(Foreign Account Tax Compliance Act) Jim Browne 214.651.4420 jim.browne@strasburger.com Joe Perera 210.250.6119 joe.perera@strasburger.com Agenda Background Rules for Withholding Agents Classification of Foreign Entities Rules for Foreign Financial Institutions (FFIs) Rules for Non-Financial Foreign Entities (NFFEs) 1
Background Prior law Information reporting on interest, dividends, broker payments, and other payments to U.S. persons; backup withholding on interest and dividends 30% withholding tax on a foreign person s U.S. source income not effectively connected with a U.S. business (Chapter 3 withholding) Exceptions for bank deposits, portfolio interest, and gains Reasons for change U.S. persons held investment assets through foreign entities; interest and gains were not subject existing at-source information reporting and withholding provisions, and were not being reported by the U.S. beneficial owners FATCA was enacted to clamp down on tax evasion and improve taxpayer compliance by giving the IRS new administrative tools to detect, deter, and discourage offshore tax abuses. Background New Law FATCA operates similar to U.S. backup withholding rules: Primary requirement is information reporting: FATCA requires collection and reporting of information on financial accounts held by U.S. persons at foreign financial institutions and held by U.S. persons through non-financial foreign entities Withholding as a backup requirement. If the reporting requirements are not satisfied, FATCA generally imposes a 30% withholding tax on payments to nonexempt foreign entities of U.S. source passive-type investment income and proceeds Effective Date Generally effective July 1, 2014, subject to numerous exceptions and transition rules Transitional IRS enforcement in 2014 and 2015 (IRS will take into account good faith efforts to comply with FATCA) 2
Agenda Background Rules for Withholding Agents Classification of Foreign Entities Rules for Foreign Financial Institutions (FFIs) Rules for Non-Financial Foreign Entities (NFFEs) General rule for withholding agents Any withholding agent making withholdable payments to either a foreign financial institution ( FFI ) or a non-financial foreign entity ( NFFE ) must either Obtain a valid IRS Form W-8BEN-E documenting the entity s exemption from withholding and, if applicable, verify the entity s IRS issued global intermediary information number ( GIIN ); or Withhold 30% of the payment Payments to U.S. persons are not subject to FATCA Payments to foreign individuals are not subject to FATCA, but Withholdable payments to an individual s account at an FFI or NFFE are subject to FATCA, and Withholdable payments directly to an individual (e.g., by check) are generally subject to existing information reporting and withholding rules 3
Who is a withholding agent? Generally, any person, U.S. or foreign, in whatever capacity acting, that has the control, receipt, custody, disposal, or payment of a withholdable payment Can also apply to foreign passthru payments (discussed later) Multiple persons can be a withholding agent with respect to a single payment, but only one withholding tax can be imposed An individual is not a withholding agent with respect to payments made outside the course of such individual's trade or business What is a withholdable payment? Any payment of U.S. source FDAP income (interest, dividends, rents, compensation, premiums, annuities, and other fixed or determinable annual or periodical income ) Withholding on these payments begins July 1, 2014 U.S. source FDAP income payments to a foreign entity are generally subject to the Chapter 3 withholding rules; any FATCA withholding reduces the required withholding under the Chapter 3 withholding rules Gross proceeds from the sale of any property of a type that can produce interest or dividends that are U.S. source FDAP income Withholding on these payments begins January 1, 2017 Interest paid by a foreign branch of a U.S. bank is treated as U.S. source income for purposes of FATCA 4
Exclusions from withholdable payments Short-term obligations Interest or OID paid on, and gross proceeds from the disposition of, a short-term obligation is not a withholdable payment Short-term obligation is defined as any debt obligation payable in 183 days or less from date of original issue Effectively connected income Income effectively connected with the conduct of a trade or business within the U.S. Payee certifies ECI status on Form W-8ECI Excluded nonfinancial payments Payments not related to a lending or financial transaction, such as a payment for the use/lease of property, transportation charges, gambling winnings, awards, prizes, scholarships, and interest on accounts payable for goods or services Exclusions from withholdable payments (con t) Grandfathered obligations Payments under, and gross proceeds from the disposition of, a grandfathered obligation A grandfathered obligation is an obligation that is outstanding as of July 1, 2014 and not materially modified after July 1, 2014 An obligation is a legally binding agreement or instrument Includes a debt instrument, line of credit, ISDA derivative transaction, life insurance contract, and immediate annuity contract Excludes an agreement or instrument treated as equity, lacking a stated expiration or term, or constituting a custodial arrangement Other transitional exclusions Certain offshore payments prior to 2017 Collateral arrangements prior to 2017 5
