FATCA regulations updated but deadlines loom

by DLA Piper

The US Department of the Treasury and the Internal Revenue Service have released what they refer to as the “last substantial package of regulations” necessary to implement the Foreign Account Tax Compliance Act (FATCA).

The regulatory package, released late in February, includes proposed and temporary regulations that contain several tweaks to the final treasury regulations implementing FATCA and incorporate the amendments previewed in IRS Notice 2013-69.


FATCA enters into force on July 1, 2014.  Over the past several months, the IRS has, among other things, opened the FATCA Registration Website, published a final version of the FFI Agreement, continued negotiating, finalizing and signing numerous intergovernmental agreements (IGAs) as well as finalized a FATCA-tailored Form W-9.  A final version of Form 8966, which financial institutions and withholding agents will file to report account holder information under FATCA, has also recently been released.

While the “final” treasury regulations implementing FATCA were published in early 2013, Treasury and the IRS have continued to receive unsolicited comments from a variety of stakeholders requesting changes to and clarification of the final regulations.  In response to these comments and meetings with stakeholders, Treasury and the IRS issued these latest regulations.  This alert focuses on a number of the important changes incorporated in the regulations.

No extension of effective dates

The FATCA effective dates are modified to conform to the six-month delay announced in IRS Notice 2013-43.  However, the regulations do not extend FATCA’s general July 1, 2014 effective date.  Thus, July 1, 2014 continues to be the date when certain withholding obligations and new account onboarding procedures begin.

Withholding agents and material modifications of grandfathered obligations

A withholding agent (other than the issuer) is now required to treat a modification of a grandfathered obligation (i.e., issued before July 1, 2014) as material (and therefore subject to withholding under FATCA) only if the withholding agent has actual knowledge that a material modification has occurred.  The issuer remains subject to the lesser standard of whether it “knows or has reason to know” that a material modification has occurred.

No withholding on collateral arrangements until 2017

Withholding on payments made by a secured party with respect to assets held to secure a counterparty’s obligations will not be subject to withholding under FATCA until January 1, 2017.  This transitional rule is broader than the grandfathered obligation rule in that it applies not only to collateral on debt instruments but also to derivative contracts, securities lending transactions, and repo transactions.

Relaxed definition of expanded affiliated group

An expanded affiliated group (EAG) that includes a foreign financial institution (FFI) can now become compliant if it has exempt beneficial owners or certified deemed-compliant FFIs within its group; those exempt beneficial owners and certified deemed-compliant FFIs are no longer required to become participating FFIs or registered deemed-compliant FFIs.  In addition, a limited life debt investment entity (LLDIE) will not be included in an EAG as a result of any member of such EAG owning interests in such LLDIE.

Modified definition of financial institution

  • A holding company or treasury center that is part of an EAG that includes an insurance company will now be classified as a financial institution only if such insurance company issues, or is obligated to make payments with respect to, cash value insurance or annuity contracts.
  • For purposes of determining whether an entity qualifies as a custodial institution,[i] fees attributable to providing financial advice are only considered if such fees are attributable to financial assets held in custody with such entity.
  • A partnership or other non-corporate entity may now be a holding company if substantially all the activities of such entity consist of holding more than 50 percent of the voting power and value of the stock of one or more common parent corporations of one or more EAGs.

Deemed-compliant FFIs

  • Certain credit card servicers that accept deposits on behalf of credit card issuers can now qualify as registered deemed-compliant.
  • A sponsoring entity for a sponsored investment entity or sponsored controlled foreign corporation will not be jointly and severally liable for the sponsored entity’s obligations unless the sponsoring entity is also a withholding agent for such obligations.
  • The definition of LLDIE has been relaxed by (i) removing the requirement that an LLDIE’s organizational documents cannot be amended without the consent of all of its investors; (ii) clarifying that an LLDIE issues debt or equity interests under a trust indenture or similar agreement; (iii) extending the category so that it applies to an LLDIE that issued all of its interests on or before January 17, 2013; (iv) allowing an LLDIE to be treated as a certified deemed-compliant FFI until the LLDIE liquidates or terminates; (v) removing the requirement that investors be unrelated to each other; and (vi) expanding the types of assets that the entity can hold and still qualify as an LLDIE.
  • Investment advisors and managers that do not maintain financial accounts are eligible to become certified deemed-compliant.  This change conforms to many IGAs that already contain this category as part of their Annex II.

