Tax and Employee Benefits Alert
The Internal Revenue Service (IRS) released Notice 2015-66 on Friday, September 18, 2015, announcing its intention to amend the regulations under the Foreign Account Tax Compliance Act (FATCA) to extend various compliance deadlines and change the treatment of collateral securing certain obligations. Taxpayers may rely on Notice 2015-66 until such time as the regulations are amended.
Delayed Expansion of FATCA Withholding
FATCA requires 30 percent withholding on certain payments of U.S. source fixed or determinable, annual or periodic (FDAP) income, which are referred to as "withholdable payments." Under the regulations, withholdable payments will expand to include payments of gross proceeds on the sale or other disposition of property that can produce U.S. source interest or dividends effective January 1, 2017. Notice 2015-66 announces that the IRS will amend the FATCA regulations to delay the expansion of withholdable payments until January 1, 2019.
In addition, the regulations also provide that withholding will be required on foreign passthru payments to nonparticipating foreign financial institutions (FFIs) or recalcitrant account holders no earlier than January 1, 2017, or the date on which final regulations are issued defining the term "foreign passthru payment." Notice 2015-66 announces that the IRS will amend the FATCA regulations to delay withholding on foreign passthru payments until the later of January 1, 2019, or the date on which regulations are issued defining the term foreign passthru payment.
Delayed Deadline for Sponsored FFI Registration
Under the regulations, certain investment entities and controlled foreign corporations may be treated as sponsored FFIs. In general, a sponsoring entity agrees to undertake most FATCA compliance obligations, such as registration, due diligence and reporting, on behalf of a sponsored FFI. The regulations and intergovernmental agreements (IGAs) generally provide that a sponsoring entity is not required to register as a sponsored FFI with the IRS until December 31, 2016. Before that date, the sponsored FFI uses the global intermediary identification number (GIIN) assigned to the sponsoring entity. The delayed effective date was intended to provide the IRS with time to develop a streamlined registration process for sponsoring entities to use in registering their sponsored FFIs on the online FATCA portal.
Notice 2015-66 delays the deadline for a sponsoring entity to register its sponsored FFIs and obtain GIINs for them until December 31, 2016. As a result, sponsored FFIs may continue to use the GIIN assigned for their sponsoring entity through December 31, 2016. The notice cautions, however, that sponsoring entities should register their sponsored FFIs before the deadline to ensure that they have time to provide their GIINs to withholding agents before January 1, 2017.
Delayed Deadline for Sponsored Direct Reporting Non-Financial Foreign Entity (NFFE) Registration
Under the regulations, NFFEs may be treated as a direct reporting NFFE or a sponsored direct reporting NFFE. In general, a sponsoring entity agrees to undertake most FATCA compliance obligations, such as registration, due diligence and reporting, on behalf of a sponsored direct reporting NFFE. A direct reporting NFFE reports information on its substantial U.S. owners and other information to the IRS rather than providing information on its substantial U.S. owners to withholding agents. The sponsoring entity of a sponsored direct reporting NFFE reports on behalf of the sponsored direct reporting NFFE.
The regulations generally provide that a sponsoring entity is not required to register a sponsored direct reporting NFFE with the IRS until December 31, 2016. Before that date, the sponsored direct reporting NFFE uses the GIIN assigned to the sponsoring entity. The delayed effective date was intended to provide the IRS with time to develop a streamlined registration process for sponsoring entities to use in registering their sponsored direct reporting NFFEs on the online FATCA portal.
Notice 2015-66 delays the deadline for a sponsoring entity to register its sponsored direct reporting NFFEs and obtain GIINs for them until December 31, 2016. As a result, sponsored direct reporting NFFEs may continue to use the GIIN assigned to their sponsoring entity through December 31, 2016. The notice cautions, however, that sponsoring entities should register their sponsored direct reporting NFFEs before the deadline to ensure that they have time to provide their GIINs to withholding agents before January 1, 2017.
Extended Deadline for Limited FFIs and Limited Branches to become FATCA-Compliant
In general, for an FFI or branch to be treated as a participating FFI or registered deemed-compliant FFI, each FFI within its expanded affiliated group (EAG) and each of its branches must be FATCA-compliant. The FATCA regulations provide a temporary transition rule that permits FFIs and branches ("limited FFI" or "limited branch") located in jurisdictions whose local laws prevent compliance with FATCA to be present in an EAG with participating FFIs. To qualify for the transition relief, the entity generally must register with the IRS as a limited FFI or limited branch (or be registered by another member of the EAG if local law prohibits the entity from registering directly) and comply with FATCA to the extent allowed. This generally requires the limited branch or limited FFI to document its account holders, retain the documentation for six years and not open accounts for U.S. persons or nonparticipating FFIs. Although the limited FFI or limited branch is subject to withholding as a nonparticipating FFI under FATCA, its presence within the EAG does not prevent other FFIs from qualifying as participating FFIs.
