Coping with FATCA if You’re Not a Foreign Financial Institution

Panelists: Michael Hirschfeld, Dechert LLP, New York, NY Quyen Huynh, Attorney-Adviser, Office of International Tax Counsel, Department of Treasury, Washington DC Dianne C. Mehany, Caplin & Drysdale Chartered, Washington DC Steven A. Musher, Associate Chief Counsel, International, Internal Revenue Service, Washington DC 1

FATCA Overview •  Citizens, residents, and US corporations are subject to US federal income tax on “worldwide income.” •  US primarily relies on voluntary compliance, but supplements through withholding and third party reporting. •  US Government learned through the years that certain US “persons” (expanded definition) are attempting to evade US income tax by holding and investing money offshore. •  Enter FATCA. Enacted in March 2010 as part of Hiring Incentives to Restore Employment (HIRE) Act. 2

FATCA’s Purpose • 

FATCA specifically targets US investors seeking to avoid US tax by •  Depositing money offshore, or •  Becoming investors in offshore funds that invest in the US, which offshore funds legitimately had no US tax in two cases: •  No tax on portfolio interest; •  No tax on capital gains from the sale of stocks or securities (except for sale of US real property holding companies). 3

FATCA’s Scope •  FATCA added new chapter 4 to Code, Sections 1471 – 1474, and accompanying regulations. •  Requires that foreign financial institutions (FFIs), and NonFinancial Foreign Entities (NFFEs) to a lesser extent, comply with the information network. •  FATCA generally requires withholding (at a 30% rate) on certain payments made to FFIs who do not enter into an agreement with the IRS to report certain information about its US accounts to the IRS, and on certain NFFEs (or the beneficial owner) who fail to provide to the withholding agent certain information about substantial US owners. 4

FATCA’s Timeline Deadline  

Ac+on  Item  

December  31,  2013  

Par/cipa/ng  FFI’s  FFI  Agreement  and  registered  deemed-­‐compliant  FFI’s  registra/on  must  be  effec/ve  to  avoid  withholding   All  accounts  maintained  by  this  date  (or,  if  later,  the  FFI  Agreement  effec/ve  date  (for  par/cipa/ng  FFIs)  or  before  the  date  of   implementa/on  of  required  account  opening  procedures  (for  registered  deemed-­‐compliant  FFIs  –  generally  their  registra/on  date))   treated  as  “pre-­‐exis/ng  accounts”  

