Foreign Account Tax Compliance Act (FATCA)

Summary	1
The Origins of FATCA	1
Definition	2
Key Dates	7
Introduction	9
U.S. Person	9
US Indicia	10
US Account	10
Account holders of Investment Entities	11
Types of Foreign Assets and Whether They are Reportable	11
Determination of whether a trust has a substantial US owner	12
Requirements to avoid withholding	14
Ability to obtain a refund of overwithheld tax	14
Minimum Threshold for Reporting a US Financial Account for FFIs	15
Legal prohibitions on reporting U.S. accounts & on withholding	15
Identifications and Reporting requirements under FATCA and IGA	16
Key differences between FATCA and IGA Models 1 and 2	17
Complete list of joint FATCA statements between the United States and other countries	18
Who need to file Form 8938, “Statement of Specified Foreign Financial Assets	20

FATCA

The provisions commonly known as the Foreign Account Tax Compliance Act (FATCA) became law in March 2010.

FATCA targets tax non-compliance by U.S. taxpayers with foreign accounts. FATCA focuses on reporting:

By U.S. taxpayers about certain foreign financial accounts and offshore assets.
By foreign financial institutions about financial accounts held by U.S. taxpayers or foreign entities in which U.S. taxpayers hold a substantial ownership interest The objective of FATCA is the reporting of foreign financial assets; withholding is the cost of not reporting.

Definitions

Foreign Financial Institution (“FFI”)

Foreign Financial Institution (“FFI”) and Participating FFIs: An FFI is a non-U.S. entity

that accepts deposits in the ordinary course of a banking or similar business, or
a substantial portion of whose business is (e., at least 20% of its gross income during

prescribed periods is attributable to) holding financial assets for others, or that is engaged in the business of investing, such as mutual funds, hedge funds, private equity funds, venture capital funds, and similar entities. (Treas. Reg. § 1.1471-5(e)) FFIs generally are required to enter into an agreement with the IRS to report on their account holders and to withhold on payments to those account holders if they do not comply with FATCA requirements. (Treas. Reg. § 1.1471-4(a).) An FFI that has entered into such an agreement with the Service is a participating FFI; an FFI that has not, and is not a deemed-compliant or exempt beneficial owner, is a nonparticipating FFI.

Non-Financial Foreign Entity (“NFFE”)

Any foreign entity that is not an FFI, including entities deemed NFFEs pursuant to an intergovernmental agreement. (Treas. Reg. § 1.1471 -1(b)(74).) NFFEs are not required to register with or report to the IRS, but certain payments made to a passive NFFE may be withholdable payments if the NFFE does not either certify that it has no substantial U.S. owners or give the payor information about those U.S. owners.

Withholdable payment

Includes payments of fixed or determinable annual or periodical income (“FDAP”), and gross proceeds from the sale or disposition of a type that can produce interest or dividends from U.S. sources. If FATCA requirements are not met by the payee, withholdable payments are subject to the 30% FATCA withholding tax.(Treas. Reg. §1.1473-1(a). See also 1473(1)(A)) Generally, the exceptions from foreign withholding otherwise applicable (such as for portfolio interest or bank deposits) do not apply to the FATCA withholding tax paid to nonparticipating FFIs and apply to NFFEs only if they supply the required information. Treaty provisions will reduce the tax even for nonparticipating FFIs, but only by means of a refund, and no interest will be allowed.
(Treas. Reg. §1.1474-5)

Specified U.S. Person

A U.S. person subject to the FATCA reporting and withholding requirements. Generally, any U.S. individual or entity except publicly traded corporations, tax-exempt organizations, IRAs, REITs, RICs, and government instrumentalities. (Treas. Reg. § 1.1473-1(c).)

Recalcitrant Account Holder

A person who fails to supply information as required under FATCA (Treas. Reg. § 1.1471-5(g).). Payments made to recalcitrant account holders are subject to withholding.

FFI Agreement

Certain FFIs must enter into an agreement with the IRS to report information as required by FATCA. If an FFI required to enter into an FFI agreement does not, payments made to the FFI will become with holdable payments. (Treas. Reg. § 1.1471-4(a))

Deemed-compliant FFI

Entities deemed to be compliant without entering into an FFI Agreement. Such entities include registered, certified and owner-documented deemed-compliant FFIs.( Treas. Reg. § 1.1471-1(b)(24).)

Registered Deemed-compliant FFI

Generally covers local FFIs that primarily serve only customers in their home country (for EU FFIs, customers from any country in the EU are treated as residents of the country in which the FFI is organized) and are subject to local law requiring the identification of the nationality of account holders. Such entities are subject to a more limited registration and reporting requirement. Additionally, an entity may be registered deemed-compliant through an inter- governmental agreement. ( Treas. Reg. § 1.1471-5(f)(1).)

Certified Deemed-compliant FFI

Certain limited life debt investment entities that are unable to comply with the reporting requirements and certain other entities such as sponsored closely held investment vehicles and smaller financial institutions. The deemed-compliant status of limited life debt investment entities terminates after December 31, 2016, after which they must register as participating FFIs or comply with the terms of an intergovernmental agreement. ( Treas. Reg. § 1.1471-5(f)(2).)