Offshore obligations and accounts

The terms offshore obligationand offshore account are coordinated with the definition of “offshore account” used for purposes of US information reporting.[ii]

Insurance companies and products

  • A foreign insurance company electing to be treated as a domestic corporation under Internal Revenue Code section 953(d) will also be treated as a US person for FATCA purposes, unless it issues, or is obligated to make payments with respect to, cash value insurance or annuity contracts and is not licensed to do business in any US state. 
  • Life insurance contracts that allow for the substitution of an insured can now be grandfathered from FATCA until the substitution actually occurs. Annuity contracts that allow for substitutions of annuitants will not be grandfathered.
  • A withholding agent may now treat a US insurance broker acting as an intermediary for a foreign insurer as the payee for purposes of obtaining the proper FATCA documentation.
  • Under a transitional exception to the definition of withholdable payment,[iii] US insurance and reinsurance premiums paid with respect to an offshore obligation now qualify for the exception even if paid via a non-US insurance broker.

Foreign central bank of issue

A foreign central bank of issue may qualify as an exempt beneficial owner with respect to income earned on its cash holdings.

Coordination of FATCA with backup withholding on recalcitrant accounts

In the case of a withholdable payment that is also a reportable payment[iv] for backup withholding purposes made by a participating FFI to a recalcitrant account holder, backup withholding will not apply if tax is withheld under FATCA, unless backup withholding is elected.

Reporting payments to nonparticipating FFIs

The transitional rules for participating FFIs and registered deemed-compliant FFIs making payments to nonparticipating FFIs have been modified:

  • Reporting will be required only with respect to nonparticipating FFIs that maintain an account with the participating FFI.
  • The definition of foreign reportable amount is modified to mean payments of foreign source income and redemptions made with respect to the account – not all payments (unless reporting of all payments is elected by the participating FFI).
  • If a participating FFI is prohibited under domestic law from reporting on a specific payee basis without consent from the nonparticipating FFI and the participating FFI has been unable to obtain such consent, it may report the aggregate number of accounts held by all such non-consenting nonparticipating FFIs and the aggregate amount of foreign reportable amounts paid with respect to such accounts.

Default of FFI agreement

The failure to significantly reduce, over a period of time, the number of account holders that the participating FFI is required to treat as recalcitrant account holders or nonparticipating FFIs will only be an event of default under an FFI Agreement if this failure results from the participating FFI’s failure to comply with due diligence procedures.

Grantor trust treated as account holder

A grantor trust is now an account holder and must therefore be documented for FATCA purposes just like any other entity.  Previously, the person treated as the owner of a grantor trust for federal income tax purposes was considered the account holder.


Passive non-financial foreign entities (NFFEs)[v] may elect to be treated as direct reporting NFFEs or sponsored direct reporting NFFEs and therefore excepted NFFEs.  As excepted NFFEs, these entities will avoid disclosure of their substantial US owners to withholding agents[vi] and instead, will self-report directly to the IRS.

Treatment of disregarded entities

An entity that is disregarded as an entity separate from an FFI is now considered a branch of the FFI.

Documentation rules

  • Substitute forms used in place of Form W-8BEN are no longer required to include an individual’s city of birth.  Instead, the substitute forms must include an individual’s date of birth.
  • A withholding agent may now document the FATCA status of preexisting account holders with documentation obtained from a branch of such withholding agent or from another member of such withholding agent’s EAG. 
  • A withholding agent will not have reason to know that a person’s claim of FATCA status is unreliable or incorrect based on documentation collected for AML due diligence purposes until the date that is 30 days after the obligation is created.  This effectively creates a 30-day period to cure documentation of new accounts and obligations based on information obtained through AML due diligence.

Future guidance

Several changes made by the regulations were not reflected in the final FFI agreement released earlier this year.  The IRS, therefore, intends to publish a revenue procedure revising the FFI Agreement.  Although Forms W-9, W-8BEN-E for individuals and W-8ECI have been revised and finalized for purposes of FATCA, only a draft version of Form-WBEN-E, for entities, has been released.

FATCA will shortly enter into force.  Although withholding is set to begin on July 1, 2014, FFIs should finalize their registrations on the FATCA Registration Website by April 25, 2014 in order to be included on the first IRS FFI List, which will be posted June 2, 2014.

If you have not done so, you need to consider how to become FATCA compliant.  This undertaking is complex, particularly for a global financial group. 


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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