•  FATCA added newof  Uchapter 4 to Withholding  on  payments   S  source  income  generally   begins  Code, Sections 1471 – agents,  par/cipa/ng  FFIs,  registered  deemed-­‐compliant  FFIs  and  IGA  FIs  must  implement  account  opening  procedures   1474. Withholding   for  new  accounts  by  this  date  (or,  if  later,  the  FFI  Agreement  effec/ve  date  (for  par/cipa/ng  FFIS)  or  registra/on  date  (for   registered  deemed-­‐compliant  FFIs))   •  Requires that foreign financial institutions (FFIs) comply Withholding  agents  and  par/cipa/ng  FFIs  must  complete  due  diligence  for  pre-­‐exis/ng  “prima  facie  FFI”  accounts  (or,  if  later,  6   June  30,  2014   aSer  the  FFI  Agreement  effec/ve  date  (for  par/cipa/ng  FFIs))   with themonths   information network . IGA  FIs  and  par/cipa/ng  FFIs  must  complete  due  diligence  for  pre-­‐exis/ng  individual  “high  value”  accounts  by  this  date  (or,  if  later,   December  31,  2014   1  year  aSer  the  FFI  Agreement  effec/ve    date  (for  par/cipa/ng  FFIs)  or  within  6  months  aSer  the  end  of  the  calendar  year  in  which   •  FATCA generally requires the  account  became  “high   value”  (for  IGA  FIs))   withholding (30%) on certain Par/cipa/ng  FFIs  much  report  on  US  accounts  with  respect  to  2013  and  2014  calendar  years  (and  by  March  15  of  immediately   made to FFIs who do not enter into an March  3payments 1,  2015   following  calendar  year  with  respect  to  2015  and  later  calendar  years)   IGA  FIs  must   report  with  the respect  to   2013  and  to 2014  calendar   years  (and  certain by  September  30  oinformation f  immediately  following  calendar  year   agreement with IRS report September  30,  2015   with  respect  to  2015  and  later  calendar  years)   about its USagents   accounts tomust  the and NFFEs (or Withholding   and  par/cipa/ng  FFIs   complete  IRS, due  diligence   for  pre-­‐exis/ng   en/ty  accounts   other  the than  “prima  facie  FFI”   December  31,  2015   accounts  (or  if  later,  2  years    aSer  the  FFI  Agreement  effec/ve  date  (for  par/cipa/ng  FFIs))   beneficial owner) who fail to provide to the withholding IGA  FIs  and  par/cipa/ng  FFIs  complete  due  diligence  for  pre-­‐exis/ng  individual  accounts  other  than  “high  value”  accounts  (or,  if   later,  2  years  aSer  the  FFI  Agreement  effec/ve  date  (for  par/cipa/ng  FFIs));  IGA  FIs  must  complete  due  diligence  for  pre-­‐exis/ng   agent certain information itsof  end  substantial US en/ty  accounts  >$250K   as  of  December  31,  2013,  about or  within  6  months   of  2013  or  later  year  in  which   a  remaining  pre-­‐exis/ng   en/ty  account  >$1  million   owners.Withholding  begins  on  gross  proceeds  from  disposi/ons  on/aSer  this  date  of  US  source  dividend/interest-­‐producing  property   January  1,  2017   January  1,  2014  

Withholding  on  “foreign  passthru  payments’  to  not  begin  prior  to  this  date  (or,  if  later,  6  months  aSer  publica/on  of  final   regula/ons  defining  the  term  “foreign  passthru  payment”)  

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FATCA’s Timeline •  IRS to launch the FATCA Registration Portal no later than July 15, 2013. •  Registration must occur by October 25, 2013 to be included on the 2013 list. •  Global intermediary identification numbers (GIINs) will be assigned for the purpose of identifying registering entities to withholding agents. •  IRS will then publish list of the names and GIINs of all participating FFIs, registered deemed-compliant FFIs, and reporting IGA Model 1 FFIs, to be used by withholding agents and participating FFIs in due diligence process. 6

Burden on FFI vs. NFFE •  Final Regulations issued January 17, 2013. •  Concerted effort to align final regulations with IGAs. •  Reporting by FFI has been subject of the majority of discussion. Preamble notes that FFIs “are generally in the best position to identify and report with respect to their U.S. customers.” •  What about NFFEs? Preamble states that the regulations place increased disclosure obligations on certain NFFEs “that present a high risk of U.S. tax avoidance.” •  Regime requires certification by certain NFFEs to avoid withholding. 7

NFFE Classification

Question: What is an NFFE? Short Answer: Anything that is not an FFI.

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Definition of FFI • 

Foreign Financial Institution • 

Foreign entity; any entity not organized under the laws of the US. Section 1471(d)(4).

• 

Financial institution. Treas. Reg. 1.1471-5(e). Any entity that

•  • 

• 

Accepts deposits in the ordinary course of a banking or similar business (depository institution);

• 

Holds, as a substantial portion of its business, financial assets for the account of others;

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Is an investment entity;

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Is a certain type of insurance company; or,

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Is a specific type of holding company or treasury center.

If foreign institution is a resident of an IGA country, IGA definition controls. Treas. Reg. 1.1471-5(d).

Classification broad. Final regulations encompass a number of entities generally not considered to be financial institutions.

