FATCA Regs Expand Deemed-Compliant FFIs

FATCA Regs Expand Deemed-Compliant FFIs

The final Foreign Account Tax Compliance Act (FATCA) regulations, issued on January 28, 2013, expand the categories of foreign financial institutions (FFIs) that are deemed to be in compliance with FATCA.

In general, under FATCA, U.S. withholding agents are required to withhold tax on certain payments to foreign financial institutions (FFIs) that do not agree to report certain information to the Service about their U.S. accounts and on certain payments to certain nonfinancial foreign entities (NFFEs) that do not provide information on their substantial U.S. owners to withholding agents. (Preamble, T.D. 9610, 78 F.R. 5874).

The preamble to the final regulations notes that the categories of FFIs that are deemed to comply with FATCA without entering into an agreement with the Service are being expanded so the Service can concentrate on applying FATCA to "higher-risk financial institutions" that provide services to global investors. (Preamble, T.D. 9610, 78 F.R. 5874).

In general, the final regulations adopt the categories of deemed-compliant FFIs that were in the proposed regulations, but in response to comments, modify and clarify some of the deemed-compliant provisions. (Preamble, T.D. 9610, 78 F.R. 5874). The new categories of deemed-compliant FFIs are for credit card issuers, sponsored FFIs, and limited-life debt investment entities. (Preamble, T.D. 9610, 78 F.R. 5874).

Deemed-compliant FFIs. The provisions pertaining to deemed-compliant FFIs are found in Regulations Section 1.1471-5(f), which states that the term "deemed-compliant FFI" includes a registered deemed-compliant FFI, a certified deemed-compliant FFI, and, to the extent provided for in the regulations, an owner-documented FFI. (Treas Reg § 1.1471-5(f)). A FFI that is deemed-compliant will be treated as having met the reporting requirements of IRC Section § 1471(b), and a deemed-compliant FFI that meets the applicable due diligence and withholding requirements will be deemed to have met its withholding obligations under IRC Section § 1471(a) and 1472(a). (Treas Reg § 1.1471-5(f)).

Registered deemed-compliant FFIs. The regulations provide that a registered-deemed compliant FFI means a FFI that meets the procedural requirements described in the regulations (in Section 1.1471-5(f)(1)(ii)) and that either is described in the regulations (in Section 1.1471-5(f)(1)(i)(A) through (F))  or is treated as registered deemed-compliant FFI under a Model 2 IGA. (Treas Reg § 1.1471-5(f)(1)).                                                                              

Under Section 1.1471-5(f)(1), the categories of registered deemed-compliant FFIs are as follows:

  1. Local FFIs (described in Treas Reg § 1.1471-5(f)(1)(i)(A))
  2. Nonreporting members of participating FFI groups (described in Treas Reg § 1.1471-5(f)(1)(i)(B))
  3. Qualified collected investment vehicles (described in Treas Reg § 1.1471-5(f)(1)(i)(C))
  4. Restricted funds (described in Treas Reg § 1.1471-5(f)(1)(i)(D))
  5. Qualified credit card issuers (described in Treas Reg § 1.1471-5(f)(1)(i)(E))
  6. Sponsored investment entities and controlled foreign corporations (described in Treas Reg § 1.1471-5(f)(1)(i)(F))

As noted above, the final regulations add the category for qualified credit issuers and the category for sponsored investment entities and controlled foreign corporations.

New category for qualified credit card issuers.  Under the final regulations, credit card issuers will be considered deemed-compliant FFIs if certain requirements are met (Treas Reg 1.1471-5(f)(1)(i)(E)). First, the credit card issuer is solely a FFI because it is "an issuer of credit cards that accepts deposits only when a customer makes a payment in excess of a balance due with respect to the card and the overpayment is not immediately returned to the customer." (Treas Reg 1.1471-5(f)(1)(i)(E)(1)).  Second, by December 31, 2013, or the date the credit card issuer registers as a deemed-compliant FFI, the credit card issuer must implement policies and procedures to either prevent a customer deposit in excess of $ 50,000 or to ensure that any customer deposit over that amount is refunded to the customer within 60 days. (Treas Reg § 1.1471-5(f)(1)(i)(E)(2)).

New category for sponsored investment entities and controlled foreign corporations. Under the final regulations, sponsored investment entities and controlled foreign corporations will be considered deemed-compliant FFIs if certain requirements are met. (Treas Reg § 1.1471-5(f)(1)(i)(F)).

A FFI will be considered a deemed-compliant sponsored investment entity under the final regulations if:

  1. it is an investment entity that is not a qualified intermediary (QI), a withholding foreign partnership (WP), or a withholding foreign trust (WT); and
  2. an entity has agreed with the FFI to act as a sponsoring entity for the FFI. (Treas Reg § 1.1471-5(f)(1)(i)(F)(1)).

A FFI will be considered a deemed-compliant sponsored controlled foreign corporation under the final regulations if the FFI:

  1. is a controlled foreign corporation (as defined in IRC Section 957(a)) that is not a QI, WP, or WT;
  2. is wholly owned, directly or indirectly, by a U.S. financial institution that agrees with the FFI to act as a sponsoring entity for the FFI; and
  3. shares a common electronic account system with the sponsoring entity that enables the sponsoring entity to identify all account holders and payees of the FFI and to access all account and customer information maintained by the FFI (which includes, but is not limited to, customer identification information, customer documentation, account balance, and all payments made to the account holder or payee). (Treas Reg § 1.1471-5(f)(1)(i)(F)(2)).

