• Jason Zücker, Director |
  • Nicolas Candolfi, Expert |

Swiss financial institutions which are Qualified Intermediaries (QIs) for US tax purposes need to know what has changed with the recent release of the new QI Agreement by the IRS. 

This is a tax technical Blog intended for readers who are familiar with QI matters.

On 13 December 2022, the IRS released the final version of the new Qualified Intermediary (QI) Agreement (Rev. Proc. 2022-43), that applies from 1 January 2023. This replaces the current QI Agreement (Rev. Proc. 2017-15), which expired on 31 December 2022. The new QI Agreement is available here.

Furthermore, on 21 December 2022, the IRS issued Notice 2023-8 which states that it plans to release proposed regulations to modify certain obligations of QIs with respect to transfers of Publicly Traded Partnerships (“PTPs”) under Section 1446 of the U.S. tax code. In particular, this includes a new presumption rule for partnerships established outside of the U.S. Notice 2023-8 is available here.

In this Blog, we set out the key points relevant for Swiss QIs.

Key points relevant for Swiss QIs

Renewal of QI Agreement

The current QI Agreement expired on 31 December 2022. QIs that wish to renew their agreement with an effective date from 1 January 2023, for another six-year term, must do so via the online QI Portal no later than 31 March 2023. Responsible Officers (“RO”) should receive an email notification from the QI Portal to inform them that the functionality to renew their QI Agreement is open. All ROs should ensure that they act upon such notification to renew their QI Agreement in a timely manner (and no later than 31 March 2023) to ensure a seamless continuation of their QI status (and retain their existing QI-EIN).  

IRS intention to publish a list of all QIs

The IRS intends to begin publishing a public list of QIs on its website (until now, no such public list of QIs was maintained). All QIs which renew their QI Agreement from 2023 (see above) will be required to consent to having their name, status as a QI, and QI-EIN publicly disclosed by the IRS.

Credentialing process to be able to access the QI Portal

The IRS intends to move the QI Portal to a new, modernized sign-in system. From Spring 2023, all existing users of the QI Portal will need to complete a credentialing process with a relevant Credential Service Provider (currently either ID.me or Login.gov) and utilize multi-factor authentication to be able to access the QI Portal going forward.

Changes relevant for the QI Periodic Review

For reviews of the year 2023 onwards, the sampling of accounts now includes a new “stratum” of the 30 top $-value accounts determined by the amount of section 1446(a) or (f) payments paid to the accounts. This means that QIs with section 1446 payments can expect a larger sample size for their periodic reviews from 2023.  

In the event of a merger between two or more QIs, the new QI Agreement now permits the aggregation of the accounts of both QIs and confirms that it is permitted to perform a single “combined” periodic review covering both the “predecessor” QI and the “successor” QI. Application to the IRS (via the QI Portal) is necessary in such cases.
In addition, a QI terminating its agreement in the final year of a certification period must submit a periodic review for either the first or second year of the certification period (unless a waiver is granted) in addition to the final certification within six months.

Changes relevant for the RO certification

The new QI Agreement now includes a mandatory requirement to submit a copy of the QI periodic review report to the IRS as part of the RO certification (previously this was optional, although in many cases the IRS subsequently requested it).

A new factual information “Appendix III” is mandatory as part of the RO certification. This “Appendix III” is a reconciliation on a line-by-line basis from the Forms 1042-S filed by and issued to QI and the final Form 1042 for the years not subject to a periodic review. For QIs applying for a Waiver, this information needs to be provided for each year in the 3 year certification period. The instructions state that this information should be populated in an Excel file, and uploaded as an attachment to the RO certification.

Section 1446 and 871(m) updates

Changes relevant for Section 1446

The new QI Agreement does not contain any transitional relief in relation to the implementation of Section 1446. Therefore, the new rules for Section 1446 apply in full with effect from 1 January 2023.

However, the new QI Agreement does provide certain relief in the case of absence of a U.S. TIN:

  • QIs are required to solicit the U.S. TIN (in writing) upon account opening (or during 2023 if their PTP investment was already active as at 1 January 2023), plus in the following 2 calendar years – this will qualify as a “best efforts” approach, and will mean the QI is not in breach of its obligations.
  • However, withholding under the presumption rules must be applied until valid documentation with a U.S. TIN has been obtained (i.e. a reduced rate of withholding cannot be applied until the U.S. TIN is obtained).

The new QI Agreement retains the “all or nothing” approach for ‘Disclosing QIs’ (i.e. the documentation for all account holders must be valid in order for the Disclosing QI option to be applied). However, the relief mentioned above (i.e. the absence of a U.S. TIN no longer means that a form is invalid) should help alleviate some of the original concern.

Notice 2023-8 issued by the IRS in late December confirmed that Treasury plans to release new proposed regulations to grant a new presumption rule for partnerships established outside the U.S.

The new rules will allow a QI to presume that an entity is not a PTP for section 1446(f) purposes, provided that the entity is (1) organized outside of the U.S., and (2) traded solely on a non-U.S. established securities market or secondary market. However, a QI that has ‘actual knowledge’ that an entity is a PTP may not rely on this presumption rule.

QIs are required to issue a recipient-specific Form 1042-S to any non-U.S. account holder upon that account holder’s request. The new QI Agreement limits the time period for such requests requiring that they must be received (i) by 31 December of the second full calendar year following the payment, (ii) increasing to three calendar years when the payment relates to a section 1446 amount. In addition, such requests may only be granted going forward for account holders that have provided their U.S. TINs.

QDD compliance

As confirmed last year in Notice 2022-37, QDD obligations with respect to section 871(m) transactions have generally been postponed until 2025.

The new QI Agreement confirms that QDDs are required to file a federal tax return (e.g. Form 1120-F for foreign corporations – incl. Schedule Q) regardless of whether an exception to the filing requirements would have otherwise applied.

Please do not hesitate to contact us if you have any questions concerning the new QI Agreement and the implications for Qis in Switzerland

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