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Definition of FFI Specific exclusions from classification as FFI: • 

The definition of depository institutions does not include an entity that solely accepts deposits from persons, or collateral or security, pursuant to a lease, loan, or similar financing agreement. Treas. Reg. 1.1471-5(e)(2)(ii).

• 

Charge and credit card services no longer considered default “banking” activities. These entities only classified as FFIs if accept “deposits” greater than $50k (or do not refund such deposits within sixty days). Prepayments are deposits. Treas. Reg. 1.1471-5(f)(1)(i)(E)(1).

• 

New categories of “exempt” entities – ones that would otherwise meet definition of FFI. New category includes certain holding companies, treasury centers, and captive finance companies of nonfinancial groups. Treas. Reg. 1.1471-5(e)(5). Now are classified Active NFFEs. Treas. Reg. 1.1472-1(c)(1)(vi).

• 

Generally, passive foreign investment entities that are not professionally managed are not financial institutions.

• 

Accounts held by estates are not financial accounts. 10

IGA Definition of FFI •  The final treasury regulation definition of FFI is generally consistent with the IGA definition. •  However, IGAs apply a broader definition to “investment entity.” The IGA definition includes a catch-all sentence stating the definition “shall be interpreted in a manner consistent with similar language set forth in the definition of ‘financial institution’ in the Financial Action Task Force (FATF).” •  Under this broad definition, a self-managed fund would qualify as an FFI under an IGA, even though it is not classified as such under the Treasury Regulations.

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Investment Entities •  Investment entity (Regulation definition) is one that primarily conducts as a business on behalf of customers: •  Trading in an enumerated list of financial instruments, including money market instruments, foreign currency, transferable securities; •  Individual or collective portfolio management; or, •  Other investing, administering, or managing funds, money, or financial assets. •  Note that definition does not include an entity that strictly advises. •  “Primarily” threshold reached if the gross income attributable to the activity exceeds 50% of the entity’s gross income during the shorter of a three year period or the period the entity has been in existence. Treas. Reg. 1.1471-5(e)(4)(iii), (iv). •  In the final regulations, fund managers are specifically included in the definition of investment entity. (Treas. Reg. 1.1471-5(e)(4)(i)(A)). 12

Investment Entities •  Conflict within the Regulations? •  Treas. Reg. 1.1471-5(e)(4)(v), Ex.1. •  Fund manager is an investment entity. Hires an investment advisor, a foreign entity, to provide investment advice. That advisor generates more than 50% of its income during the last three years from providing services as an investment advisor (satisfies “primarily” threshold). •  Regulations conclude that the investment advisor is an investment entity and an FFI. •  However, generally, entity solely providing investment advice would not be an FFI because not trading, performing portfolio management, or investing, administering or managing funds or financial assets of others. 13

Investment Entities •  Conflict between Treasury Regulations and IGAs? •  Managed family trusts and managed passive investment companies are generally FFIs under Treasury Regulations. •  IGA definition would classify both as Passive NFFEs. •  Creates documentation issues – NFFE certification differs from that of an FFI. •  How to resolve? Look to place of organization. IGA defines an NFFE as a non-US entity that is not an FFI under the Treasury Regulations and any non-US entity that is organized under an IGA country and that is not a financial institution. •  Though not clear, the latter reference to FI status most likely means an entity that is an FI according to the IGA definition. 14

Investment Entities •  What is a professional manager for purposes of investment entity definition? •  Trust managed by individual vs. entity. (Treas. Reg. 1.1471-5(e)(4)(v)). •  Ex. 5. Foreign non-grantor trust managed by Trustee, an individual. Assets are financial assets, and income derived entirely from these assets. Because Trustee does not hire third-party service provider to manage, trust is not an investment entity. Not an FFI. •  Ex. 6. Same facts only trustee hires FFI to manage and administer the assets accdg. to terms of trust document. Trust now an FFI. •  What about grantor trusts? Regulation examples address only nongrantor trusts. •  FFI vs. NFFE? •  Does it matter whether individual or entity managed? 15

Other FFIs • 

• 

Holding companies and treasury centers are FFIs only if: • 

The expanded affiliated group includes a depository institution, custodial institution, insurance company, or investment entity; or,

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The entity in question is formed in connection with or availed of by any fund or similar investment vehicle established with an investment strategy of investing, reinvesting, or trading in financial assets. Treas. Reg. 1.1471-5(e) (1)(v).