An entity meets the requirements for a "sponsored entity" under the final regulations if the sponsoring entity:

  1. is authorized to manage the FFI and enter into contracts on behalf of the FFI (such as a fund manager, trustee, corporate director, or managing partner);
  2. entity has registered with the Service as a sponsoring entity;
  3. has registered the FFI with the Service;
  4. agrees to perform, on behalf of the FFI, all due diligence, withholding, reporting, and other requirements that the FFI would have been required to perform if it were a participating FFI;
  5. identifies the FFI in all reporting completed on the FFI's behalf to the extent required under Regulations Sections 1.1471-4(d)(2)(ii)(C) and 1.1474-1; and
  6. holds status as a sponsor that has not been revoked. (Treas Reg § 1.1471-5(f)(1)(i)(F)(3)).

Certified deemed-compliant FFIs. Under the regulations, a certified deemed-compliant FFI is a FFI described in the regulations (in Treas Reg § 1.1471-5(f)(2)(i) through (iv)) that has certified to its status as a deemed-compliant FFI by providing a withholding agent with the required documentation applicable to the relevant deemed-compliant category. (Treas Reg § 1.1471-5(f)(2)).  A certified deemed-compliant FFI also includes any nonreporting IGA FFI, and a certified deemed-compliant FFI does not have to register with the Service. (Treas Reg § 1.1471-5(f)(2)).

Under Section 1.1471-5(f)(2), the categories of certified deemed-compliant FFIs are as follows:

  1. Nonregistering local banks (described in Treas Reg § 1.1471-5(f)(2)(i))
  2. FFIs with only low-value accounts (described in Treas Reg § 1.1471-5(f)(2)(ii))
  3. Sponsored, closely held investment vehicles (described in Treas Reg § 1.1471-5(f)(2)(iii))
  4. Limited life debt investment entities (transitional) (described in Treas Reg § 1.1471-5(f)(2)(iv))

New category for limited life debt investment entities. As noted above, the final regulations add a deemed-compliant category for limited life debt investment entities. The regulations provide that such entities will be treated as certified deemed-compliant FFIs prior to January 1, 2017. (Treas Reg § 1.1471-5(f)(2)(iv)). To qualify as a deemed-compliant limited life debt investment entity, the FFI must be the beneficial owner of the payment (or of payments made with respect to the account), and the FFI must meet certain requirements described in the final regulations. (Treas Reg § 1.1471-5(f)(2)(iv)).

As noted in the preamble to the final regulations, the category was added for the reason that limited life debt investment entities would not be able to comply with FATCA's registration and due diligence requirements. The preamble notes that, in general, trustees would not be permitted to register the investment vehicles as participating FFIs or comply with the due diligence requirements of a participating FFI unless the trustee was required to do so by the trust indenture or under a provision of law or unless all the investors in the vehicle agreed to amend the trust agreement to give the trustee such power.  (Preamble, T.D. 9610, 78 F.R. 5874). The preamble notes that the final regulations permit, for a limited amount of time until the end of 2016, these entities to qualify as deemed-compliant FFIs in order to address the limitations upon the authority of their trustees. (Preamble, T.D. 9610, 78 F.R. 5874).

Conclusion. The addition of the new categories of deemed-compliant FFIs for credit card issuers, sponsored FFIs, and limited-life debt investment entities reflects the Treasury's careful consideration of the comments received in the wake of the issuance of the proposed regulations.  That said, there are also instances where the Treasury's consideration of comments did not result in additional deemed-compliant categories. The final regulations do not add a category for insurance companies although the proposed regulations noted that such a category was being considered. (Preamble, T.D. 9610, 78 F.R. 5874). Rather, as noted in the preamble, insurance companies may be able to qualify as local FFIs and FFIs with only low-value accounts under the final regulations. (Preamble, T.D. 9610, 78 F.R. 5874). The final regulations also do not add categories of deemed-compliant FFIs for jurisdiction-specific entities and arrangements. Rather, the preamble explains that the final regulations adopt the approach of the proposed regulations of using "generally applicable attributes to define categories of deemed compliant FFIs." (Preamble, T.D. 9610, 78 F.R. 5874). The preamble notes that the Treasury "will continue to identify entities that qualify as deemed-compliant FFIs on a jurisdiction-specific basis" in the context of model intergovernmental agreements (IGAs) and that the final regulations treat those entities as deemed-compliant FFIs. (Preamble, T.D. 9610, 78 F.R. 5874). The preamble also states that the Treasury and the Service have undertaken to limit the number of entities subject to FATCA in other parts of the regulations (Preamble, T.D. 9610, 78 F.R. 5874), and the preamble points to the expansion of the category of exempt beneficial owners and the removal of certain entities from the definition of FFI as examples of such instances. In summary, the addition of the new categories of deemed-compliant foreign financial institutions for credit card issuers, sponsored FFIs, and limited-life debt investment entities reflects the Treasury's goal of issuing "targeted regulations" by refining the scope of the FATCA provisions and focusing on foreign financial institutions with a greater risk of non-compliance.

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RELATED LINKS: For further guidance on FATCA requirements, please see the final regulations, T.D. 9610, 78 F.R. 5874, and also:

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