Originally published April 20, 2010
Keywords: HIRE Act, FATCA, due diligence,
withholding tax, financial reporting, investment entities, foreign
trusts On March 18, 2010, President Obama signed into law the HIRE
Act,1 economic stimulus legislation intended, among
other things, to spur new job creation in the US economy. To
partially offset the costs of this new law, Congress substantially
incorporated into the HIRE Act certain provisions of the Foreign
Account Tax Compliance Act of 2009 (FATCA) (see our December 14,
2009 alert, "House 'Extenders' Provision Contains
Modified Information Reporting and Withholding Tax Provisions First
Proposed in the Foreign Account Tax Compliance Act of
2009"2 and our November 5, 2009 update,
"Foreign Account Tax Compliance Act of 2009: Information
Reporting for US Client Accounts at Non-US Financial
Institutions."3) FATCA imposes significant new due diligence, information
reporting and control burdens on non-US financial intermediaries
and investment entities, such as banks, financial institutions,
insurance companies, and investment funds and other collective
investment vehicles (whether treated as a corporation, partnership
or trust under US or non-US law), regardless of whether any of
these non-US financial intermediaries or investment entities
maintain accounts for US persons or, in the case of non-US
investment entities, are owned by US persons. Failure to comply
with the information reporting provisions of FATCA could result in
the imposition of a 30 percent withholding tax imposed on a
noncompliant institution's portfolio investments in US
securities. In addition, FATCA contains a variety of international
tax provisions that are intended to curtail improper tax avoidance
by US persons that utilize offshore accounts or non-US investment
vehicles. As a preliminary matter, FATCA creates a new chapter of the
Internal Revenue Code (the Code) that effectively requires a
foreign financial institution (FFI) to fully disclose information
to the Internal Revenue Service (IRS) concerning certain accounts
maintained by a US person.4 Generally, depository
accounts with balances of less than $50,000 that are maintained by
US citizens and residents are not subject to reporting. The
definition of FFI covers a broad class of non-US entities that
include traditional financial institutions, such as banks and
brokerage houses, but also include any non-US entity engaged
primarily in the business of investing, reinvesting or trading in
securities (e.g., investment funds, hedge funds, private equity
funds and other collective investment vehicles organized outside
the United States, investment trusts and insurance
companies).5 Under FATCA, FFIs will be required either to certify that they
do not maintain accounts, directly or indirectly, for US persons or
to enter into an agreement with the IRS to provide information
relating to certain US persons that directly or indirectly maintain
an account at such financial institution (FFI Agreement). The FFI
Agreement will impose both reporting and withholding obligations
and, at a minimum, require the FFI to: This new reporting regime will apply in addition to the current
withholding tax regime that applies to US source income paid to
non-US persons under the qualified intermediary program (QI
program). Tax will only be withheld once under either the
provisions of FATCA or the current withholding rules applicable to
US source payments (i.e., there will be no concurrent withholding
tax imposed on the same payment under both withholding
provisions). As is discussed below, non-US persons that would otherwise be
permitted to obtain tax treaty benefits with respect to a payment
of US source income will not be entitled to treaty benefits with
respect to this new withholding tax to the extent that (i) the
account is maintained at an FFI that has not entered into an FFI
Agreement with the US Treasury Department (Treasury) or the IRS, or
(ii) the non-US person is considered a Recalcitrant Account Holder.
