On September 18, 2015, the Department of the Treasury (“Treasury”) and the Internal Revenue Service (“IRS”) issued Notice 2015-66, providing that the regulations under chapter 4, sections 1471-1474 of the Internal Revenue Code of 1986, as amended, commonly referred to as FATCA, will be amended to extend certain transitional rules. The amendments provide some relief from impending deadlines by (1) delaying the start of withholding on gross proceeds and foreign passthru payments; (2) extending the availability of special treatment for limited branches and limited foreign financial institutions; (3) extending the deadline for sponsoring entities to register their sponsored entities; and (4) extending the deadline for certain Model 1 IGA countries to exchange information with the U.S. with respect to 2014. Additionally, the amendments will modify the rules addressing certain grandfathered obligations. Taxpayers may rely on Notice 2015-66 until the regulations are amended.
Withholding on Gross Proceeds and Foreign Passthru Payments
FATCA subjects withholdable payments, such as U.S. source interest and dividends, made to foreign financial institutions (“FFIs”), to 30% withholding tax, unless the FFI is a participating FFI (i.e., a FFI that complies with FATCA) or otherwise satisfies an exemption or qualifies for the benefits of an intergovernmental agreement (IGA) between the U.S. and the jurisdiction of the residence of the FFI.
Gross Proceeds Withholding
Gross proceeds from the sale or other disposition of property that can produce U.S. source interest or dividends are also subject to the FATCA withholding tax but, prior to the notice, were not subject to withholding until January 1, 2017. The notice extends the start date of FATCA withholding on such gross proceeds by two (2) years. Under the notice, withholding on such proceeds will not be required until sales or other dispositions that occur on or after January 1, 2019.
Foreign Passthru Payment Withholding
Foreign passthru payments made to recalcitrant account holders and nonparticipating FFIs by a participating FFI are also subject to withholding; however, the term, “foreign passthru payment,” has not yet been defined under FATCA. Prior to the notice, participating FFIs were not required to withhold on such foreign passthru payments until the later of January 1, 2017 or the date of publication of final regulations defining “foreign passthru payment.” The notice extends the start date of withholding on foreign passthru payments to the later of January 1, 2019 or the date of publication of such final regulations.
Delaying Registration Deadline for Certain Sponsored Entities
In lieu of complying with FATCA directly as a participating FFI, certain FFIs are eligible for deemed compliant FATCA status as a sponsored FFI. In the case of a registered, deemed compliant sponsored FFI, the sponsoring entity is responsible for satisfying the FATCA requirements of the sponsored FFI as if the sponsored FFI was a participating FFI, including registering the sponsored FFI with the IRS. Under current regulations, a sponsoring entity must obtain a Global Intermediary Identification Number (“GIIN”) for such sponsored FFIs by registering such FFIs with the IRS generally by no later than January 1, 2016. For payments made prior to January 1, 2016, withholding agents may rely on a withholding certificate containing only the sponsor’s GIIN. Similar rules apply to sponsors of sponsored direct reporting non-financial foreign entities (“NFFEs”).
The notice extends the deadline for registering sponsored entities to January 1, 2017. Beginning on January 1, 2017, the sponsor must use a sponsored FFI’s GIIN when filing any forms on behalf of the sponsored FFI and must provide such GIIN to withholding agents. Generally the registration requirement for sponsored deemed compliant entities under the Model 1 and Model 2 IGAs will be extended from December 31, 2015 to December 31, 2016.
Withholding Agent Reliance
The expected amendments will also allow a withholding agent to rely on withholding certificates where sponsored registered deemed compliant FFIs and sponsored direct reporting NFFEs use the sponsoring entity’s GIIN for payments made prior to January 1, 2017. Any payment made on or after January 1, 2017 will require the sponsored entity’s GIIN on a new withholding certificate, or, if the withholding agent already has a withholding certificate with the GIIN of the sponsoring entity of the payee, the sponsored entity’s GIIN can be communicated via verbal or written communication (such as email). Withholding agents will have 90 days from the date it obtains the sponsored entity’s GIIN to verify its accuracy against the published IRS FFI list.
