Thursday, May 2, 2013

FATCA regulations

Final FATCA regs issued by IRS—Part VI (Various modifications to prop regs)

T.D. 9610, 01/17/2013, Reg. § 1.1471-1, Reg. § 1.1471-2, Reg. § 1.1471-3 , Reg. § 1.1471-4, Reg. § 1.1471-5, Reg. § 1.1471-6 , Reg. § 1.1472-1, Reg. § 1.1473-1, Reg. § 1.1474-1 , Reg. § 1.1474-2, Reg. § 1.1474-3, Reg. § 1.1474-4 , Reg. § 1.1474-5, Reg. § 1.1474-6, Reg. § 1.1474-7

IRS has issued long-awaited final regs implementing chapter 4, Subtitle A of the Code, which was added by the Hiring Incentives to Restore Employment Act of 2010 (HIRE Act, P.L. 111-147, 3/18/2010) (Code Sec. 1471 through Code Sec. 1474 )—commonly referred to as the Foreign Account Tax Compliance Act, or FATCA. The final regs make a number of significant changes to the proposed regs, including phased-in timelines, deferring the effective date of the foreign financial institution (FFI) agreement, and extending the deadline for FFIs to report for calendar years 2013 and 2014. This article, the sixth of a multi-part series, covers changes made by the final regs to provisions on exempt beneficial owners, withholding with respect to nonfinancial foreign entities, and several key definitions.
Part I of the series, which provides statutory background and an overview of the regs, is at Weekly Alert ¶  12  01/24/2013. Part II covers exceptions to the requirement to deduct and withhold tax on payments to certain foreign financial institutions at Weekly Alert ¶  11  01/24/2013. Part III explains the rules and deadlines applicable to FFI agreements at Weekly Alert ¶  17  01/24/2013. Part IV covers certain modifications to FATCA's scope and coverage at Weekly Alert ¶  42  01/24/2013. Part V explains rules relating to the identification of the payee for FATCA purposes at Weekly Alert ¶  19  01/24/2013.
Background.  Generally effective for payments made after Dec. 31, 2012 (but delayed in IRS guidance and proposed regs, see Weekly Alert ¶  12  01/24/2013), the Hiring Incentives to Restore Employment Act of 2010 (HIRE Act, P.L. 111-147) established rules for withholdable payments to foreign financial institutions (FFIs; generally including non U.S. banks, broker-dealers and other custodians, investment vehicles, and certain insurance companies) and for withholdable payments to other foreign entities by adding a new Chapter 4 to the Code (Code Sec. 1471 through Code Sec. 1474). The new rules provide for withholding taxes to enforce new reporting requirements on specified foreign accounts owned by specified U.S. persons or by U.S.-owned foreign entities (“U.S. accounts”).
Under Code Sec. 1471(a), a withholding agent must withhold 30% of certain payments to an FFI unless the FFI has entered into an “FFI agreement” with IRS to, among other things, report certain information with respect to U.S. accounts. Chapter 4 also imposes on withholding agents withholding, documentation, and reporting requirements with respect to certain payments made to certain other foreign entities.
See Weekly Alert ¶  12  01/24/2013 for additional background on the FATCA provisions.
Exempt beneficial owners.  Under Code Sec. 1471(f), withholding on payments to FFIs (including nonparticipating FFIs) isn't required if the beneficial owner is (1) a foreign government, a political subdivision of a foreign government, or a wholly owned agency or instrumentality of any of the foregoing; (2) an international organization or a wholly-owned agency or instrumentality of such an organization; or (3) a foreign central bank of issue; or (4) part of a class of persons that IRS identifies as posing a low risk of tax evasion.
The final regs make several key changes to the provisions on exempt beneficial owners. (Reg. § 1.1471-6) The final regs:
... expand the circumstances in which certain classes of entities qualify as exempt beneficial owners;
... modify when an entity qualifies as an exempt beneficial owner under Reg. § 1.1471-6(g) (i.e., entities owned by only exempt beneficial owners);
... clarify that, subject to an exception in Reg. § 1.1471-6(f) for retirement funds, an entity can't qualify as an exempt beneficial owner unless it is the beneficial owner of the payment;
... expand the definition of an exempt beneficial owner to include any entity identified as such pursuant to an intergovernmental agreement (IGA);
... allow an entity to qualify as an “international organization” if it is a supranational organization or intergovernmental organization recognized as an international organization under certain provisions of foreign law or that has in effect a headquarters agreement with a foreign government, and prevents private inurement under the principles of Reg. § 1.1471-6(b)(3)(ii);