Transitional rule for preexisting obligations No withholding is imposed on withholdable payments made before July 1, 2016 with respect to a preexisting obligation if the withholding agent does not have documentation indicating that the payee is a nonparticipating FFI If the payee is a prima facie FFI (a foreign entity that is classified as a financial institution under NAICS or SIC codes), the withholding agent must treat the payee as a nonparticipating FFI beginning January 1, 2015 until documented otherwise A preexisting obligation is any account, instrument, contract, debt, or equity interest maintained, executed, or issued by the withholding agent that is either (a) outstanding on June 30, 2014 (or on the effective date of an applicable FFI agreement), or (b) issued to an entity on or after July 1, 2014 and before January 1, 2015 Agenda Background Rules for Withholding Agents Classification of Foreign Entities Rules for Foreign Financial Institutions (FFIs) Rules for Non-Financial Foreign Entities (NFFEs) 6
Classification of foreign entities A foreign entity receiving withholdable payments must determine if it is an FFI or an NFFE Why is the distinction important? A foreign entity classified as an FFI must meet broad information gathering, reporting, and other compliance requirements to qualify for an exemption from withholding on withholdable payments it receives A foreign entity classified as an NFFE has less comprehensive requirements to qualify for exemption from withholding What is an FFI? A foreign financial institution (FFI) is any entity that: Accepts deposits in the ordinary course of a banking or similar business (depositary institution); Is engaged in the business of holding financial assets for the account of others (custodial institution); An investment entity (i.e., engaged primarily in the business of investing, reinvesting, or trading in securities, partnership interests, commodities, or derivatives in the above, such as mutual funds, hedge funds, private equity funds, and securitization vehicles). A specified insurance company issuing cash value insurance or annuity contracts; or Certain holding companies and treasury centers of financial institutions and investment vehicles. Exceptions may apply to entities in a foreign country that has entered into an intergovernmental agreement with the IRS ( IGA ) 7
What is an NFFE? A non-financial foreign entity (NFFE) is any foreign entity that Is not an FFI; or Is treated as a NFFE under an applicable IGA Agenda Background Rules for Withholding Agents Classification of Foreign Entities Rules for Foreign Financial Institutions (FFIs) Rules for Non-Financial Foreign Entities (NFFEs) 8
To avoid FATCA withholding, an FFI must be: A participating FFI by signing an FFI agreement with the IRS and meeting other applicable requirements A reporting IGA FFI by being resident of a country that signs an IGA with the IRS and meeting other applicable requirements Within some other FFI exemption under the FATCA regulations Participating FFI An FFI is a participating FFI and is exempt from withholding if: The FFI has entered into a FFI agreement with the IRS; The FFI has registered with the IRS and has obtained a GIIN; The FFI provides a valid Form W-8BEN-E to the withholding agent identifying itself as a participating FFI and providing the GIIN to the withholding agent; The withholding agent verifies the participating FFI s name and GIIN against the published IRS FFI list; and The withholding agent does not know or have reason to know that the information in the Form W-8BEN-E is unreliable or incorrect 9
Requirements of an FFI agreement Due diligence. Obtain information for each of its account holders to determine which (if any) accounts are U.S. accounts, accounts held by a recalcitrant account holder, or accounts held by nonparticipating FFIs A recalcitrant account holder is an account holder that fails to comply with a reasonable request to provide U.S. account status information or fails to provide any necessary waiver from foreign disclosure law Verification. Adopt a compliance program and periodically certify compliance to IRS Reporting. Report annually on Form 8966, FATCA Report, information on U.S. account holders, recalcitrant account holders, and nonparticipating FFIs, and file Form 1042-S for payments to recalcitrant account holders and nonparticipating FFIs; alternatively, issue Form 1099 to U.S. persons Requirements of an FFI agreement (con t) Withholding Withhold on withholdable payments to recalcitrant account holders and nonparticipating FFIs Withhold on foreign passthru payments to recalcitrant holders and nonparticipating FFIs beginning on the later of January 1, 2017 or when regulations are issued defining foreign passthru payments Regulations are expected to broadly define foreign passthru payments as payments that are attributable, directly or indirectly, to withholdable payments; see IRS Notice 2011-19 Intent is to prevent use of participating FFIs as blocker entities 10