• 

Regulation prohibits financial group from sheltering payments from FATCA withholding in a separate entity.

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Hence, holding companies and treasury centers that are members of nonfinancial groups are NFFEs.

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What percentage of FFIs may be part of non-financial group before reclassification occurs?

Insurance companies under Section 501(c)(15) are FFIs because they are not restricted from maintaining financial accounts for specified US persons. Treas. Reg. 1.1471-5(d)(5)(v).

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FFI Exempt Owners •  Certain beneficial owners of what would otherwise be FFIs are exempt. Treas. Reg. 1.1471-6. •  Foreign Governments •  Includes integral parts, controlled entities, & political subdivisions •  International Organizations •  Foreign Central Banks •  US Territories •  Retirement plans •  Treaty qualified •  Broad participation exemption •  Narrow participation exemption •  Watch out: Less than 50 participants •  Pension plan funds & investment vehicles exclusively for pension plans •  Question: Will any non-pension ownership (e.g., carried interest) lose exemption? •  Entities wholly owned by exempt beneficial owners. •  Any of the above fails exemption if payment received for commercial financial activity of a type by insurance company, custodial institution, or depository institution. Treas. Reg. 1.1471-6(h).

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Account Holder of FFI • 

Account holder generally the person listed or identified as the owner, regardless of whether such person is a flow-through entity. Treas. Reg. 1.1471-5(a)(3). • 

If an estate is listed as account owner, it (not the beneficiaries) is the holder.

• 

If a partnership or simple trust is listed as the owner, that entity is the holder.

• 

Exempt beneficial owner only treated as account holder if all payments made to the account treated as made to the exempt beneficial owner.

• 

However, if a grantor trust is listed as the owner, the trust is not the owner to the extent a person is deemed to own a portion of the trust under the grantor trust rules. In that case, that person is the account holder of such portion of the trust he is deemed to own. The remaining assets (not deemed owned by another under Sections 671 – 679) are held by the trust. Treas. Reg. 1.1471-5(a)(3)(ii).

• 

When account held by entity disregarded for US tax purposes, look through to the owner of that entity to determine the account holder.

• 

An individual, rather than a financial institution, holding a financial account for the benefit of another is not the account holder. Treas. Reg. 1.1471-5(a)(3)(iii).

List specifically restricted to owners of FFIs. What definitions apply to NFFEs? 18

So, Define an NFFE 1. 

Excepted NFFEs a. Active NFFEs b. Exempt NFFEs 2.  Passive NFFEs

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Excepted NFFEs • 

Publicly traded corporation – one whose stock is regularly traded on one or more established securities markets for the calendar year. Treas. Reg. 1.1472-1(c)(1)(i). •  Anti-abuse rule exempts from the definition of “regularly traded” any trade conducted with the principal purpose of meeting the regularly traded requirements. Also, class of stock is not regularly traded if “pattern of trades conducted to meet the requirements.” Lastly, antiabuse rule prohibits the application of the special definition for the year of initial public offering if the public offering had as a principal purpose qualifying for the special definition. Treas. Reg. 1.1472-1(c)(1)(i)(B)(3).

• 

A corporation belonging to the same group as a corporation defined above. Treas. Reg. 1.1472-1(c)(1)(ii).

