The Final FATCA Regulations: Highlights

The US Treasury Department has issued the final FATCA regulations.

Although simplified and clarified, the Regulations are lengthy (544 pages) and more than 150 pages longer than the Proposed Regulations.

In drafting the Regulations, the US Treasury Department adopted a targeted, risk-based approach to implement FATCA by balancing policy considerations and administrative burdens and more fully incorporating local AML/KYC documentation practices. The Regulations detail the operational aspects of implementing FATCA – to reduce administrative burdens and clarify the interaction of the unilateral regulatory regime with the bilateral intergovernmental (IGA) regime.

Of particular importance is that the Regulations fill in many of the gaps that foreign financial institutions (FFIs) had as to how to implement FATCA. Nevertheless, FFIs, particularly global financial institutions, will have continuing challenges implementing the rules under the Regulations and IGAs within the current timelines among geographies, lines of business, clients and products.

HEADLINE CHANGES

• Withholding: grandfathered date extended for obligations outstanding on January 1, 2014 and for gross proceeds and foreign passthru payments occurring before January 1, 2017.
• Covered FFIs: clarified and scope limited; non-professionally managed passive entities now are non-financial foreign entities (NFFEs), not FFIs; clarification of scope of depository institutions, insurance companies and investment funds.
• Financial account: clarified and scope limited.
• Deemed compliant: current category requirements relaxed and several new categories added.
• Retirement funds: exempted categories expanded and relaxed.
• Due diligence/documentation rules: calibrated, based on value, risk profile; greater reliance on currently existing information, AML/KYC and local statements and self-certifications.
• Timing: delay timeframes to review existing accounts and implement FATCA’s obligations in stages.
• Compliance and verification: FFI obligations detailed with respect to establishing, reviewing and remediating compliance program.
• Local law conflicts with FFI Agreement: FFI’s withholding and reporting obligations under an FFI Agreement and local law conflicts clarified.
• Regulation and IGA/definitional conformance: numerous definition variances and other items under Proposed Regulations and IGAs conformed.
• IGAs: details provided as to interaction of Regulations and IGAs.
• IRS Portal: details provided, including with respect to registration and applicable dates.

OVERVIEW

The Regulations contain myriad, detailed rules. This Alert focuses on a number of the important changes between the Regulations and the Proposed Regulations. Future alerts will analyze more technical aspects of the Regulations.

WITHHOLDING

• Grandfathering. Obligations outstanding on January 1, 2014, and associated collateral, are exempt from FATCA withholding.
• Foreign passthru payments. Exempted from FATCA withholding until the later of January 1, 2017, or six months after the date of publication of final regulations defining the term “foreign passthru payments.”
• Dividend equivalent payments. Exempted from FATCA withholding with respect to obligations outstanding any time prior to six months after the final regulations published.
• US source FDAP. January 1, 2014 for certain payees; then in subsequent years phased in for other payees.
• Gross proceeds from US obligations. Exempted from FATCA withholding until January 1, 2017.

COVERED FFIS

• Depository institution: precondition is accepting deposits in the ordinary course of its business with customers; in addition, the entity must regularly engage in one or more of the banking or financing activities enumerated in the Regulations; thus, finance companies that do not fund operations through deposits are excluded. The Regulations also clarify that an IGA controls as to whether a resident entity described in an applicable IGA is an FFI.
• Investment entity: definition is clarified and narrowed to exclude passive, non-commercial investment vehicles and trusts. Thus, passive, not professionally managed entities will generally be treated as passive NFFEs rather than FFIs, but entities that function or hold themselves out as mutual funds, hedge funds, or similar investment vehicles established with an investment strategy of investing, reinvesting or trading in financial assets will be investment entities.
• Certain holding companies and treasury centers: limit the circumstances under which a holding company or treasury center is treated as an FFI.

