- Entities that accept deposits in the ordinary course of a banking or similar business. This category generally includes commercial banks, savings and loan institutions, thrifts, credit unions, building societies, and other cooperative banking institutions.
- Entities that hold financial assets for the account of others as a substantial portion of their business. This category generally includes broker-dealers, clearing organizations, trust companies, custodial banks, and custodians of employee benefit plan assets, among others.
Note that for purposes of paragraphs 1 and 2, while the fact that an entity is subject to either foreign or domestic banking laws is relevant to such entity’s status as a financial institution under FATCA, it is not determinative of that status.
- Entities engaged primarily in the business of investing, reinvesting, or trading in securities or similar interests. This category generally includes mutual funds, funds of funds, exchange-traded funds, hedge funds, private equity and venture capital funds, as well as other managed funds, commodity pools, and investment vehicles. The Notice explicitly provides that the concept of "business" in this context will be distinct from (and presumably broader than) that of "trade or business" as used elsewhere in the Internal Revenue Code. As a result, even an isolated transaction might cause an entity to be engaged primarily in the business of investing, reinvesting, or trading in securities.
- a foreign government, political subdivision, or wholly owned agency or instrumentality thereof;
- an international organization or wholly owned agency or instrumentality thereof; or
- a foreign central bank of issue.
- obtain with respect to each account holder information necessary to enable the FFI to determine whether an account is a "U.S. account";
- comply with due diligence procedures with respect to identification of U.S. accounts (discussed in detail below);
- annually report certain specified information on any U.S. account the FFI maintains (see Reporting on U.S. Accounts, below);
- withhold 30% on all passthru payments to recalcitrant account holders[2] (i.e., account holders that fail to provide reasonable information solicited by an FFI pursuant to its FATCA reporting obligations) or non-Participating FFIs;
- comply with Treasury requests for certain information on any U.S. accounts; and
- in any case in which a foreign law would prevent these reporting obligations, either obtain a waiver from the relevant account holder or close the account.
- Entities exempt from all FATCA withholding. This category, which will be excluded from the definition of FFI and treated as Excepted NFFEs (see above), will include
- holding companies of non-FI groups;
- start-up companies, within 24 months of organization, investing capital with the intent to operate a non-FI business;
- liquidating or reorganizing entities that intend to recommence non-FI operations; and
- hedging/financial centers of non-FI groups that do not provide such services to non-affiliates.
Although Treasury and the IRS intend to issue guidance providing for such exceptions, parties may not rely on these articulated intentions prior to the issuance of such definitive guidance.
The Notice also explicitly identifies U.S. branches of FFIs as well as CFCs as entities that will not be categorically excepted from the requirements of FATCA; however, it does anticipate efforts to coordinate other information reporting required of CFCs.
The new rules are generally effective for withholdable payments made after December 31, 2012. However, payments made pursuant to any obligation outstanding on March 18, 2012, as well as gross proceeds attributable to the disposition of any such obligation, are specifically exempt. The Notice states that, for these purposes, "obligation" means any legal agreement that produces or could produce withholdable payments, but will exclude (i) equity; (ii) any agreement that lacks a definitive expiration (e.g., savings deposits and other similar accounts); and (iii) brokerage, custodial, and other similar agreements to hold and administer financial assets for the accounts of others. It appears that under this definition, a purchase of assets pursuant to a purchase agreement entered into on or before March 18, 2012, would not be subject to withholding. It is not clear if the exclusion applies to revolving credit facilities that may still be drawn down following that date.
Note that any material modification to an obligation will result in a deemed issuance of the obligation on the date the modification becomes effective. With respect to debt, the "deemed exchange" rules under existing Treasury Regulations will be used to determine whether a material modification has occurred. If a deemed issuance occurs as a result of a material modification of an obligation, the obligation will lose its grandfathered obligation status and will be subject to FATCA.
Identification of U.S. Accounts by Participating FFIs
The Notice sets out procedures by which Participating FFIs would identify their U.S. accounts. Future guidance will distinguish between accounts in existence prior to the effective date of the FFI Agreement, and those established subsequently. Participating FFIs will generally be allowed to rely on available, electronically searchable documentation maintained by the FFI for pre-existing accounts, while new accounts will require an examination of all available information received in connection with the account.[3]
Reporting on U.S. Accounts
A Participating FFI must report to the IRS the following information with respect to each U.S. account:
- name, address, and taxpayer identification number (TIN) of the account holder that is a specified U.S. person;
- for an account holder that is a U.S.-owned FE, the name, address, and TIN of each substantial U.S. owner thereof;
- account number;
- account balance or value; and
- gross receipts and gross withdrawals/payments from the account (though future regulations may limit the extent of this disclosure).
Future guidance will provide more information regarding the calculation of the balance or value of the account for reporting purposes. FATCA also permits a Participating FFI to elect to comply with the Form 1099 reporting provisions that would apply if the Participating FFI were a U.S. person and each specified U.S. person or U.S.-owned FE that holds an account at such FFI were a citizen of the United States.
Withholding Obligations
FATCA requires all withholding agents to deduct and remit to the IRS a 30% withholding tax on all withholdable payments made to FFIs and NFFEs that do not fall into any of the specifically excepted categories described above.
Note, however, that "withholdable payments" excludes income taken into account by the beneficial owner as income effectively connected with the conduct of a trade or business within the United States.
