When investing in foreign markets, 81-100 Group Trusts often experience issues obtaining tax treaty benefits. Foreign tax authorities often are not assured that the underlying pension plan participants within the group trust are treaty eligible, and therefore require proof in the form of documentation at the underlying participant level. This is a burdensome requirement for the group trust and compliance is difficult.
An “81-100 Group Trust” refers to a collective investment trust, group trust, or collective investment fund that is a commingled pool governed by ERISA. It qualifies for tax exempt treatment under Internal Revenue Service (IRS) Revenue Ruling 81-100 (as modified by Revenue Ruling 2004-67 and Revenue Ruling 2011-1) because all of its assets are derived from either qualified plans or certain governmental plans (group trust) pools that are exempt from US taxation under Section 501(a) of the Internal Revenue Code (IRC).
In this edition of In Focus, we turn to France and Indonesia to discuss the treaty eligibility challenges 81-100 Group Trusts encounter when investing in these markets. Click here to read more on Belgium and Denmark, or click here to read more on Austria, Japan, Switzerland, and Sweden.
Markets of Investment That Present Tax Treaty Challenges
In 2012, the French Tax Authorities issued a statement of practice outlining treaty eligibility requirements for “simple collective trusts of pensions.” Based on a recent interpretation of the statement of practice, local subcustodians are no longer supporting tax treaty relief at source for Revenue Ruling 81-100 Group Trusts.
The current language of the certificate of residence (CoR) issued to a Revenue Ruling 81-100 Group Trust is deemed insufficient to support tax treaty benefits in France. The current CoR states that “the fund is a group trust arrangement described in Revenue Ruling 81-100, and, to the best of our knowledge, each participant is a resident of the United States.” However, pursuant to Revenue Ruling 2014-24, plans eligible to participate in 81-100 Group Trusts may include Puerto Rican retirement plans. This is problematic because the tax treaty between the US and France does not extend its benefits to pension funds established in the US territories. For this reason, the French Tax Authorities are requiring full transparency to the underlying participating pensions in the Group Trust.
Pursuant to the statement of practice, Revenue Ruling 81-100 Group Trusts seeking tax treaty benefits in France through the standard tax reclaim procedure must provide the following documentation:
- Form 5000 and Form 5001 for the group trust
- A CoR for the group trust
- A list of all members of the group trust
- A list of all members of the group trust that are US pension funds covered by the following Internal Revenue Code (IRC) sections, where all members must be established and managed exclusively for the purpose of providing retirement benefits and hold less than 10 percent of the voting shares of the French distributing entity:
- IRC Section 401(a) Qualified Retirement Plans
- IRC Section 403(b) Tax Deferred Annuity Contracts
- IRC Section 457 Deferred Compensation Plans
- An attestation issued by the US tax authorities for each pension fund within the group trust stating that it has been established and operates in accordance with the above-referenced IRC sections (a certificate of residence for each pension fund)
- An attestation stating the percentage of rights to French dividends received by the collective trust, attributable to pension funds that come under the reference IRC sections
Investors will need to produce the referenced documents on an annual basis.
The statute of limitations for filing tax reclaims in France is December 31 of the second year following the year of the dividend payment.
In January of 2019, the Indonesia Directorate General of Tax (DGT) issued a new simplified treaty application DGT form. Unlike the two previous DGT forms, the new form applies to all taxpayers, including Revenue Ruling 81-100 group trusts. The new DGT form can be certified by the investor’s local tax authority or the form can be accompanied by a CoR.
Although the application process has been somewhat simplified, the issuers’ withholding agents determine treaty eligibility of investors. Some withholding agents maintain that Revenue Ruling 81-100 Group Trusts are not deemed beneficial owners for tax treaty eligibility purposes and that the language of the CoR confirms this by referring to the entity as a “group trust arrangement.”
Other withholding agents determine treaty eligibility based on how investors complete part V of the DGT form. Part V of the form aims to identify treaty abuse by questioning whether the investing entity demonstrates sufficient economic substance.
Language in Form 6166 Causing Tax Treaty Eligibility Issues
The language on the Form 6166 issued to group trusts has undergone some changes in the past years. An older version of the 6166 issued to group trusts used to state “I certify that, to the best of our knowledge, the above named entity is a trust forming part of a pension, profits sharing, or stock bonus plan qualified under 401(a) of the US Internal Revenue Code, which is exempt from US taxation under section 501(a), and is a resident of the United States for the purposes of US taxation.” Over time, the content of the Form 6166 has changed to state “I certify that the above named fund is a group trust arrangement described in Revenue Ruling 81-100, and to the best of our knowledge, each participant is a resident of the United States.” The current wording of the 6166 may imply to foreign tax authorities that the group trust is not eligible for treaty benefits in its own right, but only to the extent of its participants being treaty eligible.
As a result of a proposal submitted by the Association of Global Custodians (AGC), in conjunction with the American Bankers Association (ABA), the IRS has agreed to revise the wording of the 6166 issued to Revenue Ruling 81-100 Group Trusts. The newly worded CoRs will certify that the fund is a Revenue Ruling 81-100 Group Trust, a resident of the US for purposes of US taxation, exempt from US taxation, and consists exclusively of pensions, retirement, or similar arrangements that are themselves exempt from US taxation.
This new language is more closely aligned with how tax treaties define eligible pension funds. The newly worded CoRs are due to be released prior to the end for 2019.
In order to protect our client’s rights to reduced withholding tax rates, BBH continues to apply for relief at source and to file reclaims in markets where preferential tax rate opportunities are available to group trusts under the tax treaty between the two countries. BBH is an active participant in the AGC which provides a forum for addressing issues which create impediments for our clients seeking treaty benefits and local law reduction opportunities. In this manner, BBH was able to actively participate in the AGC’s proposal to revise the language of the 6166 issued to Revenue Ruling 81-100 group trusts which was recently accepted by the IRS.
For more information please contact your relationship manager or the Global Tax Services Group.