On February 20, Treasury and the IRS issued new final and temporary Foreign Account Tax Compliance Act (FATCA) regulations. In brief, the new FATCA regulations provide positive changes with respect to several issues raised by the insurance industry, including the treatment of:
- Holding companies that own insurance companies;
- Payments on certain offshore obligations where an insurance broker is involved;
- Premiums paid to U.S. insurance brokers acting as intermediaries for foreign insurers or reinsurers;
- Events of default under foreign financial institution (FFI) agreements;
- Grantor trusts; and
- “Exempt beneficial owners” (EBOs) that are members of an FFI’s expanded affiliated group (EAG).
We discuss these and several other changes in greater detail below.
Sutherland Observation: Overall, the new FATCA regulations are a significant improvement over the prior regulations, but there remain a number of unintended and intended consequences that could have significant commercial consequences to policyholders and the industry. We suspect that we have not yet heard the final word on the application of FATCA to insurers.
In total, the new FATCA regulations contain more than 50 discrete amendments and clarifications to the regulations that were issued in January 2013 (the prior FATCA regulations). Treasury and the IRS also issued coordinating regulations on February 20 in order to “harmonize” the requirements contained in the pre-FATCA rules under Chapters 3 and 61 of the Internal Revenue Code (IRC) and IRC § 3406 with the requirements under FATCA.
Holding Companies: The prior FATCA regulations provided that a holding company that was not otherwise an FFI would be treated as an FFI merely because it owns an “insurance company,” even if the insurance company was not a “specified insurance company,” i.e., an insurer that issues cash value insurance contracts or annuities. The new FATCA regulations adopt industry comments and amend the definition of an FFI so that a holding company will not be treated as an FFI merely because it is part of an expanded affiliated group that includes an insurance company that is not a specified insurance company. See Treas. Reg. § 1.1471-5(e)(1)(v).
Offshore Obligations: Under the prior FATCA regulations, payments made with respect to an offshore obligation prior to January 1, 2017, would not be withholdable payments unless paid by an intermediary. This rule seemed to preclude the use of transitional relief for insurance premiums paid between foreign insurers and reinsurers on U.S. risks where a broker is involved, which is generally the case. The new FATCA regulations provide that insurance brokers will not be treated as intermediaries for purposes of this transitional relief. See Temp. Treas. Reg. § 1.1473-1T(a)(4)(vi). However, while the new FATCA regulations provide that insurance brokers are not intermediaries for the purposes of the transitional rule for offshore payments, these regulations may have inadvertently excluded reinsurance premiums from the definition of offshore obligation as provided under Temp. Treas. Reg. § 1.1471-1T(b)(88). We understand that Treasury and the IRS are aware of this potential oversight and hope they will clarify that the transitional relief does apply to foreign insurance and reinsurance obligations.
Definition of Payee: The prior FATCA regulations provided that withholding agents that make payments to an agent or intermediary must obtain information regarding the relevant beneficial owners. As such, withholding agents are subject to increased due diligence and/or data collection requirements with respect to withholdable payments made through insurance brokers that are not the beneficial owners of the premium payments. The new FATCA regulations address this issue, at least partially, by allowing a withholding agent to treat U.S. insurance brokers as the payees with respect to the withholdable payments. This new rule does not appear to address payments made by withholding agents to foreign insurance brokers and therefore the increased requirements still may apply when premiums are paid through a foreign broker. See Temp. Treas. Reg. § 1.1471-3T(a)(3)(iii).
Event of Default: The new FATCA regulations revise the rule regarding what constitutes an event of default under an FFI agreement. Under the new FATCA regulations, an event of default occurs for a participating FFI only if the participating FFI fails to significantly reduce the number of account holders or payees that the participating FFI is required to treat as recalcitrant account holders or nonparticipating FFIs as a result of the participating FFI failing to comply with the required due diligence procedures for account and payee identification and documentation. Thus, an event of default no longer occurs merely because the participating FFI fails to reduce the number of recalcitrant account holders created by, for example, a change in the FATCA status of such account holders.
Grantor Trust Rules: The new FATCA regulations also remove the grantor trust rule in the definition of account holder, so that the general rule for treating an entity as an account holder will apply to grantor trusts. This change was adopted in order to address certain issues with respect to the determination of a substantial U.S. owner of a foreign grantor trust and the determination of whether such a substantial U.S. owner would be considered an account holder with respect to the trust.
EBOs: Under the prior FATCA regulations, it was unclear whether EBOs were considered part of an FFI’s EAG and therefore had to become either a participating FFI or a registered deemed-compliant FFI. The new FATCA regulations allow EBOs to be excluded from this requirement, meaning that they should not have to register with the IRS.
Additional Changes of Note: The new FATCA regulations also adopt a number of changes previewed in Notice 2013-43 and Notice 2013-69, including:
- The revised timelines for implementation of the FATCA requirements.
- The treatment of FFIs located in jurisdictions that have signed intergovernmental agreements for the implementation of FATCA (IGAs) but that have not yet brought those IGAs into force.
- The election for certain non-financial foreign entities (NFFEs) to be treated as direct reporting NFFEs or sponsored direct reporting NFFEs, with additional requirements for such electing entities.
- The rules and requirements related to direct reporting NFFEs and sponsored direct reporting NFFEs.
- The modification of the definition of U.S. person to include a foreign insurance company that has made an election under IRC § 953(d) and that either is not a specified insurance company or is a specified insurance company that is licensed to do business in any State.
- The clarification of FFI withholding statement requirements.
- The coordination of withholding under Chapter 4 and backup withholding under IRC § 3406.
- The modifications to the transitional reporting requirements for a participating FFI or registered deemed-compliant FFI making a payment of a foreign reportable amount to a nonparticipating FFI.
- The clarification of the term “branch” with respect to an FFI to include an entity that is disregarded as an entity separate from the FFI.
While the new FATCA regulations address a number of issues related to the insurance industry, certain issues are left untouched. For example, the new FATCA regulations fail to address the insurance industry’s previous comments that insurance premiums paid with respect to non-cash value insurance premiums be treated as non-withholdable payments for FATCA purposes (as they are for Chapter 3 purposes).