FINANCIAL ACCOUNT

• The Regulations limit the scope of the term “depository account” in a number of ways and, in that regard, provide clarifying guidance with respect to equity or debt interests in different types of financial institutions.
• The Regulations simplify insurance definitions and contracts and clarify when an insurance company is an FFI or a NFFE.
• The Regulations expand the exception from financial account status for certain savings accounts to accommodate savings vehicles used in a number of countries.

DEEMED COMPLIANT

• The Regulations generally retain the same deemed compliant categories included in the Proposed Regulations, subject to modification and clarification, and add new categories for certain credit card issuers, sponsored FFIs (i.e., where a trustee or fund manager manages trusts or funds on a consolidated basis) and limited-life debt investment entities.
• Insurance companies can now qualify as local FFIs and FFIs with only low-value accounts.
• The Regulations have relaxed various requirements for registered deemed compliant FFIs, including local FFIs, qualified collective investment vehicles and restricted funds.
• The Regulations have added a six month “cure” period to correct non-compliance with the deemed compliant requirements.
• Retirement fund deemed compliant categories have been moved to the “exempt beneficial owner” category.
• Nonprofit entities have been moved from the deemed compliant category to the excepted NFFE category.
• IGA deemed compliant entities will be treated as deemed compliant entities under the Regulations.

RETIREMENT FUNDS

The Regulations expand the circumstances under which certain classes of entities qualify for exemption from FATCA, including certain retirement funds and exempt beneficial owners identified in an IGA.

DUE DILIGENCE/DOCUMENTATION RULES

• The Regulations significantly modify and relax general requirements for identifying, documenting and retaining documentation of account holders and the interaction with AML/KYC rules. The Regulations in certain circumstances permit reliance on withholding certificates, written statements, elimination of the penalty of perjury requirements, substitute and non-IRS forms (including forms in a foreign language), reliance on pre-FATCA W-8 Forms; the treatment of a new account of a pre-existing customer as a pre-existing account; curing inconsequential errors; the validity of documentation; how and when the changed circumstances rule applies and its impact on documentation; rules with respect to reliance on documentation from other parties and in a “bulk: acquisition; and reliance on electronic transmission of documentation.

TIMING

• The Regulations provide delayed time frames for various actions, to include: effective date of FFI Agreement is December 31, 2013 for all Participating FFIs that receive a GIIN (defined below) prior to January 1, 2014; date new account due diligence procedures commence is January 1, 2014; accounts maintained prior to January 1, 2014 are pre-existing accounts; account holder documentation is delayed until December 31, 2015 for other than prima facie FFIs and High Value Individual Account holders; reporting account information to the IRS, on Form 8966, with respect to 2013 and 2014 is delayed until March 31, 2015.

FFI AGREEMENT AND LOCAL LAW CONFLICTS

• The Regulations provide that an FFI may enter into an FFI Agreement if it can meet the following requirements: (i) if foreign law prohibits a Participating FFI from fulfilling its withholding obligations with respect to an account, the Participating FFI must close the account within a reasonable time or, if local law prohibits closing the account, the Participating FFI must block of transfer the account; and (ii) if a Participating FFI is prohibited by foreign law, absent a waiver, from reporting information on an account that it must treat as a US account, the Participating FFI must request a waiver of foreign law from the account holder and if such waiver is not obtained within a reasonable period of time, the Participating FFI must close or transfer such account. If an FFI cannot meet the foregoing requirements, it is not eligible to enter in an FFI Agreement but may obtain status as a “limited FFI” or “limited branch” if conditions are satisfied. That status causes the limited FFI or limited branch to be subject to FATCA withholding but does not disqualify the expanded affiliated group from becoming non-compliant FFI through 2015.
• Caveat. After December 31, 2015, under the Regulations, all FFIs within an expanded affiliated group must be compliant. Thus, non-IGA FFIs/branches will not be treated as compliant and will become subject to the FATCA withholding tax unless the local country changes its laws to allow compliance with FATCA or the country enters into an IGA (IGA country FFIs/branches can remain compliant if certain conditions are met under the IGA).