Owner-Documented FFI

Certain investment entities not part of an expanded affiliated group subject to more limited reporting requirements. An FFI may only be treated as owner-documented with respect to payments received from and accounts held with a designated withholding agent.(Treas. Reg. § 1.1471-5(f)(3). ) The withholding agent may only treat a payee as an owner-documented FFI if 1) the agent has a certificate identifying the payee as a non-intermediary owner-documented FFI; 2) the agent is a U.S. financial institution or participating FFI, or agrees, pursuant to an intergovernmental agreement to act as a withholding agent; 3) the payee submits to the agent a reporting statement and valid documentation with respect to each owner; and 4) the agent does not know or have reason to know that the payee maintains any financial account for a nonparticipating FFI, that the payee is in an expanded affiliate group with a non-owner-documented FFI, or that a U.S. person has an interest in the FFI (aside from some exceptions).(Treas. Reg. § 1.1471-3(d)(6).)

Prima Facie FFI

Any payee that the withholding agent has in an electronically searchable record that designates the person as

a qualified intermediary (“QI”) or non-qualified intermediary (“NQI”) or,
under NAIC or SIC codes, a foreign commercial bank, savings institution, credit union, investment bank, entity engaging in miscellaneous financial investment activities, security broker, or similar entity.( Reg. § 1.1471-2(a)(4)(ii)). For any withholdable payment made to an FFI prior to January 1, 2016, with respect to a preexisting obligation, withholding agents generally may treat payees – for which they do not have documentation that the payee is a nonparticipating FFI – as a participating FFI; however, that date is accelerated to July 1, 2014 in the case of a prima facie FFI.

Sponsored FFI

An FFI that is managed by a trustee or fund manager that reports on all its funds on a consolidated basis. Such FFIs may be registered or certified deemed-compliant. (Treas. Reg. § 1.1471-5(f)(1)(i)(F);)

Excepted NFFE

Includes Active NFFEs and publicly traded companies. Payments to excepted NFFEs are not subject to withholding.( Treas. Reg. § 1.1471-2(c)(1).)

Active NFFE

An NFFE of which less than 50% of its income is passive (a category similar to FDAP income). Active NFFEs are Excepted NFFEs.(Treas. Reg. § 1.1472-1(c)(1)(iv).)

Passive NFFE

An NFFE other than an excepted NFFE.( Treas. Reg. § 1.1471-1(b)(88).) Note that the definition of FFI includes many passive vehicles. An example of a passive NFFE is a family trust with passive income that is managed by an individual.( Treas. Reg. § 1.1471-5(e)(4), ex. 5.)

Investment Entity

An investment entity is an entity that primarily engages in investment management, such as a hedge fund.( Treas. Reg. § 1.1471-5(e)(4).)

Depository Institution

An entity accepting deposits in the ordinary course of business and conducting certain other financial services. Such entities are classified as FFIs.( Treas. Reg. § 1.1471-5(e)(1)(i).)

Insurance Company

An entity that is regulated as an insurance business under the laws of any jurisdiction in which it does business, and that has more than 50% of its income or assets attributable to such activities. The final regulations provide special rules to determine whether Insurance Companies are FFIs or NFFEs.(Treas. Reg. § 1.1471-1(b)(60).)

Restricted Fund

A deemed-compliant investment fund that targets only non-U.S. investors as deemed-compliant entities, Restricted Funds are not required to enter into FFI agreements. Restricted Funds have until the later of June 30, 2014 or six months after the date the fund registers with the IRS as a registered deemed-compliant FFI to comply with the Restricted Fund requirements.(Treas. Reg. §1.1471-5(f)(1)(i)(D).)

Exempt Beneficial Owner

Includes foreign governments, foreign central banks, U.S. territory governments, and similar entities. Withholding agents are not required to withhold on payments made to exempt beneficial owners.(Treas. Reg. § 1.1471-6. Importantly, reserve activities (i.e. activities undertaken to maintain required reserves) are not taken into account for the purposes of determining FFI status.)

Excluded Non financial Payments

Payments excluded from the definition of “withholdable payment.” Originally defined in the proposed regulations as payments “in the ordinary course of business,” the definition of these payments has been replaced with a list of the payments that are excluded. (Treas. Reg. § 1.1473-1(a)(4)(iii).)

Pass thru” Payment

Includes withholdable payments and foreign pass thru payments. Pass thru payments made to recalcitrant account holders are subject to withholding.(Treas. Reg. § 1.1471-5(h).)

Foreign “Pass thru” Payment

A payment made by a FFI that is compliant under FATCA attributable to a withholdable payment. Such payments will not be subject to withholding until January 1, 2017. (Treas. Reg. § 1.1471-5(h)(2).)

Model 1 Intergovernmental Agreement

The partner jurisdiction agrees to adopt local laws requiring the reporting of information with respect to U.S. accounts in compliance with the reporting required by FATCA. FFIs in jurisdictions under a Model 1 agreement are not required to report directly to the IRS. (Treas. Reg. § 1.1471-1(b)(72).)

