Originally published April 20, 2010

Article by Jonathan A. Sambur , James R. Barry , Donald C. Morris Michael R. Butowsky

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.

New Withholding Tax and Information Reporting Regime for Certain Payments to Non-US Banks, Funds, Insurance Companies and other 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:

  • Determine whether an account is a "United States account" (with respect to FFIs that are investment funds, collective investment vehicles or other types of FFIs that do not maintain "accounts," the term "account" would mean an equity or debt interest in the FFI that is not regularly traded on an established securities market) (US Account);6
  • Comply with certain verification and due diligence procedures that relate to the identification of US Accounts (these requirements will be specified by regulation, but one possibility is that these rules may be based on the "know your customer" (KYC) standards for identifying US persons, including indirect account holders, that apply in the anti-money laundering (AML) context);7
  • Report certain information annually to the IRS relating to the FFI's US Accounts;
  • Withhold taxes at a 30 percent rate on any "passthru payment"8 to
    • an account holder (whether the beneficial owner is a US person or a non-US person) that has not provided information necessary for the FFI to comply with its verification and due diligence obligations, or to a US Account that has not waived local bank secrecy rules, thereby prohibiting the FFI from complying with its information reporting obligations (Recalcitrant Account Holder),
    • another foreign financial institution that has not entered into an FFI Agreement with the IRS, or
    • another FFI that has entered into an FFI Agreement and that has elected to have an FFI "up the chain of payment" withhold tax attributable to the portion of such payment made to a Recalcitrant Account Holder or an FFI that has not entered into an FFI Agreement;
  • Comply with requests by the IRS for additional information relating to any US Account maintained by the FFI; and
  • Obtain appropriate waivers of local privacy laws from the owners of US Accounts or, to the extent not provided, close the account.

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.

Non-US Non-Financial Entities Must Disclose Substantial US Owners or Withholding Tax Imposed on US Source Payments

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.

Dividend Equivalent Payments Received by Foreign Persons Shall Be Treated as Dividends

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.

Repeal of Foreign Exceptions to Registered Bond Requirements

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.

Passive Foreign Investment Company Reporting

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.

Provisions Relating to Foreign Trusts


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.

Other Provisions

  • FATCA requires that all withholding agents that are financial institutions electronically file their information reporting returns. In contrast, current law permits financial institutions to file paper returns in cases where the institution would be required to file fewer than 250 returns during the year.
  • FATCA provides certain additional information reporting requirements for individuals that own non-US Accounts. As a general matter, these provisions authorize the imposition of penalties for failure to report non-US financial assets owned by a US citizen or resident. These requirements are generally similar to those of TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), but they also reach non-US assets owned outside of an account relationship with an FFI (e.g., non-US stocks or debt obligations). FATCA increases the penalty for understatements attributable to undisclosed foreign financial assets that are not reported under the information reporting regime applicable to non-US financial assets.
  • FATCA authorizes a new six-year statute of limitations period for assessment of tax on understatements of income attributable to non-US financial assets.
  • The HIRE Act further delays, for two years (until December 31, 2019), the implementation of the worldwide interest allocation rules of section 864(f) of the Code.


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.

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