IRS Issues FATCA and Chapter 3 Withholding Tax Regulations

The IRS issued final, temporary and proposed Treasury regulations under the Foreign Account Tax Compliance Act (FATCA) and Chapter 3 withholding tax rules.

Practical Law Corporate & Securities

On December 30, 2016, the IRS issued final and temporary regulations under FATCA (FACTA Regulations) and final and temporary regulations under the Chapter 3 withholding tax rules and Chapter 61 information reporting rules (Withholding Regulations). The IRS also issued proposed FATCA regulations.

FATCA imposes a 30% withholding tax on certain payments to foreign financial institutions (FFIs) that do not meet information reporting requirements for their US accounts and to certain non-financial foreign entities (NFFEs) that do not provide information concerning their substantial US owners to withholding agents. Chapter 3 generally imposes a 30% withholding tax on certain payments of US-source fixed or determinable, annual, or periodic income (unless subject to an exception or a reduced rate under an income tax treaty). Chapter 61 contains information reporting rules for certain payments made to US persons.

The FATCA Regulations generally finalize prior temporary regulations and incorporate changes previously announced in IRS notices, with some clarifications and changes, including withholding documentation requirements, treatment of US branches of FFIs, and account reporting requirements for FFIs that are partnerships. The Withholding Regulations finalize previous temporary Treasury regulations that were issued to coordinate with the FATCA rules and provide some clarifications and some helpful changes for withholding agents. Changes include allowing withholding agents to rely on an electronic transmission of a withholding certificate (for example, an IRS Form W-8BEN) for all open tax years (and not just for payments made after March 6, 2014) and to cure late documentation for claims that income is effectively connected income exempt from withholding.

The proposed FATCA regulations address verification requirements for a sponsoring entity of a sponsored FFI. Treasury regulations under FATCA allow certain FFIs and NFFEs to be sponsored by other entities for purposes of meeting their FATCA requirements. The proposed regulations also address certification requirements and procedures for the IRS's review of certain trustee-documented trusts and other certification procedures.

The FATCA Regulations are generally effective on January 6, 2017, although they may be applied as of January 28, 2013. The Withholding Regulations are generally effective on January 6, 2017. The proposed FATCA regulations will apply when finalized.

For more information on FATCA, see Practice Notes, FATCA: FFIs and NFFEs ( and FATCA Withholding ( .

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