NEW YORK WASHINGTON PARIS LONDON MILAN ROME FRANKFURT BRUSSELS
in alliance with Dickson Minto W.S., London and Edinburgh
IRS RELEASES PROPOSED FATCA REGULATIONS
On February 8, 2012, the Internal Revenue Service released proposed regulations to implement
the Foreign Account Tax Compliance Act (“FATCA”), which targets income tax noncompliance
by U.S. taxpayers holding certain financial accounts in foreign countries by imposing disclosure
and withholding obligations on foreign entities. With notable exceptions, the proposed
regulations generally incorporate and expand upon the guidance outlined in previous IRS
implementing FATCA (the “FATCA Notices”). Further, the proposed regulations
provide the most detailed guidance to date as to how foreign entities classified as “foreign
financial institutions” (“FFIs”) can qualify as “participating FFIs” and thus avoid the withholding
tax regime imposed under FATCA. While the proposed regulations are voluminous, this
memorandum highlights the significant issues they address. This memorandum also addresses a
joint statement released on February 8, 2012 by the Treasury Department and five European
nations discussing a potential framework for international cooperation in the implementation of
Highlights of the Proposed Regulations, and the FATCA Notices and Code Language
The proposed regulations relax a number of important obligations placed upon FFIs by FATCA
and the FATCA Notices, and expand the transition period for FATCA compliance in a number
Expanded Scope of “Grandfathered Obligations”
The grandfathering date for payments relating to outstanding obligations has been proposed to be
extended from March 18, 2012 to January 1, 2013. The proposed regulations provide that
payments made under, or any gross proceeds from the disposition of, “grandfathered
obligations,” which are obligations that are outstanding on the grandfathering date, will generally
not be subject to FATCA.
Transitional Rule for “Expanded Affiliated Groups”
The proposed regulations provide a two-year transition period, effective until January 1, 2016,
for the full implementation of the rules outlined in the FATCA Notices, which require that each
FFI that is a member of an “expanded affiliated group” satisfy either the FATCA disclosure
requirements for “participating FFIs” or the disclosure requirements for “deemed-compliant
FFIs” in order for any FFI in that group to qualify as a “participating FFI.” During the
transitional period, an affiliate member of a group of FFIs that is resident in a jurisdiction
prohibiting reporting or withholding as required by FATCA will not prevent the other FFIs
IRS Notices 2010-60, 2011-34, and 2011-53.
- 2 -
within the same group from qualifying as participating FFIs, as long as the FFI legally prevented
from complying with FATCA satisfies a number of requirements, including (1) agreeing to
perform due diligence to identify its U.S. accounts, (2) retaining account holder documentation
pertaining to its identification of U.S. accounts for six years, and (3) reporting with respect to its
U.S. accounts to the extent permitted under the laws of the FFI’s jurisdiction of residence.
Expanded List of Deemed-Compliant FFIs
The proposed regulations would expand the category of deemed-compliant FFIs not subject to
the general FATCA requirements. Under the proposed regulations, “qualified collective
investment vehicles,” or FFIs regulated as investment funds under the laws of their countries of
organization, would be classified as deemed-compliant FFIs as long as each distributor of the
relevant investment fund’s interests is: (1) a participating FFI, (2) a deemed-compliant FFI
registered with the IRS, (3) a local bank, or (4) a “restricted distributor” defined to be generally a
local investment advisor with at least 30 clients but less than $175 million in assets under
management, along with other requirements. Deemed-compliant FFIs will also include certain
banks and other entities conducting business only with local clients.
Due Diligence Requirements for Reviewing Client Accounts
The due diligence requirements for participating FFIs were relaxed from the protocols outlined
in the FATCA Notices and now generally allow electronic review of U.S. accounts in existence
when FATCA is effective. The proposed regulations also state that a participating FFI will not
be held strictly liable for the failure to identify a U.S. account as long as the participating FFI
fulfills the verification procedures set forth in its FFI agreement with the IRS.