An FFI that has not entered into an FFI Agreement may obtain a
reduced rate of tax pursuant to an applicable income tax treaty but
only relating to those payments for which it is the beneficial
owner. Newly enacted section 1471 of the Code provides for the
imposition of a 30 percent withholding tax either on any payment to
an FFI of US source income or on the gross proceeds from the sale
of property that produces US source income (Withholdable
Payments).9 This withholding tax would apply to all
Withholdable Payments made to the FFI (including those on assets
held for the institution's own account), not merely those
Withholdable Payments attributable to a US person. At the FFI
level, the withholding tax can be avoided if the FFI enters into an
FFI Agreement with Treasury Department or the IRS. To the extent that the FFI enters into an FFI Agreement,
withholding tax will only be imposed on payments attributable to
those accounts whose owners do not provide sufficient identifying
information or accounts maintained by other FFIs that have not
entered into an FFI Agreement with the IRS (discussed further
below). Thus, in this situation, withholding tax imposed at a 30
percent rate would only apply to payments attributable to those
customers of an FFI who do not provide sufficient information
enabling the FFI to comply with its customer identification and
information reporting obligations discussed above.10 The legislation authorizes Treasury or the IRS to terminate an
FFI Agreement, and thereby subject an institution to withholding
tax imposed at a 30 percent rate, if a determination is made that
the FFI is not in compliance with the agreement. It is unclear
under what circumstances such a determination would be made (e.g.,
whether a technical default would result in such a determination or
whether some type of gross noncompliance is required), but it is
anticipated that FFIs that do not engage in some level of
information reporting are likely to risk termination of their
respective FFI Agreements. For example, an FFI that contends it is
only obligated to withhold tax, and not to provide additional
information, because it only provides banking services to
Recalcitrant Account Holders or FFIs that have not entered into
agreements with the IRS, is likely to have its FFI Agreement
terminated or not approved in the first instance. FATCA authorizes Treasury and the IRS to establish two
categories of exemptions to the reporting requirements. The first
exemption deems a particular FFI to have complied with an FFI
Agreement (presumably, even if the FFI does not enter into such
agreement with the IRS), if the FFI satisfies certain procedures
that ensure the FFI does not maintain US Accounts, and certain
rules relating to accounts the FFI maintains for other FFIs. One issue that bears watching with respect to this exemption is
whether the implementing rules to be adopted by Treasury and the
IRS will permit an FFI to avoid the client identification and tax
compliance burdens associated with FATCA if the FFI can prove that
it has procedures in place that ensure it maintains no US Accounts.
Further, the availability of this exemption may be limited or
potentially not available to FFIs that maintain accounts for other
FFIs that have not entered into FFI Agreements with the IRS. It is possible that limitations relating to accounts maintained
by an FFI for other FFIs could be determined by reference to the
value of such accounts (or the amount of withholding associated
with such accounts) in comparison to the total value of all
accounts maintained by the FFI. It is anticipated that an affiliate
of an FFI that has entered into an FFI Agreement and is compliant
with the requirements of such agreement may nevertheless qualify
for this exemption even if the FFI has not entered into an
agreement, provided that the affiliate can demonstrate that it does
not maintain US Accounts and the FFI complies with certain
procedures. The second exemption permits Treasury and the IRS to exempt
certain FFIs from FATCA information reporting and withholding tax
altogether if it is determined that compliance with these
requirements is not necessary to reduce improper international tax
avoidance by US persons. In this regard, it is anticipated that
Treasury and the IRS may permit certain classes of widely held
collective investment vehicles to qualify for this
exemption.11 Entities providing administration,
distribution and payment services on behalf of such vehicles,
certain controlled foreign corporations owned by US financial
institutions and certain US branches of FFIs (that are treated as
US payors under present law) may also qualify for this
exemption.12 FATCA generally requires FFIs to report full account statement
information on US Accounts to the IRS. Although much is left to be
developed in the rulemaking process, it appears that FFIs will be
required to report identifying information (e.g, name, address,
taxpayer identification number), account numbers, account balances
or values and the gross receipts, withdrawals or payments from the
account. As is discussed below, in addition to reporting on US Accounts,
FFIs will be required to certify that they have correctly
distinguished US Accounts from non-US Accounts as a means to