Extending Special Treatment for Limited Branches and Limited FFIs
Transitional rules provide that an FFI may qualify as a participating FFI even if one or more FFIs in the participating FFI’s expanded affiliated group cannot satisfy the participating FFI requirements. Such FFIs are “limited FFIs” or “limited branches” under the current FATCA regulations. On December 31, 2015, limited FFI and limited branch statuses will expire, and any limited FFI or limited branch must fully satisfy the participating FFI requirements.
Both Model 1 and Model 2 IGAs generally require that all of an FFI’s related entities or branches maintain FATCA compliance for the FFI to qualify under the applicable IGA. Both types of IGAs provide an exception for FFIs with related entities or branches located in jurisdictions that prevent such entity or branch from complying with FATCA, or for branches or entities that are non-compliant due to the expiration of the transitional rule for limited FFIs and branches.
Under the new rules, the availability of limited FFI and limited branch statuses will be extended until January 1, 2017. Thus, current limited FFIs and limited branches are eligible to continue under limited FFI and limited branch status until December 31, 2016. On January 1, 2017, limited branch and limited FFI statuses will be terminated.
On December 31, 2015, limited FFI and limited branch registrations will be placed in “registration incomplete” status on their online FATCA account, and if they seek to continue such status during 2016 pursuant to the notice, they will be required to edit and resubmit their registrations after December 31, 2015.
Extending IGA Deemed Compliant Treatment and Information Exchange Deadline
Generally Model 1 IGAs provide for the exchange of FATCA information between governments, which, in the case of 2014, is required by September 30, 2015. Some Model 1 IGAs, however, have been signed or agreed to in substance, but not yet brought into force.
Under the notice, Treasury will continue to treat FFIs covered by deemed effective IGAs that have not yet entered into force as of September 30, 2015, as complying with, and therefore not subject to withholding under FATCA, so long as the relevant jurisdiction continues to demonstrate their “firm resolve” to bring the IGA into force and any information that was required to be exchanged by September 30, 2015 is exchanged by September 30, 2016.
With respect to Model 1 IGAs that have been brought into force, failure to exchange 2014 information on September 30, 2015 will not cause such jurisdiction’s FFIs to be treated as non-compliant, so long as the relevant jurisdiction notifies the U.S. competent authority before September 30, 2015 of the delay and provides assurance that the jurisdiction is making good faith efforts to exchange the information as soon as possible.
Reporting Model 1 FFIs remain subject to local law regarding the timing of information required to be reported to local jurisdictions under the applicable IGA.
Modifying Treatment of Grandfathered Obligations
Generally a payment made under a “grandfathered obligation” is not a withholdable payment under FATCA. A grandfathered obligation includes an agreement requiring a secured party to make payments with respect to posted collateral securing the grandfathered obligation. To the extent collateral secures both grandfathered and non-grandfathered obligations, current rules require a pro rata allocation by value to determine what portion of the collateral secures the grandfathered obligation.
Under the notice, the pro rata allocation rule for pooled collateral will be optional. This will provide financial institutions the option to treat collateral securing both grandfathered obligations and obligations that are not grandfathered as securing only non-grandfathered obligations. Under this alternative, withholding will be required on all payments made with respect to the collateral. Financial institutions may find this less administratively burdensome than the pro rata approach.
The definition of grandfathered obligation will also be amended to include any obligation that gives rise to substitute payments and that is created as a result of the payee posting collateral that is otherwise treated as a grandfathered obligation. According to the notice, this change is intended to treat substitute payments made with respect to a grandfathered obligation that is posted as collateral as payments under a grandfathered obligation and therefore not subject to FATCA withholding.
Overall the notice contains extensions and clarifications to the FATCA rules that should ease the ongoing transitional phase-in of FATCA compliance and withholding.