IRS Notice postpones several key deadlines and provides other relief.
On September 18, the US Internal Revenue Service (IRS) released Notice 2015-66 (the Notice) announcing that the US Department of the Treasury and the IRS intend to amend Treasury regulations under legislation commonly referred to as the Foreign Account Tax Compliance Act (FATCA) to extend the applicability of certain transitional rules and modify certain “grandfathered obligation” rules with respect to collateral.
Extension of Several Transitional Rules
The forthcoming amended FATCA regulations will postpone certain key dates relating to the applicability of withholding, extend the period during which certain classifications under FATCA remain available, and delay certain other deadlines relating to registration and diligence requirements.
Delayed Withholding Start Dates for Gross Proceeds/Foreign Pass-thru Payments
Pursuant to the Notice, the starting date for FATCA withholding on gross proceeds has been delayed for two years until January 1, 2019. Withholding on payments of US-source “fixed or determinable annual or periodical income,” such as dividends and interest, is currently in effect and will not be impacted by the forthcoming amended regulations.
The starting date for FATCA withholding on “foreign pass-thru payments” has been delayed for at least two years, to the later of January 1, 2019 or the publication of final regulations defining the term “foreign pass-thru payment.”
Extended Availability of “Limited Branch” and “Limited FFI” Status
The availability of limited branch status and limited foreign financial institution (FFI) status will be extended for one year until December 31, 2016. As background, an FFI that is a member of an “expanded affiliated group” is eligible to be treated as either a “participating FFI” or a “registered deemed-compliant FFI” (and therefore compliant with FATCA) only if all other members of the expanded affiliated group are treated as either participating FFIs, deemed-compliant FFIs, or exempt beneficial owners. The laws of certain jurisdictions, however, may prevent group members from attaining such classification (e.g., by preventing a branch or affiliate from entering into an FFI agreement).
To address this hurdle, group members in such jurisdictions may be assigned the temporary “limited branch” or “limited FFI” designations so as to permit group members located outside of such jurisdictions to qualify as “participating FFIs” and “registered deemed-compliant FFIs.” The Notice explains that the additional time is intended to provide FFIs further time to evaluate whether to continue to operate in jurisdictions where limited branches or limited FFIs exist.
The Notice also states that a registered limited branch or registered limited FFI that wishes to continue such status during the 2016 calendar year must edit and resubmit its FATCA registration on the FATCA registration website after December 31, 2015.
Extended Transitional Period Applicable to “Sponsored Entities”
The IRS is continuing to develop a streamlined process to allow sponsoring entities to register their sponsored entities on the FATCA registration website. Currently, a sponsored entity is not required to complete a registration with the IRS to obtain its own Global Intermediary Identification Number (GIIN) and can use the GIIN assigned to its sponsor.
Accordingly, the Notice provides that the FATCA regulations will be revised to
- delay the deadline for sponsoring entities to register their sponsored entities for one year—from December 31, 2015 to December 31, 2016;
- provide that sponsored investment entities will maintain their deemed-compliant status as long as they are registered by the sponsoring entity on or before the later of December 31, 2016 and the date that is 90 days after a US-reportable account is first identified; and
- extend the time that a withholding agent may rely on a withholding certificate provided by a sponsored entity that includes only the GIIN of its sponsoring entity to December 31, 2016. Thereafter, the withholding agent will be required to obtain a GIIN assigned to the sponsored entity.
Extended Transitional Rules With Respect to IGAs
As of now, the Notice states that 112 jurisdictions are treated as having, in effect, an “intergovernmental agreement” (IGA) for the implementation of FATCA. In prior guidance, the Treasury and the IRS announced that jurisdictions treated as having IGAs in effect include any jurisdiction that has agreed in substance on the terms of an IGA and that agreed to be included on the list of such jurisdictions, in addition to any jurisdiction that has signed an IGA with the United States.
The Treasury and the IRS intend to continue to treat jurisdictions that have not yet brought Model 1 IGAs into force on September 30, 2015 as having brought such IGAs into force. The Treasury intends to continue to treat FFIs covered by such IGAs as complying with the FATCA so long as the partner jurisdiction demonstrates “firm resolve” to bring the IGA into force and exchanges information that would be reportable on September 30, 2015 by September 30, 2016 (together with any information reportable under the IGA on September 30, 2016).
Further, the Notice acknowledges that certain jurisdictions with a Model 1 IGA in force are continuing to develop the infrastructure needed to automatically exchange information with the United States. As a result, FFIs covered by such IGAs will be treated as complying with the FATCA even if the applicable partner jurisdiction has not exchanged 2014 information by September 30, 2015 (the current deadline for exchange of information by a jurisdiction with a Model 1 IGA in place) as long as the partner jurisdiction notifies the Treasury by September 30, 2015 of the delay in exchange and provides assurance that the jurisdiction is making good faith efforts to exchange information as soon as possible.
The above extensions do not affect when FFIs should report information to a partner jurisdiction that remains governed by local law.
Modified Treatment of Collateral Under the “Grandfathered Obligation” Rule
The FATCA regulations generally provide that FATCA withholding does not apply with respect to payments made under “grandfathered obligations.” Grandfathered obligations are those “obligations” that were outstanding as of July 1, 2014. Under the regulations, a grandfathered obligation also includes an agreement requiring a secured party to make a payment with respect to collateral posted to secure a grandfathered obligation. Where collateral secures both grandfathered and non-grandfathered obligations, the current FATCA regulations provide that in determining the collateral posted to secure the grandfathered obligations, one must allocate, pro rata by value, the collateral to all outstanding obligations secured by the collateral (the “pro rata rule”).
The Notice acknowledges commentary that compliance with the pro rata rule is burdensome, as well as the preference by some to not apply the pro rata rule, but instead to treat any collateral securing both grandfathered and non-grandfathered obligations as posted to secure non-grandfathered obligations (and, accordingly, withhold on all payments made with respect to the collateral). Accordingly, the Notice announces that the FATCA regulations will be revised to provide that the pro rata rule is not mandatory, thus permitting a secured party to withhold on all collateral that secures both grandfathered obligations and non-grandfathered obligations, or apply the pro rata rule with respect to such collateral.
The Notice also addresses an issue regarding certain “substitute payments” made with respect to grandfathered obligations. Under the current regulations, if a payee pledges a grandfathered obligation as collateral and the secured party acts as intermediary for payments made under such obligation, the payments by the secured party to the payee with respect to such collateral are not subject to FATCA withholding. However, the definition of “grandfathered obligation” does not cover an obligation that is created as a result of the posting of collateral that is itself a grandfathered obligation (a situation which may arise where collateral is rehypothecated). In that situation, any payments to the secured party that is treated as the beneficial owner of such collateral would therefore not be treated as payments under the grandfathered obligation, but instead treated as “substitute payments” under a new obligation that does not qualify as a grandfathered obligation.
To address this concern, the FATCA regulations will be revised to provide that the term “grandfathered obligation” will include any obligation that gives rise to such substitute payments and that is created as a result of the posting of collateral that is otherwise a grandfathered obligation.