Model 2 Intergovernmental Agreement

The partner jurisdiction will provide certain information on U.S. accounts and assist in enforcement, but the FFI must still report directly. FFIs in jurisdictions under a Model 2 agreement must register with the IRS. (Treas. Reg. § 1.1471-1(b)(73).)

Depository Account

A commercial, savings, checking, or any instrument for placing money in the custody of an entity engaged in a banking or similar business for which such institution is obligated to give credit. The final regulations clarify that certain accounts, such as escrow accounts or security deposits, are not depository accounts, but that credit card balances are.(Treas. Reg. § 1.1471-5(b)(3)(i))

Expanded Affiliated Group

Similar to the affiliated group rules in Code Section 1504, except “more than 50%” replaces “more than 80%” in the Code Section. Generally, each member of the group that is an FFI must enter into an agreement with the Service for any member of the group to be treated as a participating FFI; however, there are transition rules.(Treas. Reg. § 1.1471-5(i)(2). The final regulations exclude certain entities owned solely to provide seed capital and add an anti-abuse rule that disregards certain changes in ownership or voting rights conducted with the purpose of avoiding withholding.)

Financial Account

A depository account, custodial account, or an equity or debt interest in certain investment entities. FFIs must report information required by FATCA, including identification of the holder and balance information, on financial accounts.( Treas. Reg. § 1.1471-5(b).)

Grandfathered Obligation

Any legally binding agreement or instrument outstanding on January 1, 2014.37 Grandfathered Obligations are permanently exempt from withholding. This does not include obligations that are treated as equity for tax purposes, or that lack a stated expiration date. If the obligation is materially modified, it will be treated as newly issued as of the effective date of the modification. A withholding agent may rely on the issuer’s written statement to determine whether the obligation is considered a Grandfathered Obligation. (Treas. Reg. § 1.1471-2(b)(2), (4) )

High-value Account

An account with a balance above $1,000,000.39 Preexisting high-value accounts are subject to a more stringent review process, in addition to the generally enhanced requirements associated with High-value Accounts.(Treas. Reg. § 1.1471-4(c)(5)(iv)(D)(1).)

Offshore Obligation

An account, instrument, or contract maintained or executed outside the U.S. Thus, a swap between two foreign persons made from a non-U.S. office would be an offshore obligation. Payments of U.S. source FDAP income made prior to January 1, 2017, with respect to offshore obligations, are not withholdable, unless the payer is acting as an intermediary (which specifically includes a qualified securities lender). (Treas. Reg. § 1.1471-1(b)(82).

Preexisting Account

A financial account that is a preexisting obligation.(Treas. Reg. § 1.1471-1(b)(95).)

Preexisting Obligation

Any account, instrument, contract, debt, or equity interest maintained, executed, or issued by the withholding agent that is outstanding on December 31, 2013.( Treas. Reg. § 1.1471-1(b)(98).) Payments on these obligations, if made to an NFFE, are excluded from the withholding requirements through 2014. (Treas. Reg. § 1.1472-1(b) (2).) If made to an FFI, they are excluded through 2015. New accounts of preexisting customers are also treated as Preexisting Accounts, provided the withholding agent treats the accounts as a consolidated obligation.The Preexisting Obligation exemption is a more expansive exemption than the Grandfathered Obligation exemption, in that even a new account may be exempt, so long as the customer had an account with the withholding agent prior to January 1, 2014. It is also more extensive in that it includes equity obligations. It is less broad, however, in that the Preexisting Obligation exemption only lasts through 2015, although the Grandfathered Obligation exemption is permanent. (Treas. Reg. § 1.1471-2(a)(4)(ii). The withholding agent must also not have documentation indicating the payee’s status as a nonparticipating FFI. Prima Facie FFIs, however, must be treated as nonparticipating FFIs beginning on July 1, 2014.)

Substantial U.S. Owner

Generally, a specified U.S. person holding more than 10% of the interests of a corporation, partnership, or trust (or any amount if the FFI is a foreign private equity or hedge fund). Participating FFIs must report the name, address, and taxpayer identification number of each Substantial U.S. owner of such entities. (Treas. Reg. § 1.1471-1(b)(98)(ii)(B).)

Key Dates

January1,2013	Statutory effective date for FATCA.

January 28, 2013	General effective date for the final regulations.

July 15, 2013	FFI registration web portal to open by this date. Financial institutions can register as sponsoring entities, but will not be required to provide information on sponsored FFIs.
October 15, 2013	IRS to start issuing identification numbers to registered FFIs (“GIINs”). Financial institutions can start providing information on sponsored FFIs.
October 25, 2013	Last date to register to be included on initial list of participating FFIs.
December 2, 2013	IRS will electronically post a list of participating and deemed-compliant FFIs, which will be updated on a monthly basis going forward.
December 31, 2013	Account balance testing date for certain diligence requirements. First effective date for FFI agreements for FFIs entering into agreements on or before that date.
January 1, 2014	New grandfather date for existing obligations (extended from January 1, 2013). Deadline for registered and deemed-compliant FFIs to implement verification procedures. Withholding begins for U.S.-source FDAP payments and withholdable payments made to NFFEs. Withholding intermediaries must assume FATCA responsibilities.begins for flow-through entities. All accounts in place prior to this date qualify as“preexisting accounts” for diligence purposes. Qualified intermediaries must assume FATCA responsibilities.

