Barriers to Treaty Access for 81-100 Group Trusts

In our opening segment on the 81-100 Group Trust series titled: Understanding 81-100 Group Trusts, we provided an overview of 81-100 Group Trusts and how they are structured, whilst also touching on the challenges related to withholding tax relief that they may encounter. In this second segment of the series, we will explore the intricacies of these challenges faced by 81-100 Group Trusts in certain jurisdictions by providing a broad overview of how tax authorities in different jurisdictions perceive 81-100 Group Trusts, highlighting their unique characteristics and nuances when it comes to withholding tax relief.

Challenges and Complexities in Treaty Relief for 81-100 Group Trusts

Treaty partners frequently deny or restrict treaty benefits for US 81-100 Group Trusts. While the precise reasons for such denials or limitations vary among tax authorities, they generally revolve around one or a combination of the following factors:

  • Treaty partners, in many cases, do not recognise Group Trusts as eligible for treaty benefits in their own right but rather consider the underlying pension plan participants as treaty eligible.
  • In certain instances, the treaty partner does not consider the Group Trust as a U.S. Pension Fund entitled to treaty exemptions, as the Group Trust itself does not directly provide retirement benefits to participants.
  • Finally, treaty partners express apprehension regarding the inclusion of Puerto Rican pension funds in the Group Trust arrangement, as permitted by Revenue Ruling 81-100, following its modification in 2014. The inclusion of Puerto Rican pension funds has introduced additional challenges to treaty access for Group Trusts, questioning their ability to meet the residency and limitation of benefits criteria in specific treaties.

At the end of this article, we provide a detailed market-by-market overview of the markets wherein the above factors are specifically prevalent.

Documentation Requirements and Compliance Burdens

The effect of the above concerns for treaty partners is that various tax authorities, when assessing the Group Trust entitlement to treaty relief, require documentation such as IRS 6166 certifications from the underlying participating plans. Given that these Group Trust arrangements can often have hundreds of participating plans, this is a burdensome requirement on Group Trusts and compliance therewith is often difficult or impossible.

In addition to the challenges outlined for 81-100 Group Trusts, there are also practical uncertainties regarding the recovery of over-withheld taxes, including ambiguity about which party is the appropriate entity to submit the tax relief request. As explained in our article: Understanding 81-100 Group Trusts, Group Trusts are typically structured with tiers that involve an upper-tier (referred to as “Master Trust” or “Group Trust Arrangement” or “Umbrella”) and several lower-tier vehicles (referred to as “trusts” or “funds” or “sub-funds” or “pools”) offering diverse investment strategies for participant plans. The uncertainty across some markets on whether one reclaim should be filed by the umbrella structure or separate requests should be filed by each of the underlying sub-funds creates various practical complications with retrospective reclaims.

Industry Advocacy and Collaborative Initiatives

Despite the challenges highlighted in the earlier paragraphs, there is reason for optimism as various industry bodies actively advocate with the Internal Revenue Service (IRS) for engaging in competent authority agreements and are discussing their practical applications with relevant foreign governments. These efforts aim to alleviate the difficulties faced by 81-100 Group Trusts in securing treaty relief. Notably, the Association of Global Custodians sent a comprehensive letter to the IRS in the latter part of 2021. Likewise, the Investment Company Institute sent a letter to the IRS in April 2023 and is actively continuing discussions with foreign tax authorities on these matters, further contributing to these collaborative initiatives.

WTax Investor Portal for Document Collection

WTax actively supports and participates in advocacy initiatives seeking to overcome the challenges faced by 81-100 Group Trusts. However, we remain mindful of the current stance of foreign tax authorities. Given the time limitations, especially with reclaims being statute-barred as early as two years in the case of France, it is crucial to explore practical solutions for the existing circumstances.

WTax’s investor portal was initially developed to facilitate the collection of investor documents needed for reclaims for transparent investment vehicles. This same portal has been adapted to support document gathering for participating pension plans in the 81-100 Group Trust arrangements. The portal offers an efficient way to manage pension plan document collection which allows us to proceed with the reclaims by procuring and providing the documentation required by foreign tax authorities. The investor portal plays a pivotal role in boosting investor participation rates. It also provides seamless monitoring of participation rates, automatically compiling all essential investor documents for straightforward claim submissions.

Guide to Market-Specific Challenges for 81-100 Group Trusts

We have outlined below an overview of some of the prevalent markets where 81-100 Group Trusts are experiencing difficulties in obtaining treaty benefits, together with the specific challenges faced in these markets:

Austria

Dividend Treaty Rate: 15%

Historically, 81-100 Group Trusts were eligible for treaty benefits at the level of the Group Trust provided that the treaty stipulations applicable to U.S. Pension Funds were met.

However, during the latter part of 2023, the Austrian Tax Authorities (ATA) issued notices to 81-100 Group Trusts claiming WHT relief informing them that, following a review, they are no longer viewed as pension funds but rather the ATA considers them to be investment funds which are considered transparent for Austrian tax purposes and subject to more onerous document requirements to secure treaty benefits.

In summary 81-100 Group Trusts are now required to:

  • Submit a Declaration of Widely Held Foreign Investment Funds (the Declaration) if they have 100 or more investors as well as the certificates of residence (CORs) of investors holding at least 10% in the trust; or
  • Provide the CORs of all underlying investors if they have less than 100 investors.