• 

A territory entity wholly owned by one or more resident individual of that territory. Treas. Reg. 1.1472-1(c)(1)(iii). 20

Excepted NFFEs •  Certain nonfinancial entities excepted from definition of FFI under Treas. Reg. 1.1471-5(e)(5). Treas. Reg. 1472-1(c)(1)(v). •  Start-up companies. Treas. Reg. 1.1471-5(e)(5)(ii). Must be a nonfinancial company investing capital in assets with the intent to •  Enter a new business, but only for the first two years; or, •  Enter a new line of business, but only for the two year period from the date of the board resolution approving the new business, and only if the business previously qualified as an active NFFE for the two years preceding the resolution. •  Cannot qualify if the entity will function as an investment fund (i.e., private equity fund, venture capital fund, etc.). •  Non-financial entities that are liquidating or emerging from reorganization or bankruptcy. Treas. Reg. 1.1471-5(e)(5)(iii). 21

Excepted NFFEs •  Most holding companies and treasury centers, and captive finance companies that are members of a nonfinancial group are excepted. Treas. Reg. 1.1471-5(e)(5)(i). Treas. Reg. 1.1472-1(c)(1)(v). •  Excepted holding companies may be part of nonfinancial group structures that include tiers of holding companies. •  Groups may include FFI members to limited extent when all such members are participating FFIs or deemed-compliant FFIs. •  Excepted entity can provide a mixture of holding company, treasury center, and captive finance company functions so long as substantially all of its activities are these activities. •  What happens when a private equity fund buys an operating company? 22

Excepted NFFEs Active NFFEs • 

Must meet income test and asset test. Treas. Reg. 1.1472-1(c)(1)(iv). • 

Under the income test, the entity must have less than 50% of its gross income from the preceding calendar year as passive income.

• 

Under asset test, entity must have less than 50% of its assets for the preceding calendar year as passive assets (i.e., assets that produce or are held for the production of passive income).

• 

Passive income usually includes investment income such as dividends, interest, rents, and royalties (other than active rents), annuities, the excess of gains over losses from the sale or exchange of these types of property, etc.

• 

Passive income does not include (Treas. Reg. 1.1472-1(c)(1)(iv)(B)(1)) • 

Income from interest, dividends, rents, or royalties received or accrued from a related person under Section 954(d)(3).

• 

Income earned by a foreign entity dealer in securities under Section 475(c) (2). 23

Excepted NFFEs

•  Evaluation of NFFE’s assets to determine whether Active NFFE. •  Determination made after a review of income statement and balance sheet. Treas. Reg. 1.1472-1(c)(1)(iv)(C). •  The value of an NFFE’s assets is determined according to the FMV or book value reflected on the balance sheet. •  What if NFFE has a fiscal year rather than calendar year? •  What if substantial book-tax differences? •  Are assets on FMV or US tax basis? •  If FMV, must valuation be performed?

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Other NFFEs •  Passive NFFEs •  An NFFE that is not an excepted NFFE. •  Passive NFFEs generally include: •  Privately held operating businesses •  Professional service firms •  Any other non-publicly traded foreign entity not involved in banking or investment management. •  How much is too much? At what point are you “involved”? •  Exempt NFFEs are discussed above. Treas. Reg. 1.1471-6(a). Generally include: •  Non-financial foreign affiliated groups whose stock is regularly traded on an established securities market •  Foreign governments •  Central banks •  International organizations. 25

NFFE Compliance • 

In order to avoid FATCA withholding, NFFE generally must either • 

Identify all US owners

• 

Take steps to become “deemed” excepted NFFE. • 

Certify to an applicable withholding agent that it does not have substantial US owners, and;

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Be considered “low risk” for tax evasion use. Examples of “low-risk” entities are publicly traded non-US corporations, foreign central banks of issue, and foreign governments and their political subdivisions and wholly owned agencies. • 

Who determines “low risk?”

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Final regulations do not specify required due diligence necessary for NFFE to certify the above.

