After almost a year’s wait, the US government has released the final regulations (Regulations) relating to the Foreign Account Tax Compliance Act (FATCA).

The Regulations make a number of important changes to the proposed regulations issued in February last year (Proposed Regulations), as well as provide welcome additional guidance and clarification. Many of the amendments are highly technical and Australian financial institutions should re-examine and carefully consider whether and how the changes impact them.

There is important news for Australian financial institutions:

  • Grandfathering extended

The grandfathering date has been extended to 1 January 2014.

  • Foreign pass-thru payments still unresolved

The US continues to reserve its position in relation to withholding on foreign pass-thru payments, which is to commence no earlier than 1 January 2017, and this will be subject to further regulations in due course.

  • Expansion of deemed-compliance exemptions and exceptions from FFI status

The Regulations expand the deemed-compliance exemptions as well as the exceptions from foreign financial institution (FFI) status. Australian financial institutions that are able to rely on these categories of exemption/exception will not be subject to the general FATCA due diligence, reporting and withholding obligations. Of particular importance, complying superannuation funds that are established in Australia may now be able to rely on the deemed-compliance exemption applicable to retirement funds.

  • No silver bullet for Australian financial institutions

Australian financial institutions are likely to be disappointed that more significant concessions have not been made. The Regulations certainly do not contain a silver bullet for the Australian financial services industry against FATCA.

  • Institutions may progress their FATCA preparation with greater certainty

The release of the Regulations means that Australian financial institutions can now progress their FATCA preparations with greater certainty as to the legislative framework.

The Regulations are still relevant if Australia signs an intergovernmental agreement (IGA)

The Australian government is in negotiations with the US government in respect of an IGA to implement FATCA, in the form of the Model 1 IGA (see our alert here).

The Regulations specifically refer to the two types of model intergovernmental agreements (Model 1 and Model 2) and acknowledge the co-existence of the IGA regimes alongside the non-IGA FATCA landscape. The Model 1 IGA incorporates certain provisions from the Regulations. There are material changes in the Regulations that will apply to Australian financial institutions even if an IGA is signed.

Application of Regulations to non-Australian branches and affiliates of financial institutions

Australian financial institutions that have branches or affiliates outside of Australia, which are not located in another IGA-jurisdiction, will be governed by the Regulations in their entirety. These affiliates and branches should consider all of the changes contained in the Regulations to determine the impact for their businesses.

Extensions to Grandfathering

The Regulations extend the grandfathering date.

FATCA withholding will not be deducted from withholdable payments made in respect of certain obligations (including debt instruments, derivatives transactions, and associated collateral) that are outstanding as at 1 January 2014 (rather than 1 January 2013). The Regulations provide guidance as to the date on which an obligation will be considered to be outstanding.

Also, obligations that give rise to foreign pass-thru payments and certain payments of dividend equivalents may be grandfathered if they are outstanding on the date that is 6 months after the date on which final regulations in respect of these types of payments are published.

The limitations on grandfathering contained in the Proposed Regulations remain.

The grandfathering does not apply in respect of obligations that are treated as equity for US tax purposes, obligations that lack a stated expiration or term, or for certain agreements or instruments (including custodial agreements, brokerage agreements, investment-linked annuity contracts or insurance contracts and master agreements).

The grandfathering is lost if the obligation is materially modified.

Expansion of deemed-compliance exemptions and exceptions from FFI status

Australian financial institutions may be exempt from the FATCA due diligence and reporting obligations under an IGA. They may be specifically exempted under the terms of an Australian IGA, or may be able to rely on certain deemed-compliance exemptions or other exceptions set out in the Regulations. Consequently, the changes to these exemptions and exceptions in the Regulations are relevant to Australian financial institutions.

  • Retirement Funds

The scope of the deemed-compliance exemption for retirement funds as well as the classes of pension funds qualifying as exempt beneficial owners has been considerably broadened. Although it is already widely anticipated that Australian superannuation funds will be specified as Non-Reporting Financial Institutions in an Australian IGA, complying superannuation funds that are established in Australia may now be able to rely on this deemed-compliance exemption.