Early,2014	New versions of Forms 1042-S (reporting withholding) and 8966 expected (the new FATCA reporting form to be used by FFIs).
June 30, 2014	After this date, prima facie FFIs must become participating FFIs or be subject to the withholding standards of nonparticipating FFIs. Restricted funds have until the later of this date or six months after the date the fund registers with the IRS, to comply with the restricted fund requirements.
January 1, 2015	Payments made prior to this date on account of preexisting obligations, if made to an NFFE with unclear status, are not subject to withholding. For non-FDAP payments made after this date, the withholding agent may treat payee as a Model 1 FFI, if the FFI provides its GIIN, and the agent verifies that GIIN.
March 15, 2015	Reporting on Form 1042, the Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, begins.
March 31, 2015	Deadline for participating FFIs to file the first information reports with respect to the 2013 and 2014 calendar years.
December 31, 2015	Payments made by this date on account of preexisting obligations, if made to an FFI with unclear status, are not subject to withholding. Deadline for other reporting entities to identify account holders and payees. An FFI that becomes a participating FFI with one or more limited branches will cease to be a participating FFI unless otherwise provided by an intergovernmental agreement.
December 31, 2016	Expiration of certified deemed-compliant status for certain limited life entities.
January 1, 2017	Withholding begins on foreign “passthru” payments, gross proceeds from sales or dispositions, and certain offshore obligations. Additional diligence procedures apply.

Introduction

The Foreign Account Tax Compliance Act (FATCA) is a US law enacted in 2010 as part of the HIRE Act. The final FATCA regulations were issued on January 17, 2013. FATCA will be effective July 1, 2014, while some obligations will be implemented during a period of 2.5 years. Based on announcements by the US Treasury, we all are shortly expecting revised FATCA regulations and further guidance. The deadlines are getting quite pressing now.

FATCA is aimed at combating tax evasion by US taxpayers with overseas financial accounts. It requires non-US entities to identify US taxpayers who hold directly or indirectly certain foreign financial accounts and to report related information to the IRS (Internal Revenue Services). Parties that do not comply will be subject to a 30% withholding on certain US source payments and may also be in violation of local country laws.

The US Government is entering into Intergovernmental Agreements (IGAs) with many partner countries to overcome certain legal impediments, to reduce compliance burdens for local financial institutions and to effectively implement FATCA in their local jurisdictions. Two Model IGAs have been developed – Model 1 and 2. Currently, 22 IGAs have been signed and approximately 40 countries are in negotiation with the US to enter into an IGA (see below list).

FATCA and IGAs impact not only US individuals and entities, but also impose extra disclosure and compliance requirements on many non-US entities and may even impact non-US individuals. Many requirements under FATCA and IGAs apply even if there are no US beneficiaries or no US investments involved. While awaiting mentioned expected guidance, the probable impact of FATCA and IGAs, as well as the key steps and facilities to become compliant, are discussed below.

U.S. Person

A citizen or resident of the United States.
A domestic partnership.
A domestic corporation.
Any estate (other than a foreign estate within the meaning of 7701(a)(31)), or
Any trust if:
A court within the United States is able to exercise primary supervision over the administration of the trust, and
One or more US persons have authority to control all substantial decisions of the trust
Any other person that is not a foreign person.

US Indicia

In case during the due diligence process of the FFI an account holder with the following US Indicia is found the person is assumed a US Person:

Citizenship or residency in US;

US place of birth;

US residency address or mailing address;

US telephone number;

any standing instructions to transfer funds to a US account;

any power of attorney or other signatory authority to any person with a US address; or

Whether the account holder has provided any verified “in-care” or “hold mail” address with the US

When persons with US Indicia are identified it is required to cure items 2-7 with specific described counter evidence in order to remain treatment as a non US person.

US Account

Any financial account held by one or more specified US persons or US-owned foreign entities, with certain exceptions.

Financial Account:

Depository account
Custodial account
Equity or debt interest in an investment entity: investors, beneficiaries
Insurance and annuity contracts (some are excluded)

Financial Assets:

Financial assets include securities, partnership interests, commodities, insurance or annuity contracts, or any related interest in these, but do not include real estate.

Account holders of Investment Entities

The account holders of investment entities are the holders of equity and debt interest. The definition is depending on Investment or type of Financial Institutions.
Partnership: Equity Interest means capital or profit interest in the partnership
Fund and Investment Companies: the account holders are the equity investors
Trust: Equity interest means interest held by Persons treated as settler or the beneficiaries of all or portion of the trust, while under IGA this also includes any other natural person exercising ultimate effective control over the trust.
A beneficiary of a foreign trust include persons who have the right to receive directly or indirectly a mandatory distribution or may receive, directly or indirectly, a discretionary distribution from the trust.