Withholding agents include all persons having the control, receipt, custody, disposal, or payment of any withholdable payment. Notably, FFIs and NFFEs generally are withholding agents under FATCA.
U.S. Financial Institutions
As withholding agents, U.S. Financial Institutions (USFIs) will be required to classify entities to which they make withholdable payments to determine whether withholdable payments made by the USFIs are subject to withholding under FATCA. The Notice provides that for this purpose, USFIs will apply procedures similar to those applicable to Participating FFIs in classifying accounts held by entities.
Effective Date
The provisions of FATCA, as supplemented by the Notice, are generally effective for withholdable payments made on or after January 1, 2013.
[1] "FATCA" refers to the name of a former bill known as the "Foreign Account Tax Compliance Act of 2009" that originally proposed these provisions but was never enacted.
[2] The Notice also indicates that Treasury and the IRS intend to require a Participating FFI to report the number of and aggregate value of financial accounts held by recalcitrant account holders. FATCA also provides for an election for an FFI to be withheld upon rather than itself withhold on payments to recalcitrant account holders and non-Participating FFIs, by (i) providing any information necessary for the withholding agent to determine the appropriate amount to deduct and withhold from those passthru payments it makes to the Participating FFI and (ii) waiving any available treaty rights with respect to the amount so deducted and withheld.
[3] The Notice provides specific procedures for determining which accounts are U.S. accounts.
Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these developments. If you have any questions, please contact one of the Gibson, Dunn & Crutcher LLP attorneys listed below, or your regular Gibson Dunn contacts.
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Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
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Other FFIs exempt from all FATCA withholding. The FFI withholding regime will not apply to any payment the beneficial owner of which is an FFI that is
Because these entities are included in the definition of FFI, they are not subject to the rules applicable to NFFEs. The Notice explains that withholdable payments beneficially owned by these entities are exempt from withholding under FATCA, whether received directly or through an FFI.
Nonfinancial Foreign Entities
Even if a foreign entity concludes that it is not an FFI, it may still be subject to withholding if it is an NFFE. Withholding agents must also deduct and withhold 30% of any withholdable payment to an NFFE if the beneficial owner of such payment is that NFFE or another NFFE. NFFE is defined broadly to include any foreign entity that is not a financial institution, subject to certain exceptions. As noted below, payments to Excepted NFFEs are not subject to withholding.
Exceptions from Withholding
First Major Exception to Withholding: Participating Foreign Financial Institutions and Deemed-Compliant Foreign Financial Institutions
Payments made to any Participating FFI or Deemed-Compliant FFI will not be subject to withholding under FATCA.
A Participating FFI is an FFI that enters into an agreement (an FFI Agreement) with the IRS regarding certain due diligence, withholding, and reporting obligations with respect to the accounts maintained by the FFI. To qualify as a Participating FFI, the FFI must agree to
For these purposes, a U.S. account means any financial account held by one or more specified U.S. persons or U.S.-owned foreign entities (FEs). "Specified U.S. persons" are any U.S. persons other than corporations the stock of which is regularly traded on an established securities market (as well as any member of any such corporation’s expanded affiliated group), tax-exempt entities, individual retirement plans, federal and state governments (and their wholly owned agencies and instrumentalities), banks, REITs, RICs, common trust funds, and certain trusts. A U.S.-owned FE means any FE that has one or more substantial U.S. owners (generally, owners with interests exceeding 10%, as measured by vote or value).
Treasury and the IRS contemplate that the IRS will issue employer identification numbers to Participating FFIs (FFI EINs), which Participating FFIs will use to identify themselves to withholding agents subject to certain certification requirements (which have yet to be provided by Treasury). Withholding agents will be able to rely on FFI EINs, subject to verification by the IRS, unless the withholding agent has reason to know that the certification provided is incorrect.
A Deemed-Compliant FFI is an FFI that (i) complies with certain procedures (not set forth in the Notice, but which will be prescribed by Treasury) to ensure that the FFI does not maintain U.S. accounts, as well as other procedures dealing with accounts of other FFIs maintained by such institution; or (ii) is a member of a class of institutions for which the Secretary has determined compliance to be unnecessary.
The Notice explains that because Participating FFIs and Deemed-Compliant FFIs would still be financial institutions, they also would not be subject to the rules applicable to NFFEs.
Second Major Exception: Excepted Nonfinancial Foreign Entities
Although FATCA also provides for withholding on payments to NFFEs, no withholding will apply to payments beneficially owned by any of the following (collectively, Excepted NFFEs): (i) any publicly traded corporation and its affiliates; (ii) any entity organized in a U.S. territory and wholly owned by a resident of that territory; (iii) any foreign government, political subdivision, or wholly owned agency or instrumentality thereof; (iv) any international organization or wholly owned agency or instrumentality thereof; and (v) any foreign central bank of issue. This list may be expanded by regulation. Similarly, there will be no withholding on any class of payments that Treasury identifies as posing a low risk of tax evasion, such as foreign retirement plans (see Other Exceptions below). All Excepted NFFEs are excluded from the definition of U.S.-Owned FE.
Other Exceptions
Categories of Entities Specifically Excepted
The Notice states that Treasury and the IRS will issue guidance identifying classes of entities that will be excluded from certain requirements of FATCA, and notes the following intended exceptions: