PLR 200320005: Foreign pension arrangement classified as a trust

Plain-English summary

A foreign arrangement collected employee and employer contributions to provide retirement and death benefits to covered workers and survivors. It was regulated in its home country and invested funds to protect those benefits. The IRS classified the arrangement as a trust for U.S. federal income tax purposes under the entity classification regulations. The ruling did not decide whether the arrangement or its beneficiaries qualified for U.S. tax benefits or treaty relief.

Ruling snapshot

• Question: Should the foreign pension arrangement be classified as a trust for U.S. federal income tax purposes?
• Outcome: Approved.
• Key authorities: Treas. Reg. § 301.7701-4(a).

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury

Number: 200320005
Washington, DC 20224
Release Date: 5/16/2003
Index Number: 7701.03-00
Person to Contact:

Telephone Number:

Refer Reply To:
CC:PSI:B1-PLR-153550-02
Date:
January 28, 2003

Legend:

X
=

Entity
=

Country A
=

Covered Employees =

Act B
=

Act C
=

Body D
=

Dear :

This responds to the letter dated September 19, 2002 and related correspondence, submitted on behalf of X, requesting a ruling that X is treated as a trust for federal income tax purposes under §301.7701-4 of the Procedure and Administration Regulations.
2
PLR-153550-02

FACTS

The information submitted discloses that X was organized as an Entity under the laws of Country A. X was created to provide old age and/or death benefits to Covered Employees in Country A. X is exempt from tax under the laws of Country A.

X is governed by Act B and C and regulated by Body D. Body D is the official government body established under Act C to supervise insurance companies and pension funds in Country A. X's organizing document provides that X's purpose is to insure the pensions of Covered Employees and their surviving relatives. X has the power to engage in any activity that conforms to Act C and that serves to protect the benefits accumulated by the parties.

X derives its funds from a combination of employee contributions, employer contributions, and income from investments. X must invest its available funds responsibly, based on an investment plan adopted annually. X must submit to Body D annually an audited report of its financial position showing that the provisions of Act C are satisfied and that the interests of Covered Employees and their surviving relatives are guaranteed. X must also submit to Body D an actuarial report concerning X with a signed statement of the actuary, if X needs to explain any actuarial measures taken. The members of X cannot unilaterally assign or transfer their pension benefits to another person.

LAW AND ANALYSIS

Section 301.7701-1(b) of the Administration and Procedure Regulations provides that the classification of organizations that are recognized as separate entities is determined under §§301.7701-2, 301.7701-3, and 301.7701-4 unless a provision of the Internal Revenue Code provides for special treatment of that organization.

Section 301.7701-4(a) provides that, in general, an arrangement will be treated as a trust if it can be shown that the purpose of the arrangement is to vest in trustees responsibility for the protection and conservation of property for beneficiaries who cannot share in the discharge of this responsibility and, therefore, are not associates in a joint enterprise for the conduct of business for profit. If an entity has both associates and a business purpose, it cannot be classified as a trust for federal income tax purposes.
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PLR-153550-02

CONCLUSION

Based solely on the facts submitted and the representations made, we conclude that X is classified as a trust for federal income tax purposes under §301.7701-4(a).

Except as expressly provided, no opinion is expressed concerning the federal income tax consequences of the facts described above under any other provision of the Code. Specifically, we make no determination concerning whether X or its beneficiaries are entitled to any benefits under the Internal Revenue Code or the income tax treaty entered into by Country A and the United States concerning income derived from the United States.

This ruling is directed only to X who requested it. Section 6110(k)(3) provides that it may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to X.

Sincerely,

/s/ David R. Haglund

David R. Haglund
Senior Technician Reviewer
Branch 1
Associate Chief Counsel
(Passthroughs and Special Industries)

Enclosures (2)
Copy of this letter
Copy for § 6110 purposes