Types of Foreign Assets and Whether They are Reportable on Form 8938
Financial (deposit and custodial) accounts held at foreign financial institutions	Yes
Financial account held at a foreign branch of a U.S. financial institution	No
Financial account held at a U.S. branch of a foreign financial institution	No
Foreign financial account or asset for which you have signature authority	No, unless any income, gains, losses, deductions, credits, gross proceeds, or distributions from holding or disposing of the account or asset are or would be required to be reported, included, or otherwise reflected on your income tax return
Foreign stock or securities held in a financial account at a foreign financial institution	The account itself is subject to reporting, but the contents of the account do not have to be separately reported
Foreign stock or securities not held in a financial account	Yes
Foreign partnership interests	Yes
Indirect interests in foreign financial assets through an entity	No
Foreign mutual funds	Yes
Domestic mutual fund investing in foreign stocks and securities	No
Foreign accounts and foreign non-account investment assets held by foreign or domestic grantor trust for which you are the grantor	Yes, as to both foreign accounts and foreign non-account investment assets
Foreign-issued life insurance or annuity contract with a cash-value	Yes
Foreign hedge funds and foreign private equity funds	Yes
Foreign real estate held directly	No
Foreign real estate held through a foreign entity	No, but the foreign entity itself is a specified foreign financial asset and its maximum value includes the value of the real estate
Foreign currency held directly	No
Precious Metals held directly	No
Personal property, held directly, such as art, antiques, jewelry, cars and other collectibles	No
Social Security’- type program benefits provided by a foreign government	No

Determination of whether a trust has a substantial US owner

If the trust is an FFI, it is considered to have a substantial US owner (and thus to be a US-owned entity) if

any specified US person is treated as the owner of the trust under the grantor trust rules; or
any specified US person owns more than a 0 per cent interest in the trust.

However, if the trust is an NFFE, only a specified US person who is treated as the owner of a portion of the trust under the grantor trust rules or who owns more than 10 per cent of the trust is considered to be a ‘substantial US owner’. Interests owned by related persons are aggregated. For purposes of determining the 10 per cent threshold for NFFEs, a person is treated as having a more than a 10 per cent interest if

they receive distributions in a particular year that exceed either 10 per cent of the value of all distributions during the year or 10 per cent of the value of the trust;
the value of their mandatory distribution rights exceeds 10 per cent of the value of the trust; or
the sum of the distributions received and the value of the mandatory distribution rights exceeds either 10 per cent of the value of distributions or 10 per cent of the value of the trust.

A de minimis rule provides that a US person will not be considered a ‘substantial US owner’ if they received USD5,000 or less during the relevant year and the value of their mandatory distribution rights, if any, is USD50,000 or less. For example, if a person had a right to receive USD20,000 for life, the present value of that right is the value of their mandatory interest. If they also received a discretionary distribution in the relevant year, the amount received is added to the value of the mandatory right to determine the total value of their interest in the trust. If a person is only a discretionary beneficiary and receives no distribution in the relevant year, they are not an owner. The regulations do not address how to value future or contingent mandatory interests or how the value of the trust is to be determined – are appraisals required? A US beneficiary is treated as indirectly owning interests the trust owns or has options to acquire in other entities, including a corporation, a partnership, or another trust. In the case of indirect ownership of another trust, the same bright-line test described above is used to determine both direct and indirect ownership. Example 3 in Treas Reg s1.1473-1(b)(7) illustrates the application of the indirect ownership rules for the purpose of determining whether a beneficiary of a foreign trust classified as an NFFE meets the 10 per cent ownership threshold. In example 3, a US person (U) holds only a discretionary interest in two foreign trusts – FT1 and FT2. FT2 is also a discretionary beneficiary of FT1. In year 1, FT1 distributes USD25, 000 to U and USD120, 000 to FT2 and a total of USD750, 000 to all of its beneficiaries, including U and FT2. FT2 distributes all of its income – the USD120, 000 received from FT1 – to its beneficiaries, of which U receives USD40, 000. U’s discretionary interest in FT1 does not meet the 10 per cent threshold. Presumably the relevant fraction is the sum of the distributions received by U (USD65, 000) over the sum of all distributions made by FT1 in the same year (USD750, 000). U’s discretionary interest in FT2 does meet the 10 per cent threshold (USD40, 000/USD120, 000).If the trust is classified as an FFI, then the ownership threshold is ‘more than 0 per cent’ rather than more than 10 per cent, so U would have been a substantial US owner of both FT1 and FT2, subject to the de minimis rule discussed above, if applicable to an FFI, which is not entirely clear. However, in the case of a corporation or partnership owned by a trust, the trust beneficiaries are indirect owners in proportion to their beneficial interests in the trust, and this determination of indirect ownership by trust beneficiaries is made based on all relevant facts and circumstances. Because the facts and circumstances test for determining indirect ownership is different from the bright-line test for determining ownership shares in a trust, it is theoretically possible for a US beneficiary to be treated as indirectly owning a larger share of an underlying holding company owned by the trust (which itself may be an FFI) than they are treated as directly owning in the trust. For example, if the beneficiary had regularly received distributions in prior years but did not receive distributions in the current year, they may be treated as indirectly owning a share of the corporation owned by the trust based on a facts and circumstances test that took into account prior patterns of distribution, but as not owning any equity in the trust itself. Similarly, if the trust is an NFFE and the holding company is an FFI, a US beneficiary whose interest in the trust did not meet the ten per cent threshold could be a substantial US owner of the holding company because a zero per cent ownership threshold would be applicable for the FFI .The indirect ownership rules do not apply at all if the trust is a participating or deemed-compliant FFI, other than an owner-documented FFI. However, withholding would apply to payments made to an underlying holding company that itself was an FFI unless it were a participating FFI or deemed-compliant FFI, or another exemption from withholding applied. Thus, the identification of individual beneficial owners of stock directly held by a discretionary trust will remain a problem if the corporation is required to identify individual owners other than on the basis of actual distributions. The regulations do not adequately address this issue. The regulations simply say that if indirect ownership cannot be determined, one can presume that the entity has a substantial US owner and thus is a US-owned entity.