COMPLIANCE AND VERIFICATION

• The Regulations provide detailed rules with respect to Participating FFI compliance, to include appointment of a responsible officer, establishment of a compliance program that includes policies, procedures and processes sufficient for the Participating FFI to satisfy the FFI Agreement requirements, responsible officer periodic review of the compliance program, material failures, events of default, certification and remediation, and IRS review.
• A responsible officer may be any officer of the Participating FFI or reporting Model 1 FFI in the Participating FFI’s expanded affiliated group with sufficient authority to fulfill the duties of a responsible officer as described in the Regulations.

REGULATION/IGA CONFORMANCE

• The Regulations conform the definition of many FATCA terms to those contained in IGAs to avoid disparities that were contained in the Proposed Regulations. The Regulations also conform various items related to due diligence, such as timing and when changed circumstances must be reported.

IGAS

• FFIs covered by, and compliant with, Model 1 IGAs do not need to comply with the Regulations for purposes of avoiding FATCA withholding, but must register, as discussed below.
• In certain cases, the laws of a FATCA Partner jurisdiction may allow an FFI to elect to apply the provisions of the Regulations instead of IGA.
• FFIs covered by Model 2 IGA will be required to implement FATCA in manner prescribed by Regulations except to the extent expressly modified by the Model 2 IGA but must register, as described below.

IRS PORTAL

• The Portal will be the primary means for FFIs to interact with the IRS to complete and maintain their FATCA registrations, agreements and certifications.
• The Portal will be a paperless, secure online web portal.
• The Portal will be used for registration, electronic communication between the IRS and FFIs and other registrants and other FATCA communications.
• Registered FFIs designated as leads of an expanded affiliated group will be able to use the Portal to manage the registration status of group members. Thus, an FFI in a Model 1 country can register and enter into FFI Agreements on behalf of branches in jurisdictions covered by Model 2 IGA and in non-IGA countries.
• The Portal will be accessible to FFIs NLT than July 15, 2013. At that time, FFIs will be able to register as Participating FFIs, sponsoring entities or as limited FFIs or registered deemed compliant FFIs (including reporting Model 1 FFIs, which are treated as registered deemed compliant FFIs under the Regulations).
• Once an FFI has registered, the IRS will approve its registration and issue a GIIN (Global Intermediary Identification Number) to each Participating FFI and registered deemed compliant FFI.
• Model 1 FFIs or an FFI described as a Reporting Financial Institution under the Model 2 IGA will also be required to register so long as the FATCA Partner jurisdiction is identified on a list published by the IRS of countries treated as having in effect an IGA, even if any necessary ratification of such IGA in the jurisdiction has not yet been completed.
• The IRS currently contemplates that the GIIN may also be used by reporting model 1 FFIs to satisfy reporting requirements under local law and is discussing this possibility with its Model 1 IGA partners.
• Under a transitional rule, for payments made prior to January 1, 2015, it will not be necessary for a Model 1 FFI to have a GIIN, provided that the Model 1 FFI’s withholding certificate specifies that it is a Model 1 FFI and identifies its IGA jurisdiction.
• A GIIN will be assigned beginning no later than October 15, 2013 and will be used as the ID number for satisfying the FFI’s reporting obligations and identifying its status to a withholding agent.
• The IRS will electronically post the first IRS list of Participating FFIs and registered deemed compliant FFIs (including Model 1 FFIs) on December 2, 2013, and will update the list on a monthly basis.
• The last date by which a FFI can register with the IRS to ensure inclusion on the December 2013 IRS FFI list is October 25, 2013.

FORTHCOMING IRS GUIDANCE

• IRS will issue a Revenue Procedure before the Portal opens containing all the terms and conditions of an FFI Agreement, including administrative provisions such as those relating to termination, renewal and modification of the agreement.
• A revision of the requirements for a QI agreement for external audit procedures to verify a QI’s compliance with its QI agreement.
• New forms (and instructions) relating certification, reporting and withholding FATCA requirements.

For more information about the FATCA Regulations, please contact Alan Granwell or Witold Jurewicz.