Refinement of Definition of “Financial Account”
The primary purpose of FATCA is to cause disclosure of “U.S. accounts” of FFIs. The
definition of a “U.S. account” under FATCA is limited to those accounts meeting the definitional
requirements of a “financial account.” The proposed regulations refine the definition of
“financial account” to generally focus on traditional bank, brokerage, and money market
accounts, and interests in investment vehicles. The definition in the proposed regulations
excludes most debt and equity securities issued by banks, insurance companies, and brokerage
firms, subject to an anti-abuse rule. The proposed regulations also clarify that insurance
contracts that provide “pure insurance protection,” such as term life, disability, health, and
property and casualty insurance contracts, will not be classified as “financial accounts” for
purposes of FATCA. However, insurance contracts with an investment component (such as cash
value insurance contracts and annuity contracts) will be “financial accounts” for purposes of
Delay of Withholding Requirements for Passthru Payments from Participating FFIs to
Nonparticipating FFIs and Recalcitrant Account Holders
The proposed regulations do not include a definition for “foreign passthru payments” and would
delay withholding requirements with respect to such payments until January 1, 2017. The
FATCA Notices outlined the “foreign passthru payment” as a passthru payment other than a
- 3 -
withholdable payment upon which withholding would be required to the extent of the percentage
of the FFI’s U.S. assets, and delayed withholding on such payments until January 1, 2015. The
preamble to the proposed regulations indicates that the IRS is still considering ways to ease
compliance with passthru payment withholding, implement certain withholding procedures for
FFIs that are flow-through entities, and prevent the use of FFIs as “blockers” to avoid
withholding by U.S. withholding agents.
Insurance Companies as Financial Institutions Subject to FATCA
The proposed regulations state that insurance companies that issue, or are obligated to make
payments with respect to, cash value insurance policies or annuity contracts are “financial
institutions” subject to FATCA. The proposed regulations further define an “insurance
company” as a company more than half of the business of which during the calendar year
consists of issuing, or being obligated to make payments with respect to, insurance or annuity
contracts or the reinsuring of such contracts.
Significant Obligations of FFIs
The proposed regulations significantly clarify the requirements FFIs must satisfy in order to be
classified as “participating FFIs.” The proposed regulations outline the withholding, due
diligence, reporting, verification, and other requirements that must be included in the agreement
between an FFI and the IRS (the “FFI agreement”) in order for the FFI to qualify as a
“participating FFI.” The FFI agreement will require a participating FFI to adopt written policies
and procedures to comply with its responsibilities under the FFI agreement, conduct periodic
internal reviews of its compliance, and periodically provide certification and certain other
information to the IRS. The FFI agreement will also contain procedures for circumstances in
which a participating FFI fails to fulfill its requirements under the FFI agreement. The preamble
to the proposed regulations states that the IRS intends to publish a draft model FFI agreement in
early 2012, and a final model FFI agreement in the fall of 2012.
The proposed regulations provide detailed requirements for a participating FFI to satisfactorily
complete due diligence in order to identify its U.S. account holders. The diligence standards
establish different levels of required diligence based upon (1) whether an account is held by an
individual or an entity, (2) whether the account is a new or a preexisting account at the time the
FFI enters into a verification agreement with the IRS, and (3) the monetary value of the account.
The diligence requirements are as follows:
A. Preexisting Individual Accounts
• Accounts of $50,000 or less are exempt from any diligence requirement.
• Certain cash value insurance and annuity contracts of $250,000 or less are also
exempt from review.
• General accounts exceeding $50,000 but not exceeding $1,000,000 are subject
only to review of electronically searchable data for indicia of U.S. status (“U.S.
indicia”), such as U.S. contact information or a notice to wire funds to a bank
- 4 -
account in the United States. No further review is necessary if no U.S. indicia are
uncovered in the electronic search.
• Accounts exceeding $1,000,000 are subject to a review of both electronic and
nonelectronic files for U.S. indicia, and there must be an inquiry into the actual
knowledge of any of the FFI’s employees or officers who assist the account
holder under examination. However, non-electronic documents are required to be
searched only in cases where the status of the account holder is ambiguous.