• 

NFFE must provide the proper certification to the withholding agent. however, final regulations no longer require NFFE to provide financial statements, letters from counsel, etc. 26

NFFE Certification

•  Unlike in proposed regulations, certain NFFE certifications now have an indefinite validity period, absent a change in circumstances of the NFFE . •  Requirements for indefinite validity: •  NFFE must be the payee and the withholding certificate must be furnished with “documentary evidence” establishing the entity’s non-US status. •  Applies to NFFEs whose stock is regularly traded, or who are Active NFFEs.

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NFFE Certification

•  Withholding Agent may rely (subject to good faith reliance) on PreFATCA Form W-8 in certain instances. Treas. Reg. 1.1471-3(d)(1). •  Withholding agent need not update form to verify status of a foreign individual, foreign government, or international organization. •  For payments prior to January 1, 2017, withholding agent need not update pre-FATCA Form W-8 for payee that is not a foreign individual, foreign government, or international organization, so long as withholding agent has additional documentation required, such as withholding statements, certifications as to owners, etc.

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NFFE Certification

•  Withholding agents may rely on review conducted for anti-money laundering due diligence purposes to identify substantial US owners of passive NFFEs in lieu of obtaining certification from owners. May rely on withholding certificate, and can rely indefinitely in certain circumstances, including for low-risk categories. •  Alternative documentation allowed so long as contains sufficient data to support the payee’s FATCA status. •  Third-party credit agency information may be utilized for identifying an individual or entity’s FATCA status.

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NFFE Compliance •  If excepted NFFE •  No FFI-esque agreement between foreign entity and IRS •  No withholding on withholdable payments beneficially owned by excepted NFFE. Treas. Reg. 1.1472-1(c). •  If exempt NFFE, withholding agent not required to withhold on withholdable payment (or portion) made to NFFE. •  Must determine who is the beneficial owner of an NFFE to identify whether additional compliance steps required. •  Treasury Regulations identify standard of “reliableness” for withholding agent to rely on self-reporting by NFFE as to its status. Treas. Reg. 1.1472-1(d). •  In the absence of valid documentation, the presumption rules apply and withholding must occur. Treas. Reg. 1.1472-1(d)(5) 30

NFFE Compliance •  Final regulations list the presumptions by withholding agent in absence of reliable documentation. Treas. Reg. 1.1471-3(f)(3). •  Presumption of US status vs. foreign. Treas. Reg. 1.1471-3(f)(3). •  Payment presumed to be to a specified US person, unless “indicia” of foreign status exists – i.e., actual knowledge of EIN beginning with two digits “98”; communications mailed to foreign address; primary telephone number outside the US; name of the payee is the type that is on the per se list of foreign corporations in the regs. •  Presumption that entity is a nonparticipating FFI. Treas. Reg. 1.1471-3(f)(4). •  Presumption that payment is effectively connected income for certain US branch payees. Treas. Reg. 1.1471-3(f)(6).

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Withholdable Payments to NFFE • 

Section 1473(1) defines withholdable payment as, subject to certain exceptions: • 

• 

Any payment of interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income (FDAP income), if such payment is from sources within the US; and Gross proceeds from the sale or disposition of any property of a type which can produce interest or dividends from sources within the US. (proceeds from certain excluded property not included. Treas. Reg. 1.1473-1(a)(4)(iv)).

• 

Payments effectively connected with a US trade or business are not generally withholdable payments. Treas. Reg. 1.1473-1(a)(4)(ii).

•  • 

IRS declined to define passive income by reference to Section 954(c). The exclusions from withholding under chapter 3 or Section 881 do not apply for determining whether income constitutes “withholdable payment.” 32

Withholdable Payments to NFFE • 

Payments of FDAP on an offshore obligation prior to January 1, 2017 are not withholdable payments if the payor is not acting as an intermediary. Treas. Reg. 1.1473-1(a)(4)(vi). •  Intermediary includes qualified securities lender, as defined chapter 3.

Ex. US branch of a foreign financial institution making payments of interest on a deposit account. Passthru payments • 

• 

Withholding agent must withhold on “passthru payments” to NFFE. Obligation enforced through participating FFI. Treas. Reg. 1.1471-5(h). • 

Not yet defined.