demonstrate that the FFI is not improperly avoiding this
information reporting requirement. In this regard, FFIs may be
required to collect additional documentation, possibly including
IRS Form W-8BEN (Certificate of Foreign Status of Beneficial Owner
for United States Tax Withholding) from all holders of non-US
Accounts. As an alternative to the above information reporting
requirements, FFIs may elect to comply with FATCA's information
reporting obligations by satisfying the information reporting
obligations currently imposed on US financial institutions with
respect to payments to US persons (i.e., reporting payments on Form
1099). In such instances, an electing FFI would report payments to
US Accounts as if the recipient of the payment were a US individual
and the payment were considered made in the United States. Prior to making this election, FFIs will have to evaluate the
cost and administrative burden between the applicable information
reporting rules for US financial institutions and FFIs. For
example, some FFIs may determine that procedural, IT or other
system modifications required to comply with the information
reporting rules applicable to US financial institutions are too
burdensome and, therefore, may prefer to comply with the
FFI–specific reporting regime described above. FATCA does not specify how an FFI is to demonstrate its basis
for differentiating US Accounts from non-US Accounts. In a report
that accompanied FATCA, the Joint Committee on Taxation (JCT)
indicated that Treasury could allow FFIs to rely on KYC procedures
currently in place in many institutions in order to comply with
local AML, anti-terrorist financing or sanctions laws as a basis
for distinguishing US Accounts from non-US Accounts.13
The extent to which the IRS or Treasury will allow institutions to
utilize existing procedures to comply with FATCA is uncertain and,
no doubt, will be the subject of extensive consultation with
industry representatives. In this regard, FFIs will be well served
to express their views directly to the IRS and Treasury or through
representative trade associations.14 Treasury and the IRS could require FFIs to rely on
certifications (e.g., possibly a suitably modified Form W-8BEN)
supplied by the account holder to confirm that the account is not a
US Account. Of course, reliance on such certifications is unlikely
to be available if either the FFI or any affiliate knows, or has
reason to know, that any information provided in the certification
is incorrect based on other information obtained by the FFI
pursuant to local KYC or AML procedures. FATCA does not indicate
whether these certifications must be transmitted to, or be retained
for review by, the IRS. As noted above, FATCA provides a refund procedure through which
an FFI is able to claim any applicable income tax treaty benefits
to the extent the 30 percent withholding tax is applied to payments
beneficially owned by that financial institution. No interest would
be allowed or paid by the IRS with respect to any such refunds.
There is, however, no similar refund procedure generally available
for non-US persons that are clients of FFIs that have had taxes
withheld under these rules. In other words, non-US persons that
hold accounts at FFIs that have not entered into an FFI Agreement
will lose the benefit of any reduced rate of withholding tax
provided pursuant to an applicable income tax treaty. An FFI will
need to file a claim of refund (and a US federal income tax return)
relating to payments beneficially owned by the FFI in order to
obtain a refund or reduced rate of tax pursuant to an applicable
income tax treaty. It appears that the intent of this provision is to strongly
persuade FFIs to enter into FFI Agreements with the United States
by subjecting nonconforming FFIs to a competitive disadvantage. To the extent that withholding tax is imposed with respect to a
Recalcitrant Account Holder, the tax may be refunded if the
Recalcitrant Account Holder provides information that establishes
the account holder as maintaining a US Account or a non-US Account
that is eligible for a reduced rate of tax pursuant to an
applicable income tax treaty. If such a claim for refund is made,
the IRS will not pay any interest with respect to any overwithheld
taxes if the overwithheld tax is refunded within 180 days after the
refund claim is filed. The claim for refund would otherwise be
treated similar to a claim of overwithholding pursuant to Chapter 3
of the Code.15 We believe that, in order to effect a claim of refund, the
Recalcitrant Account Holder will, at a minimum, need to provide
information to the IRS that establishes the identity of the account
holder as a US person (e.g., name, address and taxpayer
identification number) for US Accounts or a non-US person
(presumably by certification or otherwise) if the account is a
non-US Account. FATCA's information reporting and withholding tax provisions
will become effective with respect to payments made after December
31, 2012 (subject to limited exceptions for certain existing
instruments). Even before FATCA was enacted, Treasury and the IRS
publicly stated that they had begun preparations for developing and
issuing the significant amount of guidance that would be necessary
to implement FATCA. Despite these efforts, many commentators