Under the terms of the FATCA regulations, the transition relief for limited FFIs and limited branches generally expires on December 31, 2015. However, FFIs located in IGA jurisdictions will generally not be tainted by a related entity that is prevented from complying with FATCA under local law, effectively making permanent the temporary relief provided under the regulations. Accordingly, FFIs in non-IGA jurisdictions that have limited branches or limited FFIs within their EAG would have been required to determine by the end of this year whether they will cease operations in jurisdictions that do not permit such branches or FFIs to comply with FATCA. Notice 2015-66 extends the transition relief provided for limited branches or limited FFIs to January 1, 2017. However, limited branches or limited FFIs that cannot comply with FATCA before December 31, 2015, will be required to edit and resubmit their FFI registration on the IRS FATCA portal after December 31, 2015, to continue to be eligible for the transition relief.
Changes to the Treatment of Collateral Securing Certain Obligations
Under the FATCA regulations, withholdable payments are potentially subject to FATCA withholding if made to a noncompliant or undocumented payee. However, a withholdable payment does not include a payment made under a grandfathered obligation. A grandfathered obligation includes certain obligations outstanding on July 1, 2014. Equity interests generally cannot be treated as grandfathered obligations. A grandfathered obligation must include all the terms of the obligation and a fixed term or duration. An agreement requiring a secured party to make a payment with respect to collateral posted to secure a grandfathered obligation is also treated as a grandfathered obligation. Under the FATCA regulations, if collateral secures both grandfathered and nongrandfathered obligations, the collateral posted to secure the grandfathered obligations must be determined by allocating the collateral to all outstanding obligations secured by the collateral on a pro rata basis by value. Notice 2015-66 announces that the IRS intends to amend the regulations to make application of this rule optional, so that a withholding agent may choose to treat all payments with respect to collateral securing both grandfathered and nongrandfathered obligations as securing nongrandfathered obligations.
The regulations also provide a transitional rule whereby a payment made on or before December 31, 2016, by a secured party, or to a secured party other than a nonparticipating FFI, with respect to collateral securing one or more transactions under a collateral arrangement is not treated as a withholdable payment, provided that only a commercially reasonable amount of collateral is held by the secured party (or by a third party for the benefit of the secured party) as part of the collateral arrangement.
Notice 2015-66 also announces that the IRS intends to amend the regulations to address the treatment of substitute payments made by a secured party with respect to posted collateral that is itself a grandfathered obligation. The regulations created a distinction between transactions in which a payee posts a grandfathered obligation as collateral but remains the beneficial owner of the collateral and one in which the secured party becomes the beneficial owner, such as under a sale and repurchase agreement. Notice 2015-66 announces that the IRS will amend the regulations to eliminate this distinction, so that substitute payments made to a payee with respect to a grandfathered obligation that was posted as collateral will be treated as a payment made under a grandfathered obligation that is exempt from FATCA withholding.
Delay of Exchange of Information Under Model 1 IGAs
In general, a partner jurisdiction that has entered into a Model 1 IGA with the United States must exchange certain information regarding U.S. accounts that was reported to it by FFIs and branches within the jurisdiction. The deadline for providing required 2014 information for this purpose under the IGAs is generally September 30, 2015.
In recognition of the difficulties involved in establishing internal reporting procedures under local law, Notice 2015-66 generally delays the deadline for exchanging information under a Model 1 IGA, provided that certain requirements that depend upon whether the IGA has come into force or the obligation to exchange information has taken effect. If a Model 1 IGA has not yet come into force, the notice provides that an FFI in an IGA jurisdiction will be treated as complying with, and not subject to withholding under, FATCA provided that the partner jurisdiction continues to demonstrate "firm resolve" to bring the IGA into force and reports information with respect to 2014 no later than September 30, 2016. If a Model 1B IGA (a non-reciprocal IGA) has already come into force or the obligation to exchange information under a Model 1A IGA (a reciprocal IGA) has taken effect, an FFI in that jurisdiction will be treated as complying with, and not subject to withholding under, FATCA provided that the partner jurisdiction notifies U.S. competent authority of the delay before September 30, 2015 and provides assurances that it is making good faith efforts to exchange the information as soon as possible.
For more information, please contact:
Michael Lloyd, email@example.com, 202-626-1589
Michael Chittenden, firstname.lastname@example.org, 202-626-5814