FATCA Toolkit

A collection of resources designed to assist with Foreign Account Tax Compliance Act (FATCA) compliance.

Practical Law Tax

The Foreign Account Tax Compliance Act (FATCA), enacted as part of the Hiring Incentives to Restore Employment Act of 2010, imposes a 30% FATCA withholding tax on withholdable payments made to certain foreign financial institutions (FFIs) and non-financial foreign entities (NFFEs) that do not meet specific information reporting requirements.

FATCA's purpose is not to collect the FATCA withholding tax but to instead force foreign entities (over which the US does not generally have jurisdiction) to report information to the IRS about their US account holders and owners. The FATCA withholding tax operates as a stick intended to compel FFIs and certain NFFEs to disclose information to the IRS about US persons who may be hiding untaxed income offshore.

Withholdable payments include:

  • US-source interest, dividends, rents, royalties and compensation (US FDAP).

  • Gross proceeds from the sale, redemption, repurchase or other disposition of any property of a type that produces US-source interest or dividends (gross proceeds).

FATCA withholding on US FDAP generally began on July 1, 2014. However, FATCA withholding on gross proceeds does not begin to take effect until January 1, 2019. Under a grandfathering rule, FATCA withholding does not apply to payments in respect of, or gross proceeds from the disposition of, "obligations" that are outstanding on July 1, 2014 and that are not materially modified after that date.

The term FFI is a misnomer. It sweeps up, in addition to conventional financial institutions, foreign investment vehicles of many different types, including public mutual funds, private equity and hedge funds, securitization vehicles and family investment companies. However, the FATCA withholding tax on withholdable payments does not apply to certain categories of FFIs, including:

  • Participating FFIs (an FFI that enters into an FFI agreement).

  • "Deemed-compliant" FFIs.

  • FFIs that are excepted from FATCA.

  • FFIs that are "exempt beneficial owners."

Under the Treasury regulations, a participating FFI generally must identify its "US accounts" and annually report information about those accounts to the US. The FFI generally must also withhold the FATCA withholding tax on the portion of any withholdable payment made to either:

  • An FFI that has not entered into an FFI agreement (a nonparticipating FFI).

  • Any "recalcitrant account holder" that fails to provide the required information for FATCA reporting or to waive laws prohibiting disclosure of that information.

An NFFE can generally avoid the FATCA withholding tax on withholdable payments by:

  • Certifying to the payor that it does not have a "substantial US owner" or identifying any substantial US owners. A substantial US owner generally includes any US person (subject to exceptions for publicly traded corporations and their affiliates, tax-exempt entities, banks, real estate investment trusts, regulated investment companies, securities dealers, brokers and certain other entities) that directly or indirectly owns at least 10% of the foreign payee.

  • Qualifying as an "excepted NFFE," which includes, among other things, publicly traded corporations, direct reporting NFFEs, and an "active NFFE" if less than 50% of its gross income is passive income and less than 50% of its assets are assets held to produce passive income.

  • Qualifying as an "exempt beneficial owner."

Several foreign countries raised a variety of FATCA compliance issues. In particular, many FFIs could not comply with the FATCA due diligence, reporting, withholding and account closure requirements in the Treasury regulations because of foreign legal restrictions. In response, the US Department of the Treasury (Treasury Department) developed an alternative FATCA framework for FFIs located in countries that enter into an intergovernmental agreement (IGA) with the US.

The Treasury Department has published two Model IGAs (referred to as Model 1 and Model 2) to implement FATCA. An FFI in an IGA country is relieved of certain FATCA requirements under the Treasury regulations.

Model 1 was developed in consultation with France, Germany, Italy, Spain and the UK. Model 1 requires FFIs to report FATCA information directly to their local governments. Model 1 has a reciprocal version for countries with an existing tax information exchange agreement (TIEA) or income tax treaty (DTC) with the US and a nonreciprocal version. The main difference between the reciprocal and nonreciprocal version is that the reciprocal version requires the US to exchange information currently collected on accounts held in US financial institutions by residents of partner countries. There are two versions of the nonreciprocal Model 1 IGA: one version for countries with an existing TIEA or DTC and a second version for countries without a TIEA or DTC.

Model 2 was developed in consultation with Japan and Switzerland. Unlike Model 1, Model 2 establishes a framework of direct FATCA reporting by FFIs to the IRS with additional information exchange by request between the US and the partner countries. There are two versions of the Model 2 IGA: one version for countries with an existing TIEA or DTC and a second version for countries without a TIEA or DTC.

The Treasury Department has updated the Model IGAs and the accompanying annexes on several occasions. The most recent versions can be found on the Treasury Department's FATCA page.

The FATCA Toolkit provides a collection of continuously maintained resources designed to assist with FATCA compliance.

 

Practice Notes

 

Checklists

 
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