IRS Issues Final Set of FATCA Regulations | Practical Law

IRS Issues Final Set of FATCA Regulations | Practical Law

The IRS and Treasury Department issued the final substantial set of Treasury regulations neccessary to implement the Foreign Account Tax Compliance Act.

IRS Issues Final Set of FATCA Regulations

Practical Law Legal Update 5-558-6705 (Approx. 5 pages)

IRS Issues Final Set of FATCA Regulations

by Practical Law Corporate & Securities
Published on 24 Feb 2014 • United Kingdom, USA (National/Federal)
The IRS and Treasury Department issued the final substantial set of Treasury regulations neccessary to implement the Foreign Account Tax Compliance Act.
On February 20, 2014, the IRS and Treasury Department released the final substantial set of Treasury regulations necessary to implement the Foreign Account Tax Compliance Act (FATCA). The regulations package includes two sets of final and temporary regulations that:
  • Provide amendments and clarifications to the FATCA regulations issued in January 2013 (the Revised FATCA Regulations).
  • Coordinate the FATCA reporting and withholding rules with the general withholding rules for US-source payments made to foreign persons (Chapter 3 rules), the backup withholding rules under IRC Section 3406 for payments made to certain US persons and the information reporting rules under Chapter 61 (the Withholding Coordination Regulations).
Key changes and clarifications in the Revised FATCA Regulations include:
  • Changes to the requirements for treating a limited life debt-investment entity as a certified deemed-compliant foreign financial institution (FFI). These changes will make it easier for existing securitization vehicles (for example, collateralized loan obligation (CLO) vehicles) to qualify as certified deemed-compliant FFIs by:
    • eliminating the requirement that a limited life debt-investment entity's organizational documents cannot be amended without the consent of all investors;
    • clarifying that a limited life debt-investment entity issues debt or equity interests under a trust indenture or similar agreement;
    • expanding the category of pre-existing limited life debt-investment entities to those that are in existence and have issued all of their interests on or before January 17, 2013 (instead of December 31, 2011);
    • allowing a pre-existing limited life debt-investment entity to qualify as a certified deemed-compliant FFI until it liquidates or terminates (rather than expiring on January 1, 2017);
    • eliminating the requirement that investors be unrelated; and
    • expanding the types of assets that a limited life debt-investment entity can hold.
  • Modifying the definition of "expanded affiliated group" to exclude pre-existing limited life debt-investment entities (those entities that have issued all of their interests and are in existence on or before January 17, 2013).
  • Allowing certain non-financial foreign entities (NFFEs) to report substantial US owner information directly to the IRS rather than to withholding agents. The IRS previewed this change in IRS Notice 2013-69.
  • Adding a transitional rule for collateral arrangements so that FATCA withholding on payments made by a secured party with respect to collateral will begin on January 1, 2017.
  • Clarifying that a branch of an FFI includes an entity that is disregarded as an entity separate from the FFI.
  • Modifying the definition of custodial institution to define income attributable to holding financial assets to include fees for providing financial advice with respect to financial assets held or to be held in custody by the entity (rather than fees for providing financial advice). This change will generally exclude from the definition of custodial institution an entity whose sole business is providing financial advice to clients (if the entity does not act as a custodian or broker).
  • Adding certain investment advisors and investment managers that do not maintain financial accounts as entities eligible to be treated as certified deemed-compliant FFIs.
  • Modifying the requirements for material modifications of grandfathered obligations so that a withholding agent (other than the issuer of the obligation) is required to treat a modification as material only if the withholding agent has actual knowledge that a material modification has occurred (rather than treating a modification as material if the withholding agent knows or has reason to know that a material modification has occurred).
The Revised FATCA Regulations are effective on March 6, 2014. The IRS and Treasury Department plan to publish a revenue procedure revising the FFI agreement to conform to the Revised FATCA Regulations.
The Withholding Coordination Regulations coordinate pre-FATCA Chapter 3, backup withholding and information reporting rules with the FATCA withholding and reporting rules. Key changes to existing rules include:
  • Removing inconsistencies in the documentation requirements under the Chapter 3 rules and FATCA.
  • Coordinating the withholding requirements under the Chapter 3 rules, backup withholding rules and FATCA to ensure that payments are not subject to overlapping withholding (overlapping withholding under both Chapter 3 and FATCA, or under both Section 3406 and FATCA).
  • Coordinating IRS Form 1099 reporting rules with the information reporting rules under FATCA to reduce duplicative reporting.
The Withholding Coordination Regulations are effective on March 6, 2014.