FATCA’s Legal Issues

White & Case LLP

To address concerns that US taxpayers were failing to report income generated in offshore accounts, the US Congress adopted Sections 1471 through 1474 of the Internal Revenue Code, commonly referred to as “FATCA,” in early 2010. FATCA constitutes an attempt by the US to recruit the assistance of non-US financial institutions to obtain information on offshore accounts held by US persons. The leverage employed by the US to encourage or compel information sharing with respect to such accounts is a requirement that persons making “withholdable payments” to a foreign financial institution or “FFI” generally withhold 30% of such withholdable payments, unless such FFI enters into an agreement with the IRS to provide information with respect to accounts maintained by US tax residents and by non-US entities that have substantial US ownership.

The term FFI is defined quite broadly, and includes banks, entities holding financial assets on behalf of others, mutual funds, private equity funds, among other institutions. Certain financial institutions, however, will be treated as deemed compliant with the provisions of FATCA (including certain non-US pension plans, tax exempt entities, non-US banks conducting solely a local business, among others). The deemed compliant FFIs would be exempt from the new FATCA withholding tax and would not be required to enter into a FATCA reporting agreement with the IRS.

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