising from the Statutory Text
The statutory provisions settled the theoretical question posed by Grecian Magnesite, while generating a host of practical ones. Primarily these practical questions concern the exceptions to the withholding requirement and the determinants of the amount to be withheld, such as the following:
  • How can the transferee/buyer confirm that the transferor/seller is a US Person and thus not subject to the withholding requirement?
  • Where withholding is conducted, how (and how soon) must the revenue be deposited with the U.S. Treasury?
  • How does the transferee/buyer report the withholding activity to the IRS?
  • What if the transferor/seller enjoys no gain on the sale and, if so, how is such a loss position evidenced?
  • Is there a de minimis exception if the value of the partnership’s assets yielding ECI is relatively small in proportion to the total value of the assets held by the partnership?
  • What if the partnership makes a distribution to a partner in excess of the partner’s adjusted basis in the partnership interest (which is conceptually regarded as a partnership interest disposition under §731)? 
  • How do the fund’s liabilities (the transferor/seller’s share of which transfers to the transferee/buyer along with the sale of the interest) affect the calculation of the amount realized and thus the withholding due?
  • How is the value of the sale calculated when the partnership’s expenses were not yet allocated to the transferor/seller?
  • Will the withholding rules apply (and if so, how) to a non-recognition transaction, where taxation is deferred?

Release of Notice 2018-29
The absence of any guidance on such fundamental operational matters helped persuade the US Treasury Department to swiftly suspend the application of the new withholding rules to the sale of publicly-traded partnership (PTP) interests at the end of December 2017, while inviting comments on other similarly-affected transactions. This uncertainty for the sale of non-PTP interests lingered until April, when the IRS released Notice 2018-29, addressing - in full or in part - the key questions emerging from the new statute (see list above) and inviting taxpayers to rely on the Notice until formal regulations could be prepared, proposed and published. By referencing the FIRPTA regulations as the source for guidance, supplemented by a few additions specific to the text of §864(c)(8), the IRS erected a short-term bridge across the holes in the statute.

Further, the Notice suspended the operation of the residual withholding obligations imposed on the funds themselves to withhold on subsequent distributions to any transferee/buyer that neglected to apply the 10% withholding at the time of the transaction. Finally, it waived the application of interest and penalties for any deposits due but not made prior to 31 May (tolling them until 31 May).

Despite the significant color daubed on the withholding picture by the Notice, several big questions remain outstanding. The most seismic is the treatment of PTPs. In a comment letter from SIFMA (the “voice of the [US] securities industry”) dated 2 August 2018, SIFMA outlined the impracticability of the FIRPTA-based approach to PTPs due to the current set-up for holding PTP interests, namely, the non-visibility of the relevant parties to one another. As an alternative, SIFMA proposes a system similar to the Qualified Intermediary (QI) regime for US publicly traded equities which imposes the withholding obligation on the client-facing custodian of the PTP interests, and relief for funds from any residual withholding responsibility. 

A second consideration overlooked by the Notice is the impact of the withholding regime on non-US flow-through entities with US partners/owners. This omission most notably implicates US partners in non-US funds of funds with investments through multiple tiers that ultimately yield ECI. Under international and flow-through taxation principles, such US partners are not subject to ECI taxation. Accordingly, the possibility ought to avail for the non-US partnership to provide a certification and underlying documentation that correspondingly reduces the withholding due on the disposition of lower tier partnership interests. For chapter 3 (QI) purposes, the Form W-8IMY and accompanying withholding statement collectively serve this objective. Therefore, the solution is at hand, even if not yet formally blessed by the IRS.

While more of a niche topic for non-PTP interests, doubts prevail concerning the correct treatment for the lending of partnership interests under §1058. Presumably, the general understanding for securities lending - that it does not constitute a sale or other disposition of the asset - applies to partnership interests with respect to §864(c)(8). However, the absence of any express expansion of the §1058 standard to the lending of partnership interests may distort or deter the sec lending market.

The single most outstanding question is, of course, whether the final regulations dedicated to withholding under §1446(f) will continue in this FIRPTA vein or swerve in another direction. While it would be unlikely (and ferociously vexing) for the IRS to compel the affected parties to adopt and implement a temporary withholding regime based on FIRPTA and then abandon it in favour of something else entirely for the permanent one, it is not inconceivable.

Considerations for Affected Swiss Parties
Swiss-based parties involved in US-based private equity investments may be impacted by the new rules in myriad ways depending on their specific role in such investment. Each role entails its own areas of concern, as follows:
  • Swiss-based private equity fund managers/sponsors with US holdings yielding ECI, for example, need to:
    • Assess their holdings in order to identify relevant holdings and develop a sense of their risk exposure;
    • Develop the various certifications that their investors will request from them in order to evidence crucial factors, such as ECI amounts, expenses and liabilities;
    • Update their offering memoranda and other legal documentation;
    • Issue communications to investors; and
    • Begin to consider residual withholding operations for once the suspension expires for funds to withhold on subsequent distributions to neglectful transferees/buyers.
  • Swiss-based, non-US investors, for example, need to:
    • Investigate their holdings by re-reviewing offering memoranda and K-1s to determine their exposure to §1446(f) withholding;
    • Evaluate the economic impacts on their investment strategies and cash flow scenarios;
    • Identify their own eligibility for withholding exceptions and prepare or obtain the certifications needed to evidence such eligibility; and
    • Set up a withholding function for acquisitions implicating §1446(f) that can determine if withholding required (i.e. request, obtain and validate relevant certifications), calculate the correct amount of withholding, withhold, deposit and report all on a strict timeline.
  • Swiss-based funds of fund managers/sponsors, for example, need to:
    • Implement both sets of activities above for Swiss-based funds and Swiss-based investors;
    • Settle on an approach to self-documentation (e.g. Forms W-8IMY plus withholding statements) as a non-US flow through entity with US beneficial owners (if relevant); and
    • Conduct an historical review for any retrospective withholding due on prior acquisitions.
  • Swiss-based, US investors, for example, need to:
    • Investigate their holdings by re-reviewing offering memoranda and K-1s to determine any exposure to possible §1446(f) withholding; and
    • Liaise with the fund managers in order to ensure that will not suffer undue §1446(f) withholdings as refunds will be a hassle.

In the end, the reliance on FIRPTA principles is as useful in Switzerland as elsewhere: Potentially beneficial, but mainly for those affected parties that have some experience with them. For the rest, the Notice introduced a new set of challenging regulations that will need time, resources and patience to master.
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