FATCA and Foreign Funds

FATCA and Foreign Funds

...[A]n article... by Lee Sheppard titled "Danilack Warns Multinationals on FATCA and GRAs" ...reports on deputy commissioner (international) Michael Danilack's views on FATCA and raises some questions... "What if private equity funds are making U.S. investments through a foreign holding company?"  ...Mr. Danilack's answer -  "the government does not want the holding company exception to be too broad, because such companies could be used to funnel dividends to U.S. investors..."

... I... thought that the holding company rule was relatively straightforward. ...[I]n a recent FATCA/fund podcast with Lexis, I mentioned the rule but I was hesitant to say that it has a direct implication to funds. ...[T]he... rule... provides that a foreign entity the primary purpose of which is to act as a holding company for a subsidiary or group of subsidiaries that primarily engage in a trade or business other than that of a "financial institution," will be excluded from the definition of financial institution...  Notice [2010-60]... speaks of the holding company not being a fund and having an investment purpose. Well, literally read, a multi-purpose blocker set up by a fund could be out of this narrative because the blocker's purpose is to block ECI and reduce reporting requirements for offshore investors.  While I appreciate the argument, I am not sure whether it makes the purpose and thrust of the holding company rule less obvious...  I am not sure whether the rule needs to be more subtle or be more or less of anything than what it already is.

My view on these issues is that the IRS should spend more time thinking about how some of these drastic FATCA rules would apply in practice and to ameliorate some of the problems that could put the industry in a serious predicament, and more importantly, lead to the loss of revenue and investment activity...  I can only hope that Treasury is thinking about all of this and some of this will be covered in upcoming guidance. 

View Ivan Mitev's opinion in its entirety on the Private Equity, Venture Capital and Hedge Fund Taxation site.

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