Legal Alert: IRS Issues Draft FATCA FFI Agreement and Announces Positive New Rules for Insurance Companies

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On October 29, the Internal Revenue Service (IRS) issued Notice 2013-69, which includes guidance to foreign financial institutions (FFIs) entering into FFI agreements with the IRS and a draft FFI agreement. The Notice also describes some of the changes the IRS intends to make to the recently released final Foreign Account Tax Compliance Act (FATCA) regulations and related forms. The IRS also announced new provisions that will positively affect property and casualty insurance companies and brokers. The three most important changes are that (1) a non-financial foreign entity (NFFE) may elect direct reporting of its substantial U.S. owners to the IRS; (2) an NFFE may be treated as a Qualified Intermediary (QI) and, if so, will not be considered a passive NFFE; and (3) the definition of “U.S. Person” will be modified to include a section 953(d) company that is not a specified insurance company, even if not licensed to do insurance business in any U.S. jurisdiction.

The Treasury Department and the IRS intend to issue regulations to provide that the definition of a passive NFFE will not include an NFFE that is a “direct reporting NFFE.” The Notice states that a direct reporting NFFE is an NFFE that elects to report on Form 8966 directly to the IRS certain information about its direct or indirect substantial U.S. owners. Reporting this information to the IRS will be in lieu of reporting the information to withholding agents, such as brokers. A direct reporting NFFE will be treated as an excepted NFFE and will be required to register with the IRS to obtain a Global Intermediary Identification Number (GIIN). In general, withholding agents and participating FFIs will identify and document a direct reporting NFFE in a manner similar to how they identify a participating FFI. In addition, a direct reporting NFFE will document itself to withholding agents and participating FFIs in a manner similar to a participating FFI, including verifying that the GIIN of the direct reporting NFFE is listed on the IRS FFI List. However, a direct reporting NFFE will not be treated as a participating FFI and will not enter into an FFI Agreement.

The Treasury Department and the IRS also intend to issue regulations to provide that a passive NFFE will not include an NFFE that is acting as a QI. However, if an NFFE is acting as a QI and is receiving a withholdable payment on behalf of a passive NFFE, then the NFFE will be required to report directly to the IRS information about the passive NFFE and its substantial U.S. owners.

Additionally, the Treasury Department and the IRS intend to modify the definition of a U.S. Person under the regulations to include a foreign insurance company that is not a specified insurance company but that has elected to be subject to U.S. income tax as if it were a U.S. insurance company under section 953(d) of the Code. This will be the case even if the company is not licensed to do insurance business in any U.S. jurisdiction. As a result, property and casualty insurance companies with section 953(d) elections generally should not be subject to FATCA reporting.

Finally, the Notice indicates that an important change will be made to the transitional reporting provisions of the regulations that will benefit specified insurance company FFIs. The new rule will modify FFI reporting of foreign reportable amounts made to non-participating FFIs and only require reporting of foreign reportable amounts paid with respect to a financial account that the FFI maintains for a non-participating FFI. Significantly, the regulations will be revised so that if a participating FFI may not report under local law on a specific payee basis without the consent of its non-participating FFI account holders, the participating FFI may report the aggregate number of accounts held by all such non-participating FFIs and the aggregate amount reported to such accounts.

Sutherland had notified the Treasury and the IRS that the rule, as provided in the final regulations, was problematic because an FFI may not be able to report on a non-participating FFI if that entity has not provided a waiver. The legal inability to report under the rules as written had the potential to cause a participating FFI to lose its participating status.