B. New Individual Accounts
• Generally, the information provided at the opening of the account, including
identification and any documentation collected under the “Anti-Money
Laundering” or “Know Your Customer” rules (the “AML/KYC rules”) must be
reviewed for any U.S. indicia. If U.S. indicia are found, the FFI must request
either a Form W-9 or a Form W-8BEN with a non-U.S. passport or other
government-issued ID evidencing citizenship in a country other than the United
• The IRS preamble to the proposed regulations highlights that these requirements
generally will not necessitate significant changes to information collection during
the opening of an account, except to the extent that U.S. indicia are identified.
C. Preexisting Entity Accounts
• Accounts with $250,000 or less are exempt from review.
• Otherwise, participating FFIs may rely upon the records collected for purposes of
the AML/KYC rules. For accounts exceeding $1,000,000, however, the FFI must
collect certification from the entity that it does not have substantial U.S. owners, or
in lieu of such certification, obtain information regarding all substantial U.S.
D. New Entity Accounts
• The proposed regulations exempt from review the substantial U.S. owners of (1)
accounts of other FFIs unless an agreement requires the FFI to do reporting on
behalf of that FFI, and (2) accounts of entities engaged in an active nonfinancial
trade or business.
• The proposed regulations will require the determination of the substantial U.S.
owners of any other entities, but it is generally expected that such a determination
will be made by obtaining a certification from the entity regarding its ownership
Reporting Obligations of Participating FFIs
The proposed regulations require a participating FFI to satisfy yearly reporting obligations
regarding each U.S. account holder and any account holder that refuses to provide the
- 5 -
information necessary to determine whether its account is a U.S. account (“recalcitrant account
holder”). The proposed regulations contain rules allowing for the coordination and
simplification of reporting by participating FFIs that are already subject to U.S. tax reporting
requirements under other U.S. tax requirements.
With regard to U.S. account holders and foreign nonfinancial entities having one or more ten-
percent U.S. owners, the proposed regulations would require a participating FFI to provide
information identifying the U.S. account holder, the value of its account, and the amount of any
payments made with respect to the account. Reports regarding the value of these accounts and
any payments made to holders of these accounts may use the currency in which the accounts are
maintained. With regard to recalcitrant account holders, the proposed regulations would require
a participating FFI to report the following each year: (1) the number and value of accounts, in
aggregate, held by recalcitrant account holders that have U.S. indicia; (2) the number and value
of accounts, in aggregate, held by recalcitrant account holders that do not have U.S. indicia; and
(3) the number and value of dormant or inactive accounts, in aggregate, held by recalcitrant
Further, the IRS has expressed its intention to extend to communications with participating FFIs
the “B” notice process currently used for notification of a name/TIN mismatch on a Form 1099.
The preamble to the proposed regulations states that the IRS may require participating FFIs to
use the IRS online TIN matching program to uncover name/TIN discrepancies before reporting
to the IRS, but promises not to implement such a requirement until January 1, 2015 or later.
Phase-in of Reporting Obligations
The proposed regulations will require reporting with respect to U.S. accounts and recalcitrant
account holders with respect to calendar year 2013 and beyond. The reporting obligations of
participating FFIs are proposed to be implemented incrementally, using the following timeline:
• For reporting with respect to calendar years 2013 and 2014, participating FFIs
must report only the name, address, TIN, account number, and account balance
with respect to each U.S. account.
• For reporting with respect to calendar year 2016 and beyond, income associated
with each U.S. account also must be reported.
• For reporting with respect to calendar year 2017 and beyond, full reporting under
FATCA (including information on the gross proceeds from broker transactions)
will be required.
Phase-in of Withholding Obligations
The proposed regulations generally require participating FFIs to begin FATCA withholding on
January 1, 2014 with respect to U.S.-sourced payments such as dividends and interest and on
January 1, 2015 with respect to payments of proceeds from the sale of U.S. securities.