  • Securitisation vehicles, CDOs and CLOs

Certain limited life debt investment entities that were in existence as at 31 December 2011 will be considered certified deemed-compliant FFIs until 1 January 2017. As a result they will not be required to report on their account holders prior to such date. This exemption seems to be designed for pre-existing securitisation vehicles and issuers of other forms of collateralised debt or loan obligations. The exemption requires the trustees to have been granted limited powers under the constitutive documents which would be insufficient to enable them to become participating FFIs. The prescriptive conditions of the exemption mean that it may be difficult for Australian vehicles to rely on the exemption, and this will need to be assessed on a case-by-case basis.

  • Sponsored investment entities and sponsored controlled foreign corporations

There is a deemed-compliance exemption for sponsored investment entities and sponsored controlled foreign corporations in respect of which a sponsoring entity agrees to perform all due diligence, withholding, reporting and other FATCA obligations for the sponsored FFI. This would permit the trustee of a managed fund, for example, to be the fund’s sponsoring entity, and to perform all FATCA obligations on its behalf.

This exemption may provide practical assistance to managed funds and other trusts, which FATCA treats as separate entities despite their lack of separate legal personality under Australian law.

There is also a separate deemed-compliance category for sponsored closely-held investment vehicles.

  • Local FFIs

The Local FFI deemed-compliance exemption has been amended to broadly align with the corresponding exemption contained in the UK and Danish IGAs. This means that any type of FFI (including investment entities) may now rely on this exemption if they meet the specified criteria.

  • Qualified Collective Investment Vehicles

The Regulations retain the requirement for these vehicles to be “regulated”. This is notwithstanding the limited types of investors that may hold interests in such vehicles. The Regulations clarify that a fund will be considered to be regulated if its manager is regulated with respect to the fund in all of the countries in which the fund is registered and in all of the countries in which it operates. It is unclear whether Australian managed funds may be able to rely on this exemption if they are unregistered schemes.

  • Certain Credit Card Issuers

An issuer of credit cards that accepts deposits only when a customer makes a payment in excess of a balance due with respect to the card and is not otherwise an FFI, may benefit from a deemed-compliance exemption. It requires specified policies and procedures to be implemented which prevent customer deposits in excess of USD50,000 or which ensure that any such deposit is refunded within 60 days.

  • Restricted Funds

The restricted funds category now benefits from a further transitional period. Restricted funds now have until the later of 30 June 2014 or 6 months after the date the investment fund registers with the IRS as a registered deemed-compliant FFI, to renegotiate its distribution agreements to include the required prohibitions on sales to specified US persons, non-participating FFIs or certain passive non-financial foreign entities.

  • Owner-Documented FFIs

The USD50,000 debt limit applicable to owner-documented FFIs has been removed. The FFI must report all individuals and specified US persons that hold such interests (subject to certain exceptions) to the designated withholding agent.

  • Excepted FFIs

The Regulations contain more comprehensive exceptions to FFI status for certain non-financial group entities, including holding companies, treasury centres and captive finance companies that are part of a non-financial group. It also extends more comprehensive exceptions for certain entities within financial groups such as dormant entities and deal-specific entities that have not been subsequently liquidated. Certain passive investment entities that are not professionally managed are excepted from the definition of FFI. This may be welcome news for entities such as certain family trusts.

Electronic registration with the IRS

The Regulations clarify the electronic registration process for FFIs registering with the IRS. FFIs will be issued a Global Intermediary Identification Number (GIIN) on registration. This can be used to establish the FFI’s chapter 4 status for identification and withholding purposes. The IRS anticipates that reporting financial institutions under a Model 1 IGA may use the GIIN to satisfy reporting requirements to their local regulator. In the case of an Australian IGA, this could be used by Australian financial institutions in reporting to the ATO.

Collective Refunds for FATCA over-withholding

The Regulations provide a process for FFIs and reporting Model 1 IGA financial institutions to file collective refund claims on behalf of its account holders and payees which have been subject to FATCA over-withholding. This will have an important consequence on the practical impact of FATCA.

Where to from here?

The key for Australian financial institutions is clearly the outcome of negotiations on an IGA with the US government. These include, in particular, the list of entities and accounts that make it into Annex II of the IGA and are therefore exempt from the FATCA due diligence and reporting obligations.

In the meantime, Australian financial institutions can proceed with their FATCA preparation, including consideration of the new deemed-compliance categories, and the negotiation of FATCA risk-allocation clauses in transactional documents, armed with greater certainty now that the long-anticipated Regulations have finally arrived.

For your reference, a copy of the Regulations in pre-publication form is available here.