 

Denmark

Dividend Treaty Rate: 15%/0%

The Danish Tax Authorities (SKAT) have historically granted a refund down to 15% for 81-100 Group Trusts but have denied them the exemption available to pension funds. SKAT has taken the position that a Group Trust does not meet the definition of “pension” under the treaty but rather is an investment company for the participating pensions given that they do not themselves provide pension or similar benefits.

During the first quarter of 2023, SKAT issued notices to some 81-100 Group Trusts advising that the Danish Tax Agency and the US Tax Agency are currently negotiating article 10(3)(c) and 22(2)(e) of their Double Taxation Treaty, specifically with reference to the interpretation in relation to a group trust arrangement. WTax is monitoring these negotiations closely.

 

Germany

Dividend Treaty Rate: 15%/0%

In 2012, the U.S. and German Competent Authorities entered into a Competent Authority Agreement regarding the eligibility of certain pension arrangements for benefits under Article 10(3)(b) of the U.S./Germany treaty. The Agreement clarified that that the term “pension fund” within the meaning of Article 10, paragraph 11 of the treaty includes a Group Trust described in IRS Revenue Ruling 81-100, provided that all of its participants are pension funds within the meaning of Article 10. However, per the agreement, for the Group Trust to be considered a ‘pension fund’ in the scope of the exemption, “all” of the participants must individually meet the residence requirement of the treaty (as well as the pension definition in Article 10, paragraph 11). Consequently, the presence of any Puerto Rican plan investment in the Group Trust may preclude the Group Trust from qualifying for treaty relief.

Adding to the complexity in Germany are the requirements imposed by Section 50j of the German Income Tax Act, which requires beneficial owners seeking to qualify for a treaty rate lower than 15% to meet the following requirements:

  • Hold the shares for a continuous period of 12 months prior to the dividend event (12 Month Holding period);

OR

  • Hold the shares for a minimum of 45-days within a 90-day period around ex-date (45-day holding period), and bear 70% of the equity price risk during the holding period (Minimum Risk Requirement), and have no obligation to pass on the dividends (No obligation to pass on Dividends Requirement).

Given the tiered structure of 81-100 Group Trusts it is unclear at which level the above holding requirements should be assessed.

Under domestic legislation, specifically the German Investment Tax Act 2018 (“GITA”), 81-100 Group Trusts can avail themselves of a Status Certificate considering that they generally meet the definition of an “investment fund” as defined in Section 1 of the GITA. By obtaining a Status Certificate based on the Group Trusts’ qualification as an investment fund, Group trusts can reduce the tax withheld at source to 15% (as opposed to the statutory rate of 26.375%).

Similar to Denmark, it is our understanding that the IRS is currently in discussions with the German Tax Authorities on the treatment of Group Trusts.

 

France

Dividend Treaty Rate: 15%

While U.S. 81-100 Group Trusts should technically be eligible for treaty benefits in France according to the wording of the double tax convention, the French Tax Authorities (FTA) “look-through” the Group Trust arrangement to the underlying participating plans in assessing treaty eligibility.

The FTA consistently requests information in line with the guidelines published in BOI-INT-DG-20-20-20-20 #260  when assessing requests filed by 81-100 Group Trusts. In line with these guidelines, they request the Group Trust to provide:

  • the complete list of member entities of the trust;
  • the list of member entities which are pension funds falling under sections 401(a), 403(b) and 457 of the US tax code and, for each of them, a certification from the IRS stating that they are a pension fund falling under the aforementioned sections of the US tax code.

The FTA will allow proportionate refunds for the ownership percentage of the participating plans that can meet these requirements and will consistently reject reclaims where the above documentation requirements cannot be met.

The manner in which Group Trusts structure their investments could potentially also have an adverse effect on treaty eligibility. This will be discussed in greater detail in our third and final segment on 81-100 Group Trusts where we take a more in-depth look at the challenges faced by 81-100 Group Trusts in France and Switzerland.

 

Switzerland

Dividend Treaty Rate: 15%/0%

In 2021, the Competent Authorities of the U.S. and Switzerland entered into an arrangement (CAA) with regards to the qualification of certain U.S. pension, or other retirement arrangements, that may be eligible for an exemption from WHT on dividends under Article 10(3) of the treaty. The CAA is effective for dividends paid on or after January 1, 2020.

However, despite these arrangements, the Swiss Federal Tax Authorities (SFTA) have continued to only grant Group Trusts a refund down to the 15% treaty rate, consequently denying them the exemption available to pension funds specifically when the Group Trust fails to furnish information on the underlying participating plans, coupled with an IRS 6166 certification for each of them.

The CAA also introduces some ambiguity on whether the SFTA will grant a partial reclaim where the Group Trust is not able to comply with the underlying pension plan documentation requests of at least 95% of the underlying participants. We will explore this in more detail in our third and final segment on 81-100 Group Trusts.

Upcoming Insights on 81-100 Group Trusts

In our third and final segment of the 81-100 Group Trusts article series, which will be released in February 2024, we will delve further into the distinctive requirements and challenges encountered by 81-100 Group Trusts in France and Switzerland. These explorations aim to shed light on the intricacies of navigating regulatory landscapes in these countries. We invite readers to stay engaged and keep an eye out for further articles as we uncover the specific nuances that 81-100 Group Trusts face in these complicated jurisdictions.

In the meantime, we encourage you to get in touch with one of WTax’s regional specialists for any of your withholding tax recovery needs.

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