Requirements to avoid withholding

A trust that is an NFFE can avoid withholding by self-certifying that it has no substantial US owners or by identifying the substantial US owners. NFFEs that are engaged in active businesses or whose equity interests are publicly traded are exempt from withholding. Unless the trust is an exempt person, a trust that is classified as an FFI can avoid withholding only by becoming a participating FFI or a deemed-compliant FFI, discussed below.

Ability to obtain a refund of overwithheld tax

A trust that is a non-participating FFI may not obtain a refund of tax that was withheld even if the amount exceeds the tax liability of the trust unless

a treaty requires it (and even then the refund is paid without interest); or
The trust is not the beneficial owner of the income that was taxed.

An NFFE can obtain a refund by providing necessary documentation concerning US beneficial owners. A foreign trust would not normally owe US tax on gross proceeds, for example, but could not obtain a refund of the overpaid tax. However, if the trustee makes a distribution to a beneficiary who is not a nonparticipating FFI, and the distribution carries out income to the beneficiary, the beneficiary can seek a refund of overwithheld tax because the beneficiary is then the ‘beneficial owner’ of the income on which tax was withheld.

Example: ABC Trust Company is a Jordanian trust company that serves as trustee of a Jordan trust, XYZ Trust. The trust is entitled to USD100x of gross proceeds from the sale of US securities in which it has a basis of USD90x. The withholding agent withholds USD30x of tax – 30 per cent of the gross proceeds. Because trust is a foreign trust, it is not taxable on gross proceeds from the sale of US securities and does not owe any US tax. XYZ Trust Company can recover the tax if it is classified as an NFFE, but not if it is classified as an FFI. If XYZ Trust is a grantor trust, however, the grantor may recover the tax. It also may be possible for a beneficiary to recover the tax if the trustee distributes the gross proceeds to the beneficiary. The grantor or beneficiary would not be taxable if they were a nonresident alien.43If the grantor or beneficiary is a US person; they would include USD100x of gross proceeds in calculating their gain. They would report gain of USD10x, would be allowed to credit the USD30x of withheld tax and, assuming a capital gains tax rate of 15 per cent, would be entitled to a refund of USD28. 50x.This rule puts an added burden on trustees to make distributions where they are necessary to protect the right to a refund. Moreover, if tax has been withheld, the beneficiary will become the beneficial owner only of the amount actually distributed. Unless the trustee can assign the withheld tax to the beneficiary and count that as a distribution, other assets would have to be distributed to the beneficiary to make the beneficiary the beneficial owner of the income. Income is deemed distributed from trusts under US tax principles based on aggregate distributions rather than using a tracing principle. Thus, unless all trust income was deemed distributed to beneficiaries who are not nonparticipating FFIs, some of the income will remain beneficially owned by the trust and tax withheld on that share of income will not be refundable if the trust is a nonparticipating FFI. It also appears that a beneficiary who is a nonresident alien would have to file a US tax return to obtain the refund even if the beneficiary had no US-source income other than FDAP.

Minimum Threshold for Reporting a US Financial Account for FFIs

The FATCA regulations set out specific due diligence requirements and thresholds with respect to individual accounts and entity accounts, and also for pre-existing accounts and new accounts. All US financial accounts of individuals with an aggregated value of US $50,000 or more must be reported to the IRS. Preexisting entity accounts of US $250,000 or less are exempt from review. Enhanced review is required for high value accounts as of US $1,000,000

LEGAL PROHIBITIONS ON REPORTING U.S. ACCOUNTS AND ON

WITHHOLDING.

In General, if a participating FFI (or branch thereof) is prohibited by law from reporting its U.S. accounts as required under section 6.02 of the agreement or from withholding to the extent required under section 4 of the agreement, the participating FFI (or branch thereof) must comply with the requirements of section 7.02 or 7.03 of the agreement.

