The bulk of the FATCA provisions go into effect with respect to payments made after 2012. There are two generally categories of payments: (i) those made to non-U.S. financial institutions; and (ii) those made to non-U.S. non-financial institutions. With respect to both payments, contained in §§1471 and 1472 respectively, there is a 30% withholding required on payments to the non-U.S. person unless such non-U.S. person meets certain disclosure and reporting requirements.
The new 30% required withholding is imposed regardless of applicable treaty provisions. This will require that in those instances where a non-U.S. payee is entitled to a more favorable treaty rate, such withholding will be recovered by the payee through a refund claim or credit against U.S. income taxes otherwise due. Withholding is required on interest on bonds or other obligations issued by state or local governments or with respect to portfolio debt (per §871(h)). Thus, for debt obligations issued after 3/18/2010, a tax-exempt organization will have to determine whether the holder is a non-U.S. person, and then if it is a financial institution or not, before interest is paid. See also §649. Section 6049 . In addition to establishing that the payee is a foreign person, the U.S. payee will need to determine whether the payee is a financial institution, whether the payee has entered into an agreement with the IRS, or whether the payee has substantial U.S. owners.
Where the payor of a withholdable payment is a tax-exempt (U.S.) organization, FATCA still applies as to “withholdable payments”. For this purpose, “withholdable payment” includes interest (including any original issue discount), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income, if such payment is from sources within the United States and proceeds from the sale or other disposition of any property of a type that can produce interest or dividends from sources within the United States.
Where the recipient is a non-U.S. person, the tax-exempt organization will have to determine whether the non-U.S. payee is a financial institution (§1471) or a non-financial institution (§1472)). Under FATCA, the term “financial institution” is one which accepts deposits in the ordinary course of its business, holds financial assets on the account of others as a substantial portion of its business, or is engaged primarily in the business of investing, reinvesting, or trading in securities, partnership interests, commodities, or any interest (including a futures or forward contract or option) in such securities, partnership interests, or commodities.
The withholding obligation under FATCA extends to the purchase of U.S. stocks and bonds from non-U.S. persons. There is no requirement that the gross proceeds represent income. If the seller is a non-U.S. entity, the FATCA provisions may still apply to the payment of the gross proceeds after 2012.
A non-U.S. exempt organization having business or investment dealings with U.S. persons may be subject to withholding at 30% as well unless an exception is present. The primary exception under FATCA is with respect to any " public international organization" or any wholly owned agency or instrumentality thereof. Under §7701(a)(18), a public international organization is one: (i) in which the United States participates pursuant to any treaty or under the authority of any Act of Congress authorizing such participation or making an appropriation for such participation, and (ii) os designated by the President through appropriate Executive Order as being entitled to enjoy the privileges, exemptions, and immunities provided in the International Organizations Immunities Act.
Where a non-U.S. exempt organization does fall within the public international organization exception it then needs to be determined whether such organization is a financial institution or is not. Most tax-exemption organizations should not fall within the definition of a financial institution although the definition is broad. For example, some organizations which have endowments held in separate entities may result in the endowment being treated as a financial institution. Perhaps that type of non-U.S. exempt organization may desire to enter into an agreement with the U.S. or otherwise disclose its U.S. accounts. Another option of course is to seek a refund under an applicable treaty provision if available. As to a non-financial, non-U.S. exempt organization, it will have to disclose to the payor the identity of any substantial U.S. owners or represent that it has no substantial U.S. owners. For this purpose a "substantial U.S. owner" is a person holding more than 10% of the voting power of all the membership interests.
Finally, it is also possible for a non-U.S. organization to be treated as making withholdable payments. The first is that of the non-U.S. organization with a U.S. branch. If the branch is treated as being engaged in a U.S. trade or business, interest that is sourced as U.S. interest paid by the branch will be treated as U.S. source income. It therefore will be a withholdable payment if paid to a non-U.S. entity. The same result may apply with respect to royalties. Where a non-U.S. organization maintains a U.S. branch using property for which royalties or licensing fees are to be paid, the royalties may be withholdable payments. Again, a third form of withholdable payment would be a non-U.S. tax exempt organization’s sale of U.S. stocks or bonds to a non-U.S. person, subject to qualification in the regulations.