consider the statutory effective date to be ambitious, in light of
the number of FFI Agreements that will need to be entered into
between the IRS and FFIs prior to the effective date. By way of
comparison, the withholding tax regulations that created the QI
program were first announced in 1996; they did not take effect
until 2001. Even then, the IRS faced a significant backlog in
reviewing and approving various countries' KYC regimes and
entering into QI agreements with FFIs. Even assuming Treasury and the IRS are able to develop the
guidance needed to implement FATCA prior to its effective date, if
those regulations require significant changes to IT systems or
other operations, FFIs may be hard-pressed to meet the statutory
deadline.16 Accordingly, it is anticipated that, during
the consultative process that will precede the promulgation of
final regulations, organizations representing the interests of FFIs
will, among other things, seek additional flexibility concerning
compliance with FATCA. It is unclear whether Treasury and the IRS
believe they possess authority to extend the effective date. FATCA also provides for a similar information reporting regime
with respect to Withholdable Payments to non-US entities that are
not financial institutions. Newly enacted section 1472 of the Code
requires withholding agents (including QIs) to deduct and withhold
a 30 percent withholding tax on any Withholdable Payments made to a
non-financial foreign entity, unless the non-financial foreign
entity generally provides identifying information about its
substantial US owners (as discussed below) or certifies that it
does not have any substantial US owners. The term
"non-financial foreign entity" includes any non-US
entity that is not a foreign financial institution (e.g. other
active business entities). Certain US source payments are exempt from these withholding
provisions, including payments beneficially owned by a foreign
non-financial entity that is a public corporation or a member of an
"expanded affiliated group"17 of a publicly
traded corporation. The withholding provisions also do not apply
to: (i) payments made to any non-US government, political
subdivision of a non-US government or wholly owned agency or
instrumentality of any non-US government; (ii) any international
organization, non-US central bank of issue or any other class of
persons identified by Treasury and the IRS for purposesof the
provision; or (iii) to any class of payments identified by Treasury
and the IRS as posing a low risk of tax evasion. It is unclear what
methodology will be used by Treasury and the IRS to determine which
classes of persons, or classes of payments, pose a low risk of tax
evasion, given the number of entities potentially subject to
FATCA's information reporting regime. This is likely to be
another area that generates substantial dialogue between the IRS
and non-US non-financial entities. As was explained above, information reporting must occur with
respect to a non-financial foreign entity's substantial US
owners, or a withholding tax will be imposed on US source payments
beneficially owned by such entity. In order to avoid such
withholding, (i) the payee or the beneficial owner of the payment
must provide the withholding agent with either the name, address
and taxpayer identification number (TIN) of each substantial US
owner or a certification that the foreign entity does not have a
substantial US owner; (ii) the withholding agent must not know, or
have reason to know, that the certification or information provided
regarding substantial US owners is incorrect; and (iii) the
withholding agent must report the name, address and TIN of each
substantial US owner to the Treasury or the IRS. It is anticipated
that, as is the case with US Accounts, Treasury and the IRS will
provide guidance on the methodology that FFIs must use to certify
that a non-financial foreign entity does not have any substantial
US owner, a method to verify certifications and, possibly, a refund
mechanism for instances where withholding occurs due to
documentation failures. FATCA provides for parity between actual dividend payments and
dividend equivalent amounts for purposes of the withholding tax
provisions (Chapters 3 and 4 of the Code). In particular, FATCA
provides that a "dividend equivalent" will be treated as
a dividend from sources within the United States. For this purpose,
the term "dividend equivalent" means (i) any substitute
dividend made pursuant to a securities lending or a sale-repurchase
transaction that (directly or indirectly) is contingent on, or
determined by reference to, the payment of a dividend from sources
within the United States, or (ii) any payment made pursuant to a
specified notional principal contract18 that is,
directly or indirectly, contingent upon, or determined by reference
to, the payment of a dividend from sources within the United
States. The term also includes any other payment that Treasury and
the IRS determine is substantially similar to such payments. The JCT report provides, as an example in its explanation of
FATCA , that the Secretary may conclude that payments under certain
forward contracts or other financial contracts that reference stock
of US corporations are dividend equivalents.19 A
dividend equivalent payment includes the gross amounts that are