• 

Not withholdable until January 1, 2017. Treas. Reg. 1.1471-5(h)(2).

• 

IGAs provide, similar to gross proceeds withholding, that the IGA countries will commit to develop a “practical and effective alternative approach” to foreign passthru withholding. 33

Transitional Rule • 

• 

• 

Withholding not required with respect to any payment under, or gross proceeds from the disposition of, a grandfathered obligation. Treas. Reg. 1.1471-2(b). Grandfathered obligation is: •  One outstanding on Jan 1, 2014; •  One that produces withholdable payments solely because gives rise to a dividend equivalent under Section 871(m), provided it was executed more than six months after date that obligations of this type are first treated as giving rise to dividend equivalents; OR •  Agreement requiring a secured party to make payments with respect to collateral securing one or more grandfathered obligations, even if collateral is not itself a grandfathered obligation. •  An obligation that is executed more than six months before the date the final regulations defining foreign passthru payments are filed. Pooled collateral will be allocated between grandfathered and nongrandfathered obligations. 34

Withholdable Payments to NFFE • 

Withholding agent must generally withhold on withholdable payments made after December 31, 2013, to NFFE unless (Treas. Reg. 1.147-1(b)(1)) • 

Beneficial owner of such payment is the NFFE, or any other NFFE. • 

• 

NFFE does not have any substantial US owners, or has identified its substantial US owners • 

• 

So, if the beneficial owner of the NFFE is a non-compliant FFI?

Passive NFFE must certify this (unless it is a WP or WT) in writing. Treas. Reg. 1.1471-3(d)(12)(iii).

Withholding agent files Forms 8966 (or such other form the IRS prescribes) and 1042-S identifying NFFEs with US beneficial owners (other than an excepted). Treas. Reg. 1.1474-1(i)(2). • 

Forms not yet issued

• 

Information will include the name of the NFFE that is owned by a substantial US owner; name, address, and TIN of substantial US owner; total of all payments made to the NFFE; and, any other information included on the soon to be issued forms.

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Substantial US Ownership •  What owners are US persons for purposes of the “substantial US ownership” test? •  Withholding agent must search for US indicia in its records •  Any listing of person as a US citizen/resident alien •  US place of birth •  US resident address •  US telephone number •  Instructions to transfer funds to the United States •  POA to person with US address •  In care of address or hold mail address that is the sole address of the holder •  What to do if find indicia but NFFE states foreign beneficial owner? 36

Substantial US Ownership •  An NFFE has “substantial” ownership by US persons if direct or indirect interest held by a US person is at least 10%. Treas. Reg. 1.1473-1(b)(1). •  Can be accidentally triggered by foreign nationals who move to the US while retaining a substantial interest in a family business in home country. •  Triggered by foreign persons who move home but retain a US greencard. •  Threshhold covers corporate stocks as well as partnerships (look to profit interests and capital interests) and beneficial interest in non-grantor trusts. •  Trust exception. If a grantor trust is wholly owned by US persons, it is not required to treat any of its beneficiaries as substantial US owners. Treas. Reg.1.1473-1(b)(4)(ii). Otherwise, beneficiaries are examined to determine whether US person. 37

Indirect Substantial Ownership Look-through rules for certain entities. Treas. Reg. 1473-1(b)(2). •  Stock of a foreign corporation owned directly or indirectly by a corporation, partnership, or trust considered owned proportionately (as determined by Treas. Reg. 1.1473-1(b)92)(iv)) by such entity’s shareholders, partners, or trust owners (if grantor trust) and beneficiaries. • 

Entity ownership of the capital or profits interest in a foreign partnership or ownership of a beneficial interest in a foreign trust (defined by Treas. Reg. 1.1473-1(b)(3)) treated as owned by the entity’s shareholders, partners, or trust owners (if grantor trust) and beneficiaries.