Requirements of an FFI agreement (con t) Legal prohibitions countermeasures Reporting. If the FFI is prohibited by foreign law from reporting information on a U.S. account as required by the FFI agreement, the FFI must either obtain a valid and effective waiver of such law from all relevant account holders and comply with the reporting requirements of the FFI agreement, or close or transfer the account or, if consent is required, request consent to do so Withholding. If the FFI is prohibited by foreign law from withholding as required by the FFI agreement, the FFI must either obtain authorization from the account holder to either withhold, close the account or terminate the obligation, or sell all of the account assets that produce (or could produce) withholdable payments, or block the account (i.e., prohibit any withdrawals or other transactions) or transfer it to an FFI that may withhold Reporting IGA FFIs Reporting Model 1 FFI FFI resident in a foreign country that has entered into a Model 1 IGA with the IRS, and not treated as a nonparticipating FFI under the IGA Reporting Model 2 FFI FFI resident in a foreign country that has entered into a Model 2 IGA with the IRS Withholdable payments to a reporting IGA FFI are exempt from withholding if the withholding agent obtains a valid Form W- 8BEN-E certifying the entity s status and, if applicable, verifies the entity s GIIN, and does not know or have reason to know that the information on the Form W-8BEN-E is unreliable or incorrect 11
Intergovernmental agreements ( IGAs ) Model 1 IGAs FFIs in the foreign jurisdiction report information to the foreign government, and the foreign government automatically exchanges the information with the U.S. Special definitions of FFIs and NFFEs Withholding on accounts of recalcitrant account holders suspended Countries with Model I IGAs include popular offshore destinations such as Cayman Islands, Guernsey, Isle of Man, Lichtenstein, Luxembourg Model 2 IGAs Foreign jurisdiction agrees to direct and enable all FFIs in that jurisdiction to enter into FFI agreements with IRS and report U.S. account information directly to IRS consistent with FATCA rules Other FFI exemptions Registered deemed-compliant FFIs Local FFIs (business and customers in one country) Members of a group that transfer U.S. accounts or accounts of recalcitrant account holders to a participating FFI, Model 1 FFI, or U.S. financial institution, or closes such accounts, within six months of opening the account or conducting required due diligence Qualified collective investment vehicles Restricted funds Qualified credit card issuers and servicers Sponsored investment entities and controlled foreign corporations QI branch of a U.S. financial institution that is a reporting Model 1 FFI 12
Other FFI exemptions (con t) Certified deemed-compliant FFIs Non-registering local bank FFI with only low value accounts (accounts less than $50,000 and no more than $50 million in assets) Sponsored, closely held investment vehicles Limited life debt investment entities in existence on January 17, 2013 Investment advisors and investment managers Owner-documented FFIs An investment entity that provides designated withholding agent all the necessary documentation (concerning any U.S. owners) and the withholding agent agrees to report to IRS or relevant foreign jurisdiction, the information concerning U.S. owners Other FFI Exemption categories (see Form W-8BEN-E) Participating FFI due diligence requirements Identification Requirement. Identify each account that is a U.S. account or account held by recalcitrant account holder or nonparticipating FFI A U.S. account is an account owned by U.S. persons or U.S. owned foreign entities having more than 10% U.S. ownership See reporting requirements for identified accounts below Documentation Requirement. Retain a record of the documentation collected or otherwise maintained when making certain payments to an account holder or payee to determine whether withholding or reporting applies 13
