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.
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. 1473. The 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.
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