used in computing any net amounts transferred to or from the
taxpayer. FATCA authorizes Treasury and the IRS to promulgate rules
that permit a reduction of tax in cases where there is a chain of
dividend equivalents, and one or more of the dividend equivalents
is subject to tax under this provision or under section 881 of the
Code.20 FATCA specifies that this provision will take effect with
respect to payments that are made on or after September 14, 2010,
which is the date that is 180 days after the date of enactment
(March 18, 2010). Accordingly, it is possible that, until Treasury
exercises its regulatory authority to identify payments that do not
have the potential for tax avoidance, there may be some disruption
to the markets for derivative instruments that use assets that
produce US source income as the reference security. FATCA repeals several provisions of the Code that had allowed
certain registration-required debt obligations to be issued in
non-registered form. In particular, FATCA repeals the rules related
to the foreign-targeted debt exception of section 163(f) of the
Code and the portfolio debt exception of sections 871(h) and 881(c)
of the Code. FATCA repeals section 163(f)(2)(B) of the Code, which excludes
from the definition of "foreign-targeted obligation"
those obligations that are reasonably designed to ensure that the
obligation will be sold (or resold) to a non-US person and where,
with respect to obligations not issued in registered form, (i) the
interest on the obligation is payable only outside of the United
States and (ii) the obligation contains a statement on its face
indicating that any US holder of the obligation is subject to
limitations under US income tax laws. The repeal of this provision is likely to have broad impact, as
no deduction will be permitted with respect to an obligation not
issued in registered form unless the obligation is issued by a
natural person, matures in one year or less or is not of a type
offered to the public. Additionally, an excise tax will be applied
to debt obligations that are not in registered form, unless similar
exceptions to those described above are satisfied. Further, sellers
of unregistered obligations that have not been subject to such
excise tax would not obtain capital gain treatment with respect to
gain derived from the sale of the obligation. A conforming amendment to the definition of
registration-required obligation requires all US government
obligations to be in registered form and repeals the
foreign-targeted obligation exception. The practical result of this
change will be that a list of owners of US government obligations
and other publicly issued debt obligations must be maintained by
the issuer of the debt obligation. FATCA also repeals the current provision that grants
portfolio-interest treatment for interest on bonds that are not
issued in registered form yet satisfy the foreign-targeted
exception of section 163(f)(2)(B) of the Code. FATCA instead
requires that, in order to qualify as portfolio interest (and be
exempt from US withholding tax pursuant to the portfolio debt
exception), the owner of the debt obligation will need to provide a
statement certifying that the beneficial owner is not a US person.
Thus, interest paid to a non-US person on an obligation that is not
issued in registered form will be subject to US withholding tax
imposed at a 30 percent rate, unless reduced by an applicable
income tax treaty. This provision is effective with respect to obligations issued
after March 18, 2012. Under current law, a shareholder of a passive foreign investment
company (PFIC) is generally required to file certain information
(e.g., Form 8621, "Return by a Shareholder of a Passive
Foreign Investment Company or Qualified Electing Fund") for
each tax year in which the US shareholder recognizes gain from the
disposition of PFIC stock, receives distributions from a PFIC or
makes certain elections with respect to their ownership of PFIC
stock. Accordingly, under current law, a shareholder of a PFIC may
avoid information reporting on an annual basis to the extent that
none of the current reporting obligations are triggered. FATCA
modifies the PFIC reporting requirements to require annual
information reporting, pursuant to rules prescribed by Treasury and
the IRS.21 This provision became effective on March 18,
2010. Treasury and the IRS issued Notice 2010-34 on April 6, 2010, to
clarify these new PFIC filing obligations. Notice 2010-34 provides
that while Treasury and the IRS are in the process of developing
guidance to implement this information reporting requirement,
persons otherwise required to file Form 8621 (e.g., upon
disposition of stock of a PFIC, or with respect to a qualified
electing fund under section 1293 of the Code) will continue to be
required to do so; however, shareholders of a PFIC that were not
otherwise required to file Form 8621 annually prior to March 18,
2010, will not be required to file an annual report for taxable
years beginning before March 18, 2010. FATCA codifies certain of the grantor trust rules that treat
certain non-US trusts as having a US beneficiary that is considered
the owner of the trust. In particular, FATCA provides that any
non-US trust that grants any person the discretion (by authority