Participating FFI due diligence requirements (con t) The identification requirement is generally satisfied by the FFI obtaining valid and reliable documentation of each account holder s FATCA status in the same manner as withholding agents FFI cannot rely on documentation the FFI knows or has reason to know is unreliable or incorrect, including due to IRS notification, GIIN verification information, or U.S. indicia (a U.S. address or telephone number, a U.S. place of birth, or standing instructions to pay amounts to a U.S. address or account) Must obtain documentation by the earlier of the date a withholdable payment is made, or 90 days after the date the account is opened Must implement procedures to identify change in FATCA status No due diligence requirements for depository accounts $50,000 held by individuals Participating FFI due diligence requirements (con t) Preexisting accounts The due diligence requirements are relaxed for preexisting accounts (i.e., a financial account that is a preexisting obligation, as defined above) Preexisting entity accounts Due diligence requirements must be performed within two years of the FFI agreement effective date (six months for prima facie FFI holders) No due diligence required if the account has a balance or value of $250,000 or less on the effective date of the FFI agreement and no account holder has previously been documented as a specified U.S. person (generally a U.S. person subject to Form 1099 reporting) Exception ceases to apply at the end of any calendar year in which the account balance or value exceeds $1,000,000 or there is a change in the holder s FATCA status 14
Participating FFI due diligence requirements (con t) Preexisting individual accounts No delay in effective date of due diligence requirements Preexisting accounts of holders previously documented as specified U.S. holders are subject to normal due diligence requirements No due diligence required if the account has a balance or value of $50,000 or less on the effective date of the FFI agreement ($250,000 or less for cash value insurance or annuity contracts) Exception ceases to apply at the end of any calendar year in which the account balance or value exceeds $1,000,000 or there is a change in the holder s FATCA status For remaining preexisting individual accounts, if there are U.S. indicia in the account information, the FFI must retain a record of documentation establishing the account holder s status as a foreign person Enhanced review procedures apply to >$1,000,000 accounts FFI reporting requirements Reporting requirements begin for withholdable payments made in 2014; FFIs will file reports by March 31,2015 Must report information on U.S. accounts Account values and balances and amounts and character of payments Reports on Form 8966 Name, address, and taxpayer identification of each specified U.S. person Account number Account balance Payments made If the account owner is NFFE, information concerning substantial U.S. owners Can alternatively issue Forms 1099 to U.S. account holders Aggregate number and value of accounts held by recalcitrant account holders 15
Agenda Background Rules for Withholding Agents Classification of Foreign Entities Rules for Foreign Financial Institutions (FFIs) Rules for Non-Financial Foreign Entities (NFFEs) Non-Financial Foreign Entities (NFFEs) Exempt NFFEs (no reporting or withholding) Publicly traded corporations Active NFFEs: Less than 50% of entity s gross income is passive income and less than 50% of entity s assets are held to produce passive income NFFEs organized under U.S. law NFFEs can avoid FATCA withholding if The NFFE provides the withholding agent with a certification that the NFFE does not have any substantial U.S. owners or provides the name, address and TIN of each substantial U.S. owner The withholding agent does not know or have reason to know that that information is wrong And the withholding agent reports the NFFE s information to the IRS on Form 8966 16
Substantial U.S. owner Corporation. Any specified U.S. person that owns, directly or indirectly, more than 10% of the corporation s stock by vote or value Partnership. Any specified U.S. person that owns, directly or indirectly, more than 10% of the profits or capital interests in the partnership Trust Any specified U.S. person treated as an owner of any portion of the trust under sections 671 through 679 (grantor trust rules); and Any specified U.S. person that holds, directly or indirectly, more than 10% of the beneficial interests of the trust. APPENDIX FATCA Related Forms Form W-9 Used by U.S. individuals and entities to certify status as U.S. person Form W-8BEN Used by foreign individuals (not entities) to certify foreign status and claim any applicable treaty benefits Form W-8BEN-E Used by foreign entities to certify foreign status, certify FATCA status, claim any applicable treaty benefits (regular withholding only), and provide other information relevant to FATCA withholding Form W-8IMY Used by foreign intermediaries or flow through entities Form 8966 Used to report account information 17
Disclaimer This document is not intended to provide advice on any specific legal matter or factual situation, and should not be relied upon without consultation with qualified professional advisors. Any tax advice contained in this document and any attachments was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under applicable tax laws, or (ii) promoting, marketing, or recommending to another party any transaction or tax-related matter. 18