... broaden the classes of pension funds qualifying as exempt beneficial owners;
... clarify that exempt beneficial owner status under Reg. § 1.1471-6(g) applies to structures in which entities are owned directly by other entities that would qualify as exempt beneficial owners;
... clarify that receiving loans from depository institutions or issuing debt to other exempt beneficial owners will not prevent an entity from qualifying as an exempt beneficial owner; and
... provide an exception to exempt beneficial owner status for foreign governments, international organizations, foreign central banks of issue, and the governments of U.S. territories that engage in certain commercial activities.
Withholding on nonfinancial foreign entities (NFFEs).  In general, a withholding agent has to deduct and withhold 30% from any withholdable payment to a NFFE if the beneficial owner is that entity or another NFFE, unless the requirements for a waiver of withholding are satisfied. One of the requirements is that the beneficial owner (or payee) provide the withholding agent with a certification that the beneficial owner has no substantial U.S. owners or the name, address, and TIN of each such substantial U.S. owner. (Code Sec. 1472(a)) The statute also provides a number of exceptions from Code Sec. 1472(a).
The final regs make a number of changes to the rules under Code Sec. 1472 applicable to withholding agents for withholding on certain NFFEs and reporting with respect to the substantial U.S. owners of certain NFFEs. (Reg. § 1.1472-1) The final regs:
... provide that withholding agents are required to withhold under Code Sec. 1472 only with respect to withholdable payments made after Dec. 31, 2013;
... provide that withholding agents are not required to withhold under Code Sec. 1472 on payments made before Jan. 1, 2015, for a preexisting obligation to a payee that is not a prima facie FFI and for which a withholding agent does not have documentation indicating the payee's status as a passive NFFE with one or more substantial U.S. owners;
... clarify the interaction of Code Sec. 1472 withholding with a participating FFI's withholding obligations under Code Sec. 1471(a) and the associated regs by, among other things, providing that a participating FFI that complies with its withholding obligations under Reg. § 1.1471-4(b) will be deemed to satisfy its obligations under Code Sec. 1472 with respect to withholdable payments made to NFFEs that are account holders;
... clarify the application of the publicly traded rules for excepted NFFE status in the year of an initial public offering;
... clarify the scope of, and expand the exceptions to, passive income;
... expand categories of excepted NFFEs to address the treatment of holding companies and similar entities that are part of and that support a group conducting an active trade or business; and
... clarify that an entity will not be an active NFFE unless less than 50% of its gross income is from passive income and less than 50% of its assets are passive assets (that is, assets that produce or are held for the production of passive income), on a weighted average basis.
Changes to certain definitions under Code Sec. 1473The final regs alter the definitions of the following terms (Reg. § 1.1473-1):
... Withholdable payment.  The final regs provide temporary relief to U.S. stock and debt issuers, including U.S. funds, by delaying withholding on gross proceeds until 2017. The final regs also temporarily exclude from the definition of a “withholdable payment” a payment of U.S. source fixed or determinable, annual or periodical (FDAP) income made with regard to an offshore obligation before 2017, by a person that is not acting as an intermediary with regard to the payment. In effect, this delays withholding on these types of payments until 2017, consistent with the withholding requirements in the Model 1 IGAs. The regs expressly include a qualified securities lender as an intermediary, and also limit the application of this rule for certain flow-through entities.
... Substantial U.S. owner.  The final regs make several changes to the proposed regs' rules for determining whether a specified U.S. person is a “substantial U.S. owner,” and provide a safe harbor that permits an entity (or its withholding agent) to treat a specified U.S. person as a substantial U.S. owner in lieu of making the calculations necessary to make that determination.
... Specified U.S. person.  The final regs add Code Sec. 457(g) plans and exempt trusts under Code Sec. 403(b) to the classes of U.S. persons that aren't specified U.S. persons. (212) 588-1113

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