given in the trust agreement, by power of appointment or otherwise)
to make a distribution from a trust to, or for the benefit of, any
person (sometimes referred to as "discretionary trust")
is to be treated as having a US beneficiary, unless the terms of
the trust specifically identify the class of persons to whom such
distributions may be made and none of those persons are US persons
during the taxable year. In conjunction with the withholding
provisions of the bill, this provision would require withholding in
all instances where a non-US trust has granted discretion to a
trustee to make trust distributions without specifying that the
potential beneficiaries of the trust do not include US persons. This provision is likely to raise significant concerns for those
persons that have non-US discretionary trusts. To the extent that
the documents governing such trusts are not suitably modified and
annually certified as having no US beneficiaries, the trust could
be considered to be owned by a US person, and any account owned by
the trust in a FFI would be treated as a US Account for purposes of
the information reporting and withholding tax rules discussed
above. Thus, the failure to revise the trust documents to comply
with this provision and to provide annual certifications could
subject the trust's accounts to the 30 percent withholding tax
applicable to Recalcitrant Account Holders. Where a US person, directly or indirectly, transfers property to
a non-US trust, FATCA provides that the non-US trust will be
presumed to have a US beneficiary for purposes of section 679 of
the Code (non-US trusts having one or more US beneficiaries). This
presumption may be rebutted if the US person that transfers the
property submits information as required by Treasury and the IRS
that demonstrates that (i) under the terms of the trust, no part of
the income or corpus of the trust may be paid or accumulated during
the taxable year to or for the benefit of a US person and (ii) if
the trust were terminated during the taxable year, no part of the
income or corpus of the trust could be paid to or for the benefit
of a US person. This provision applies to transfers of property made after March
18, 2010. It should be noted that, to the extent that non-US trusts are
presumed to have a US beneficiary, an account owned by such trust
at an FFI will be treated as a US Account and, therefore, is
subject to the information reporting requirements or the 30 percent
withholding tax described above. Accordingly, non-US trusts may
wish to revise applicable trust documents to clarify that no part
of the income or corpus of the trust may be paid or accumulated to
or for the benefit of any US person. FATCA expands certain rules governing loans of cash or
marketable securities by a non-US trust to a US grantor,
beneficiary or other US person related to the US grantor or
beneficiary, so that such loans will be treated as a distribution
of the fair market value (FMV) of the use of the property to the US
grantor or beneficiary. However, such transaction will not be
treated as a distribution to the extent that the FMV of the
property is paid to the trust within a reasonable period of
time. Similarly, for purposes of determining whether a non-US trust
has a US beneficiary under section 679 of the Code, FATCA provides
that a loan of cash or marketable securities, or the use of any
other trust property by a US person, is treated as a payment from
the trust to the US person in the amount of the loan or the FMV of
the use of the property, except to the extent that the US person
repays the loan at a market rate of interest or pays the FMV for
the use of the property within a reasonable period of time. These provisions apply to loans made and uses of property made
after March 18, 2010. FATCA expands the reporting requirements relating to non-US
trusts that are considered under the grantor trust rules to have a
US owner. Generally, the US owner would be required to provide
certain requested information to the IRS in addition to ensuring
that the non-US trust complies with any reporting obligations it
may have. This provision applies to taxable years beginning after
March 18, 2010 (likely, January 1, 2011 for calendar year
taxpayers). FATCA also modifies the minimum penalty for failing to report
information relating to a non-US trust. This provision applies to
notices and returns required to be filed after December 31,
2009. Footnotes 1. P.L.111-147 2. Available at
http://www.mayerbrown.com/publications/article.asp?id=8314&nid=6. 3. Available at
http://www.mayerbrown.com/publications/article.asp?id=7919&nid=6. 4. The term "US person" is defined in section
7701(a)(30) of the Code and means (i) United States citizens and
residents of the United States, (ii) corporations and partnerships
that are formed or organized in the United States, (iii) certain
trusts, the administration of which is primarily supervised by a
United States court and one or more United States persons have the
authority to control all substantial decisions of the trust, and
(iv) estates that would be subject to US federal income
tax. These provisions are now contained in chapter 4 of the
Code, sections 1471 through 1474. 5. FFIs include "any [foreign] entity that (1)
