What effect will it have on syndicated loan agreements?
Our June 2012 edition covered the current status and impact of the Foreign Account Tax Compliance Act (FATCA). The US government intends to use FATCA to fight tax evasion. To this end, foreign banks will be required to supply to the US tax authorities certain information on their US accounts.
On 17 January 2013, the USA published final regulations on FATCA, thereby providing further clarity on its application. In addition, Germany and the USA signed an intergovernmental agreement covering FATCA on 21 February 2013. This agreement is intended to come into force as soon as possible and, according to information from the German Finance Ministry, is based on the Model I Agreement negotiated with four additional EU countries in July 2012 (there is also a Model II Agreement, which has so far only been entered into with Switzerland). As of the end of March 2013, nine countries have entered into bilateral FATCA agreements with the USA (these include the United Kingdom, Italy and Spain). Currently, negotiations are being held with more than 50 countries. Under the Model I Intergovernmental Agreement foreign financial institutions (FFIs) will not have to enter into direct agreements (FFI Agreements) with the US tax authorities to provide information on accounts managed for US customers. Instead, this information will be supplied by German FFIs to the German government, which will forward it to the US tax authorities pursuant to separate bilateral agreements. In return, the USA will also forward information on income from interest and dividend payments of individuals who are subject to tax in Germany.
Consequences for international syndicated loan agreements
The Loan Market Association (LMA) published text proposals for dealing with FATCA in syndicated loan agreements. It is not only since then that there is concern how German banks should deal with FATCA in syndicated loan agreements which have a connection with the USA. This article examines the future legal position as it stands once the intergovernmental agreement between Germany and the USA has come into effect.
a) No US borrower
Where there is no US borrower involved in the loan agreement or where the borrower‘s payments do not otherwise originate from US sources then there is no danger that tax will be withheld on payments from the borrower to the facility agent in Germany. For its part, the latter also does not need to withhold on payments to other banks in the syndicate. This applies irrespective of whether the borrower is a bank or whether the recipient of the payment is FATCAcompliant or not.
b) US guarantor only
This legal position does not change even where there is a US guarantor involved. The obligation to withhold under FATCA only relates to withholdable payments. In addition to other annual or recurring income, these include interest payments from US sources. On the other hand, payments of a guarantor located in the USA in relation to interest not originating from sources in the USA ought not to come under the definition of a withholdable payment. The LMA takes the same view. As a result, FATCA does generally not apply where a US company guarantees the interest payments of a non- US borrower.
c) US borrower
Even when the payments originate from an US borrower, the intergovernmental agreement with the USA eliminates withholding concerns for German banks that act as facility agent. Furthermore, because there is no need to enter into an FFI Agreement, in this case German banks also do not have to withhold on payments forwarded to other syndicate members. Instead, even if a syndicated bank is not FATCA-compliant, the German facility agent will merely need to provide the US borrower with the information which allows it to withhold tax on payments to the non- FATCA-compliant bank.
The intergovernmental FATCA agreement between Germany and the USA considerably reduces the risk for German banks that payments from a borrower to a German facility agent or payments forwarded to German syndicate banks will be subject to FATCA withholding. This will need to be taken into account in contract negotiations in order to meet the interests of all those involved. The legal position may become more complicated where the syndicate includes banks located in countries that have not entered into a corresponding intergovernmental agreement with the USA. In these cases, interest payments from US sources may still be subject to a 30% FATCA withholding tax from 1 January 2014 onwards (as well as proceeds from the sale of loans from 1 January 2017) in case the loan agreement was entered into after 31 December 2013.