• 

US holder of the option to purchase stock in a foreign corporation, capital or profit interests in a foreign partnership, or an ownership or beneficial interest in a foreign trust is treated as owning the underlying interest.

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Code attribution rules for related persons apply for determination of indirect ownership. 38

IGA Controlling Persons •  IGA discusses concept of “controlling persons” rather than the “substantial ownership” in final regulations. Similar concept. •  IGA defines controlling person according to the FATF recommendations. •  Ownership threshold generally at 25% •  For high-risk customers, threshold falls to 10%. •  Final regulations declined to harmonize the percentages for determining when NFFEs “substantially owned” by US persons. Comments to proposed regulations requested that the IRS adopt the 25% threshold to conform with AML due diligence requirements. IRS declined, noting that reliance on AML due diligence in this context is more appropriate for IGAs as “jurisdictions have varying approaches to enforcing AML due diligence requirements.” 39

Self-Reporting by NFFE

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If an NFFE can confirm it has substantial US owners, it can easily certify that it is the beneficial owner of a payment.

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Foreign entities must disclose whether they are FFIs or NFFEs. This will be done on (draft) Form W-8BEN-E, which when revised, incorporates FATCA.

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Burden on both non-US investor to complete and US person to ensure it is true and complete. Question regarding foreign TINs. Unclear what standards the form recipient should apply when reviewing this information (e.g., if no foreign TIN, should form be rejected?)

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•  • 

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More enhanced due diligence will be required

E.g., if a client certifies on W-8BEN-E to be an “Excepted NFFE,” the form must be invalidated if withholding agent has evidence that client is a financial institution. Question: When will the drafts be reissued/finalized? 40

Self-Reporting by NFFE

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If an NFFE is a client or investor of a participating FFI, it may be asked by FFI to provide FATCA certification on US vs. non-US status. If not provided, deemed non-compliant and withholding begins. Use (Draft) Form W-8BEN-E to comply.

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(Draft) Form W-8BEN-E. •  Eight pages long and 25 parts. •  Parts 1-3, and 24, represent four parts in existing W-8BEN. •  Parts 4-22 include various categories, including multiple types of FFIs and excepted NFFEs. •  Part 22 is certification that active NFFE. •  Part 23 address passive NFFEs. Requires it to certify that •  Not financial institution •  Not excepted NFFE •  Either has no substantial US owners, or provided certain information in Part 25. •  Part 25 – the necessary info. 41

Is it sufficient? Pitfalls? •  Sometimes even if NFFE provides FATCA information, may still be exposed to withholding if there is a non-compliant lower tier FFI (ex. the local bank invests in US instruments via an offshore bank or fund that’s considered a non-compliant FFI). • 

FFI may unilaterally close accounts of NFFEs if compliance with FATCA considered too costly, etc.

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Rules that generally mirror Section 1441 withholding apply for payments to non-financial foreign entities.

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While not explicitly stated, the modification to the definition of recalcitrant account holders affects passive NFFEs. When a participating FFI maintains an account for a passive NFFE and has documentation for the passive NFFE, but does not have the requisite certification, it must treat the account holder as a recalcitrant account holder and not a non-participating FFI. So, withholding. 42

Next Steps •  Upcoming guidance? •  Final Forms release date? •  Further Development of IGAs?

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Thank You Michael Hirschfeld Dechert LLP 1095 Avenue of the Americas New York, NY 10036-6797 T: +1 212 698 3500 F: +1 212 698 3599 www.dechert.com

Dianne C. Mehany Caplin & Drysdale One Thomas Circle, N.W. Suite 1100 Washington, DC 20005 O: 202.862.5000 F: 202.429.3301 www.caplindrysdale.com

Slides prepared by Dianne C. Mehany and Michael Hirschfeld and do not reflect the position of the Internal Revenue Service, IRS Office of Chief Counsel, or the U.S. Treasury Department.

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