accepts deposits in the ordinary course of a banking or similar
business; (2) as a substantial portion of its business, holds
financial assets for the account of others; or (3) is engaged (or
holding itself out as being engaged) primarily in the business of
investing, reinvesting, or trading in securities, interests in
partnerships, commodities, or any interest (including a futures or
forward contract or option) in such securities, partnership
interests, or commodities." Given the breadth of this definition, it is expected that
FFIs would include investment vehicles such as CDOs, CLOs, certain
foreign securitization vehicles, and other foreign investment funds
as entities engaged "primarily in the business of investing,
reinvesting, or trading in securities..." and that such
investment vehicles would be pulled within the new information
reporting and withholding regime. 6. For this purpose, the term "United States
account" generally means a deposit or custody account that is
owned by "specified US persons" or "US owned foreign
entities." The term also includes any equity or debt interest
in such financial institution that is not regularly traded on an
established securities market. The term "specified US persons" means all US
persons other than certain identified persons, such as publicly
traded corporations and tax exempt entities. The term "US owned foreign entities" means any
non-US entity owned by one or more "substantial US
owners." The term "substantial US owner" means (i) with
respect to a corporation, any specified US person that owns,
directly or indirectly, more than 10 percent of the corporation (by
vote or value), (ii) with respect to a partnership, any specified
US person that owns, directly or indirectly, more than 10 percent
of the profits or capital interest in such partnership, and (iii)
in the case of any trust, any specified US person that is treated
as an owner of any portion of the trust under the grantor trust
rules. In the case of an FFI that is engaged in investing or
trading activities, a substantial US owner is any specified US
person that owns any interest in such corporation, partnership or
trust regardless of the size of the ownership interest. A non-US financial institution may elect to exclude from
treatment as a US Account any depository account owned by an
individual located at the financial institution and its affiliates
that has an aggregate value of less than $50,000. 7. Joint Committee on Taxation, Technical Explanation
Of The Revenue Provisions Contained In Senate Amendment 3310, The
"Hiring Incentives To Restore Employment Act," Under
Consideration By The Senate, JCX-4-10, at 40. We understand that representatives of non-US banking
organizations are advocating that the IRS base these rules on KYC
standards. 8. The term "passthru payment" is defined to
mean a withholdable payment or other payment to the extent it is
attributable to a withholdable payment. 9. The term "Withholdable Payment" is defined
to mean any US source payment (e.g., including but not limited to
interest paid by US borrowers, dividends paid by US corporations,
rents for the use of property located in the United States, or
royalties from the use of intangible property in the United States)
and the gross proceeds from the sale or other disposition of
property that produces US source income. 10. In the context of an investment vehicle that is the
beneficial owner of a Withholdable Payment and that has issued
credit tranched debt that is not regularly traded on an established
securities market, the senior holders may lack sufficient incentive
to comply with the information reporting requirements because the
burden of the withholding tax would generally be borne first by the
equity and subordinated debt classes. It may be worthwhile for
sponsors or managers of existing investment vehicles to modify the
relevant organizational documents to have those investors who would
cause the investment vehicle to be subject to the new withholding
tax as a result of noncompliance to bear the economic burden of
such noncompliance 11. JCX-4-10, at 41. 12. Id. 13. JCX-4-10, at 40. 14. Announcement 2010-22, issued on April 7, 2010,
requests comments regarding the interpretation and implementation
of the FATCA provisions. 15. Under Chapter 3 of the Code, a non-US person who
seeks a refund of tax by claiming a reduced rate of withholding tax
pursuant to an applicable income tax treaty generally is required
to file a US federal income tax return as part of their refund
claim. 16. Industry analysts have suggested that modifications
to IT systems and other operations may take between 12 to 18 months
to implement. 17. For this purpose, the term "expanded affiliated
group" means an affiliated group as defined in section 1504(a)
(generally, certain commonly controlled chains of corporations),
determined by substituting more than 50 percent for 80 percent each
place it appears, and without regard to paragraphs (2) (insurance
companies) and (3) (foreign corporations) of section 1504(b). For
this particular purpose, the term excludes partnerships that are
commonly controlled by publicly traded entities. 18. The term "specified notional principal
contract" is defined in the statute as a notional principal
contract that contains at least one of several enumerated features.
