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Clifford Chance

Clifford Chance


A Comprehensive Look at the Proposed FATCA Regulations

16 April 2012

The U.S. Treasury Department ("Treasury") and the U.S. Internal Revenue Service (the "IRS") recently published proposed regulations implementing the Foreign Account Tax Compliance provisions of the Hiring Incentives to Restore Employment Act of 2010 (commonly referred to as "FATCA"), which provide guidance on how the IRS will apply new U.S. tax compliance rules beginning in 2014 to non-U.S. banks, financial intermediaries and investment vehicles.

The purpose of FATCA is to force non-U.S. banks, financial intermediaries, investment vehicles and certain insurance companies ("Foreign Financial Institutions" or "FFIs") to report information on accounts held by U.S. persons to the IRS.

FATCA achieves that objective by generally imposing a 30% withholding tax on certain payments to FFIs ("nonparticipating FFIs" or "Non-PFFIs") that do not enter into a form agreement with the IRS (an "FFI Agreement") described in greater detail below and that are not otherwise exempt from the withholding tax.  The withholding tax also is imposed on payments to certain persons that refuse to provide identifying information or waive the benefit of customer privacy laws that would prevent reporting to the IRS under an FFI Agreement ("Recalcitrant Account Holders").

The withholding tax generally is imposed on income and proceeds (including a return of original investment) from investments in U.S. financial assets ("Withholdable Payments").  It also is imposed on certain payments made by an FFI that has entered into an FFI Agreement (a "participating FFI" or a "PFFI") to the extent such payments are attributable to Withholdable Payments ("Passthru Payments").

Additionally, FATCA imposes a 30% withholding tax on Withholdable Payments and Passthru Payments made to certain non-U.S. entities that are not FFIs ("Non-Financial Foreign Entities" or "NFFEs") if the relevant entity does not provide information on its substantial U.S. owners (if any).
Among other things, the proposed regulations:

  • Extend the grandfathering provisions to obligations issued before January 1, 2013;
  • Reserve on the treatment of "foreign" Passthru Payments and defer withholding on such payments until no earlier than January 1, 2017;
  • Expand and define the categories of exempted entities;
  • Contemplate that FFIs established in certain countries may be deemed compliant pursuant to an intergovernmental agreement;
  • Provide a transition period during which an FFI may become a PFFI or a "Registered Deemed Compliant FFI" (as defined below) notwithstanding the fact that certain of its branches or affiliates are prohibited by local law from complying with the due diligence, reporting or withholding obligations generally applicable to PFFIs;
  • Provide simplified diligence procedures for smaller preexisting individual and entity accounts;
  • Specify the documentation required for various types of entities to establish their exempt status;
  • Require PFFIs to report certain foreign source payments that are made to Non-PFFIs in 2015 and 2016; and
  • Provide guidance on the procedures necessary to verify FATCA compliance.

The proposed regulations are extensive, and this memorandum provides only a general overview.

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