Prohibitions on Reporting U.S. Accounts. A participating FFI that is prohibited under the laws of the jurisdiction in which it is resident, established, or located from reporting a U.S. account as required under section 6.02 of the agreement must satisfy the requirements of § 1.1471–4(i)(2) to request a valid and effective waiver of such law or otherwise close or transfer the account.

Reporting Model 2 FFI. A reporting Model 2 FFI that is prohibited under the laws of the jurisdiction in which it is resident, established, or located from reporting a preexisting U.S. account as required under section 6.02 of the agreement must request consent to report such account and, if consent is not provided, must report certain aggregate information about such account with other non-consenting U.S. accounts in accordance with section 6.03 of this agreement. With respect to a new account (as defined in the applicable Model 2 IGA), a reporting Model 2 FFI must obtain from each account holder of a U.S. account, as a condition of account opening, the consent required under domestic law in order for such reporting Model 2 FFI to report the account as required under section 6.02 of this agreement. Additionally, a reporting Model 2 FFI must request the account holder’s consent to report, if required by domestic law, after account opening for any new account that is not identified as a U.S. account at account opening and that must subsequently be treated as a U.S. account due to a change in circumstances. If consent is not provided by the account holder, the reporting Model 2 FFI must treat the account as a non-consenting U.S. account and report the account as described in section 6.03(B) of this agreement.
Legal Prohibitions Preventing Withholding with Respect to Recalcitrant Account Holders and Nonparticipating FFIs. To the extent a participating FFI is prohibited under domestic law from withholding with respect to recalcitrant account holders and nonparticipating FFIs as required under section 4 of the agreement, the participating FFI is required to satisfy the requirements of § 1.1471–4(i)(3) to block or transfer each account or offshore obligation held by such persons.

Identifications and Reporting requirements under FATCA and IGAs

As mentioned above, there are differences between the identifications and reporting requirements of a Participating FFI resided in a non- IGA country versus a Reporting FI resided in an IGA country. The FFI agreement and the IGA include the following requirements:

Performing specified due diligence procedures (with detailed thresholds on the account value and presumptions) on new and per-existing accounts to identify so-called US accounts. These are financial accounts (holders, investors, customers) held by:

o US persons (individual, entity, partnership, US trustee), or
o US-owned foreign entities (substantial US owner >10%; but in IGA: controlling US person >25% control)

FATCA Regulations and IGAs describe detailed procedures to review and verify account information. Individuals with US Indicia (see below) may be deemed US persons, unless they provide counter evidence.

Annual reporting to the IRS of information on US account holders and the foreign account’s income and assets (new Form 8966). The information required to be reported will include:

o Name, address, US Tax Identification Number (TIN), account number and account balance

o If account holder is a NFFE or OD -FFI, also details of its Substantial US owners

o Income and withdrawals (as of FY 2015)

Gross proceeds (as of FY 2016)

Withholding 30% on withholdable payments and as of 2017 on certain pass-through payments to recalcitrant account holders and non-participating FFIs; after a certain period, the FFI may have to close the foreign accounts of recalcitrant account holders. These obligations are both not required under IGA models, but instead a Reporting FI has to provide information about them to its US withholdings agents who then can take the withholding measures.

Documentation and compliance verification by the IRS. A Participating FFI (PFFI) must appoint a responsible officer (RO) who must establish (and periodically review) a compliance program that includes policies, procedures and processes sufficient for the PFFI to comply with the FATCA requirements. The RO is required to certify that the FFI has complied, to provide details of procedures and to report results and any material failures/events of default. The RO is also required to submit to IRS review, if required, and respond to requests for additional information from the IRS. The RO can assign Point of Contacts (POCs).

Key differences between FATCA and IGA Models 1 and 2

There are 3 regimes and each non-US entity will be subject to one of the 3 regimes based on its country of residence. Certain definitions and obligations imposed on FFIs under the IGAs may vary in important respects from those described in the Regulations.

FATCA Regulations

IGA Model 1

IGA Model 2

Applicable if the entity resides in a jurisdiction that has not signed an IGA. To become compliant the FFIs register with IRS as Participating FFI and enter into a FFI Agreement with the IRS which includes additional requirements.

PFFIs are required to withhold 30% tax on US source payments made to non-compliant account holders, to request the US accountholder to waive the privacy or secrecy rights, to close the account if a waiver is not provided and to provide a certification of compliance by a responsible officer

Most commonly applied IGA is Model 1A and it requires its local so-called Reporting FIs to report to local tax authorities who will in turn report to the IRS.

Model 1A also includes reciprocity of exchanging information of residents in IGA countries with US bank accounts. The non-reciprocal version is Model 1B

Model 2 FFIs have to sign a FFI Agreement with the IRS and comply with the FATCA regulations (almost similar to Participating FFIs in non-IGA countries), except to the extent expressly modified by their IGA.

Under Model 2 the local Reporting FIs report on US accounts directly to the IRS.