However, in the case of payments made after the date that is two
years after the date of enactment, all notional principal contracts
will be considered notional principal contracts unless Treasury
determines that the contract does not have the potential for tax
avoidance. 19. JCX-4-10, at 78. 20. This provision is intended to address transactions
similar to those described in Notice 97-66. 21. Many non-US investment vehicles, including CDOs and
CLOs, are treated as PFICs. As a result, the equityholders of such
vehicles would be subject to the heightened annual reporting
requirements under the new regime. However, as a practical matter,
many of these equityholders have made "qualified electing
fund" elections, which generally result in annual
reporting. Learn more about our
Tax Transactions & Consulting,
Financial Services Regulatory & Enforcement and
Wealth Management: Trusts, Estates & Foundations
practice. Visit us at
www.mayerbrown.com. Mayer Brown is a global legal services organization
comprising legal practices that are separate entities ("Mayer
Brown Practices"). The Mayer Brown Practices are: Mayer Brown
LLP, a limited liability partnership established in the United
States; Mayer Brown International LLP, a limited liability
partnership incorporated in England and Wales; and JSM, a Hong Kong
partnership, and its associated entities in Asia. The Mayer Brown
Practices are known as Mayer Brown JSM in Asia. This
Mayer Brown article provides information and comments on legal
issues and developments of interest. The foregoing is not a
comprehensive treatment of the subject matter covered and is not
intended to provide legal advice. Readers should seek specific
legal advice before taking any action with respect to the matters
discussed herein. Copyright 2010. Mayer Brown LLP, Mayer Brown
International LLP, and/or JSM. All rights reserved.
New Withholding Tax and Information Reporting Regime for
Certain Payments to Non-US Banks, Funds, Insurance Companies and
other Non-US Investment Vehicles
INFORMATION REPORTING PURSUANT TO AGREEMENT OR WITHHOLDING TAX
IMPOSED
POTENTIAL WITHHOLDING TAX ON US SOURCE INCOME OF AN FFI
SAFE HARBORS
INFORMATION REPORTING REQUIREMENTS DIFFER FROM CURRENT (FORM
1099) REPORTING REQUIREMENTS
FFIS MAY ELECT TO UNDERTAKE INFORMATION REPORTING AS IF THEY
WERE USFINANCIAL INSTITUTIONS
DOCUMENTATION REQUIREMENTS FOR CERTIFYING NON-US STATUS
REFUND PROCEDURE GENERALLY LIMITED TO AMOUNTS BENEFICIALLY
OWNED BY THE FFI
ACCOUNT HOLDERS OF FFIS WITH FFI AGREEMENTS MAY OBTAIN REFUNDS
OF OVERWITHHELD TAXES, SUBJECT TO LIMITATIONS
EFFECTIVE DATE
Non-US Non-Financial Entities Must Disclose Substantial US
Owners or Withholding Tax Imposed on US Source Payments
Dividend Equivalent Payments Received by Foreign Persons Shall
Be Treated as Dividends
Repeal of Foreign Exceptions to Registered Bond
Requirements
Passive Foreign Investment Company Reporting
Provisions Relating to Foreign Trusts
EXPANSION OF FOREIGN TRUSTS TREATED AS HAVING
USBENEFICIARIES
PRESUMPTION THAT FOREIGN TRUST HAS UNITED STATES
BENEFICIARY
TREATMENT OF UNCOMPENSATED USE OF TRUST PROPERTY AS A
DISTRIBUTION
EXPANDED REPORTING REQUIREMENT AND NEW MINIMUM PENALTY
Other Provisions