On 17 January 2013, the US Treasury Department (“US Treasury”) and the Internal Revenue Service (“IRS”) released the widely anticipated final regulations on FATCA. The final regulations go some way to responding to industry concerns about the regulatory burden by reducing the general compliance requirements and by coordinating full FATCA obligations more closely with those imposed under intergovernmental agreements (“IGAs”) executed by certain jurisdictions.
The final regulations confirm the phased-in timelines for due diligence, withholding and reporting, and expand the definition of foreign financial institutions (“FFIs”) and exempted entities. The final regulations also set out the registration and compliance procedures for FFIs.
Below are a few high-level observations from the final FATCA regulations.
Definitions of an FFI
FFIs include banks, custodians, investment entities, and certain insurance companies. The definition of investment entity has been aligned with the definition in the IGAs and now includes certain foreign entities that invest, administer, or manage funds or money on behalf of other persons, even if these entities are not themselves investment funds.
Passive entities that are not professionally managed (i.e., not managed by a depository institution, custodial institution, investment entity, or insurance company that qualifies as a financial institution) are generally treated as passive non-financial foreign entities (“NFFEs”) rather than FFIs.
Certain members of nonfinancial groups, such as holding companies, are excepted from FFI status under certain circumstances.
Certain investment vehicles will be able to register as deemed compliant, a less burdensome status than full participation. Also, under the final regulations, a sponsoring entity, such as an investment manager or holding company, may undertake to fulfil the due diligence and reporting responsibilities of one or more sponsored FFI. This is a welcome development, although the interaction with the IGAs is currently unclear.
A new exception has also been created for inter-affiliate FFIs (generally, entities whose activities are entirely within their financial group).
In general, the deadlines broadly remain as previously advised in November 2012 and are consistent with the UK IGA.
To avoid withholding on US source income, FFIs intending to participate in FATCA should enter into FFI agreements with the IRS by 25 October 2013 to ensure that they appear on the IRS/US Treasury FFI list by December 2013.
Each participating or deemed compliant FFI will then receive a Global Intermediary Identification Number (“GIIN”).
First information reporting is due no later than 31 March 2015 in respect of the 2013 and 2014 calendar years.
Withholding will apply starting on 1 January 2014 to payments of US source income to Non-PFFIs and NFFEs that do not provide certification that it is not beneficially owned by US persons.
Withholding on foreign pass-thru payments and gross proceeds from sales or dispositions of US property occurring begins from 1 January 2017.
Due Diligence on pre-existing accounts
All accounts maintained by FFIs prior to 1 January 2014, may be treated as pre-existing accounts.
Participating firms will need to identify pre-existing accounts held by US individuals and US-owned entities. The final regulations contain further detail on due diligence and reliance on information already on file.
All pre-existing accounts held by individuals with a balance less than US$50,000 are exempt from due diligence review (US$250,000 for entities).
For individual accounts with balances of no more than US$1 million, due diligence (which must be completed by 31 December 2015) is limited to determining the presence of US indicia in electronically searchable information. For accounts over US$1million, the requirements are more extensive and must be completed by 31 December 2014.
Due diligence for passive NFFEs can rely on AML due diligence to identify substantial US owners.
Recalcitrant account procedures
For new accounts, an account holder generally will be considered recalcitrant if it does not provide the required information within 90 days of the account opening.
If a participating FFI is prohibited by foreign law, absent a waiver, from reporting information on a US account, the participating FFI must request a waiver of foreign law. If a waiver is not obtained within a reasonable amount of time, the participating FFI must close or transfer the account.
If foreign law prohibits a participating FFI from fulfilling its withholding obligations, the participating FFI must close the account within a reasonable time, or, if local law prohibits closing the account, the participating FFI must block (or freeze) or transfer the account.
Currently, compliant FFIs in countries that have signed a Model 1 IGA (i.e. Denmark, Ireland, Mexico, Norway, Spain and the United Kingdom) will be deemed to comply with the final FATCA regulations. FFIs in countries that have signed a Model 2 IGA (i.e. Switzerland) must comply with the final FATCA regulations, except as modified by the IGA.
Broadly, FFIs have nine months to prepare for the implementation of FATCA and should now begin to plan and implement their FATCA project. Kinetic Partners can assist you with this and will continue to provide full technical and practical updates over the coming weeks.
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