A complete list of joint FATCA statements between the United States and other countries:

The following jurisdictions are treated as having an intergovernmental agreement in effect:

Jurisdictions that have signed agreements:

Model 1 IGA

Model 2 IGA

Jurisdictions that have reached agreements in substance and have consented to being included on this list (beginning on the date indicated in parenthesis):

Model 1 IGA

Bahamas (4-17-2014)
Brazil (4-2-2014)
British Virgin Islands (4-2-2014)
Bulgaria (4-23-2014)
Colombia (4-23-2014)
Croatia (4-2-2014)
Curaçao (4-30-2014)
Czech Republic (4-2-2014)
Cyprus (4-22-2014)
India (4-11-2014)
Indonesia (5-4-2014)
Israel (4-28-2014)
Kosovo (4-2-2014)
Kuwait (5-1-2014)
Latvia (4-2-2014)
Liechtenstein (4-2-2014)
Lithuania (4-2-2014)
New Zealand (4-2-2014)
Panama (5-1-2014)
Peru (5-1-2014)
Poland (4-2-2014)
Portugal (4-2-2014)
Qatar (4-2-2014)
Romania (4-2-2014)
Singapore (5-5-2014)
Slovak Republic (4-11-2014)
Slovenia (4-2-2014)
South Africa (4-2-2014)
South Korea (4-2-2014)
Sweden (4-24-2014)

Model 2 IGA

Armenia (5-8-2014)
Hong Kong (5-9-2014)

Who need to file Form 8938, “Statement of Specified Foreign Financial Assets”?

Certain U.S. taxpayers holding specified foreign financial assets with an aggregate value exceeding $50,000 will report information about those assets on new Form 8938, which must be attached to the taxpayer’s annual income tax return. Higher asset thresholds apply to U.S. taxpayers who file a joint tax return or who reside abroad (see below).

Form 8938 reporting applies for specified foreign financial assets in which the taxpayer has an interest in taxable years starting after March 18, 2010. For most individual taxpayers, this means they will start filing Form 8938 with their 2011 income tax return to be filed this coming tax filing season.

Upon issuance of regulations, FATCA may require reporting by specified domestic entities. For now, only specified individuals are required to file Form 8938.

If you do not have to file an income tax return for the tax year, you do not need to file Form 8938, even if the value of your specified foreign assets is more than the appropriate reporting threshold.
If you are required to file Form 8938, you do not have to report financial accounts maintained by:
- A U.S. payer (such as a U.S. domestic financial institution),
- The foreign branch of a U.S. financial institution, or
- The U.S. branch of a foreign financial institution.

You must file Form 8938 if:

You are a specified individual.

A specified individual is:

A U.S. citizen
A resident alien of the United States for any part of the tax year (see Pub. 519 for more information)
A nonresident alien who makes an election to be treated as resident alien for purposes of filing a joint income tax return
A nonresident alien who is a bona fide resident of American Samoa or Puerto Rico (See Pub. 570 for definition of a bona fide resident)

AND

You have an interest in specified foreign financial assets required to be reported.

A specified foreign financial asset is:

Any financial account maintained by a foreign financial institution, except as indicated above
Other foreign financial assets held for investment that are not in an account maintained by a US or foreign financial institution, namely:

Stock or securities issued by someone other than a U.S. person
Any interest in a foreign entity, and
Any financial instrument or contract that has as an issuer or counterparty that is other than a U.S. person.

AND

The aggregate value of your specified foreign financial assets is more than the reporting thresholds that applies to you:

Unmarried taxpayers living in the US: The total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year
Married taxpayers filing a joint income tax return and living in the US: The total value of your specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year
Married taxpayers filing separate income tax returns and living in the US: The total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.

Taxpayers living abroad. You are a taxpayer living abroad if:
- You are a U.S. citizen whose tax home is in a foreign country and you are either a bona fide resident of a foreign country or countries for an uninterrupted period that includes the entire tax year, or
- You are a US citizen or resident, who during a period of 12 consecutive months ending in the tax year is physically present in a foreign country or countries at least 330 days.

If you are a taxpayer living abroad, you must file if:

You are filing a return other than a joint return and the total value of your specified foreign assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year; or

You are filing a joint return and the value of your specified foreign asset is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year.

FATCA Information for U.S. Financial Institutions and Entities

U.S. financial institutions (USFIs) and other types of U.S. withholding agents are required to withhold 30% on certain U.S. source payments made to foreign entities, if they are unable to document such entities for purposes of FATCA.
USFIs and U.S. withholding agents must also report to the IRS information about certain non-financial foreign entities with substantial U.S. owners.
USFIs are also eligible to submit a FATCA Registration application via the FATCA Registration Website for the following reasons:

A USFI with a foreign branch in a Model 1 IGA jurisdiction to obtain a GIIN for the branch.
A USFI with a foreign branch that is a qualifying intermediary (QI) to renew the branch’s QI agreement.

A USFI may register as a sponsoring entity for FFIs and agree to perform, on behalf of the FFI, all the FATCA activities that the FFI otherwise would have to do.

A USFI may register as a Lead FI to manage the FATCA registration process for members of its Expanded Affiliated Group of FFIs

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