Significant Changes Made in Final FATCA Regulations

by Dechert LLP

On January 17, 2013, the U.S. Department of the Treasury (“Treasury”) and the U.S. Internal Revenue Service (the “IRS”) released final regulations (the “Regulations”) implementing foreign account reporting provisions of the U.S. Hiring Incentives to Restore Employment Act enacted in March 2010. These provisions, which have become commonly known as “FATCA”, were introduced to address perceived deficiencies in the methods available to the IRS to combat the use of foreign financial accounts or foreign entities by U.S. persons to evade U.S. taxes. Generally, FATCA imposes a new 30% withholding tax on “withholdable payments”1 and certain other payments made to non-compliant foreign financial institutions (“FFIs”) and “recalcitrant account holders".2 To avoid withholding under FATCA, an FFI generally must enter into an agreement (“FFI Agreement”) in which it agrees to comply with new reporting, due diligence and withholding requirements with respect to its U.S. accounts.3 For a brief overview of FATCA, please refer to “Final Proposed FATCA Regulations Issued.” 

The Regulations make a number of important changes to earlier guidance contained in the FATCA proposed regulations published in February 2012 (the “Proposed Regulations”) and IRS Announcement 2012-42 released in October 2012. Most notably, the Regulations coordinate many of the FATCA requirements with the existing U.S. source income tax withholding rules and recently concluded intergovernmental agreements (“IGAs”) that provide an alternative approach to FATCA implementation.4

Overview of changes made by the Regulations

The Regulations:

  • Introduce the concept of a “sponsoring entity” (e.g., trustee, director or fund manager) that may perform centralized compliance for “sponsored FFIs”;
  • Extend grandfathering from FATCA withholding to obligations outstanding on January 1, 2014 and certain other obligations;
  • Announce an online “Portal” that FFIs will use to register and enter into FFI Agreements and certify compliance with FATCA requirements;
  • Announce the introduction of a Global Intermediary Identification Number (“GIIN”) to be assigned to all registered FFIs to facilitate FATCA reporting and establish FATCA status; 
  • Summarize the provisions that will be included in FFI Agreements;
  • Clarify that an entity that is disregarded for U.S. federal income tax purposes is also disregarded for FATCA purposes;
  • Expand the scope and liberalize the rules for “preexisting obligations”;
  • Delay the effective date for withholding on gross proceeds until 2017;5
  • Expand the FFI definition to include investment advisers and managers, but relax requirements for collective investment vehicles and restricted funds to qualify as deemed-compliant FFIs; and
  • Relax documentation and diligence requirements. 

Changes to FFI status

To conform to the IGAs, the Regulations expand the definition of an FFI to include certain entities such as certain insurance companies and entities “that primarily conduct as a business” portfolio management or investing, administering, or managing funds, money, or financial assets on behalf of other persons. The Regulations exclude from the definition passive investment entities that are not professionally managed. In the case of an entity resident in an IGA jurisdiction, the determination of whether that entity is an FFI is based on the applicable IGA. The laws of an IGA jurisdiction may provide its FFIs the flexibility to comply with FATCA pursuant to the Regulations or the IGA. In addition, the Regulations expand the categories of “exempt beneficial owners” to include certain retirement funds. An expanded discussion on the changes that affect qualified collective investment vehicles and restricted funds is included below under “Special considerations for investment funds.”

Sponsored FFIs

The Regulations establish a new deemed-compliant FFI category for “sponsored FFIs” where a “sponsoring entity” agrees to register with the IRS and undertake the diligence, withholding, and reporting obligations of a participating (i.e. compliant) FFI on behalf of one or more sponsored FFIs. The provisions enable trustees and fund managers to ensure FATCA compliance of family trusts, investment subsidiaries and other passive investment vehicles where compliance by each vehicle itself would be impracticable or overly burdensome. 

Similarly, an FFI that is a member of an “expanded affiliated group” that includes one or more FFIs may elect to be part of a consolidated compliance program where a “Compliance FI” reports and ensures FATCA compliance on a consolidated basis.

Favorable rules for preexisting obligations and preexisting accounts

The Regulations contain favorable rules for preexisting obligations and preexisting accounts, and expand the definition of what constitutes a preexisting obligation.6 Generally, a preexisting obligation will include any account, instrument, contract, debt, or equity interest maintained, executed, or issued by the withholding agent that is outstanding on December 31, 2013. The Regulations also treat as a preexisting obligation a new account of a customer with a prior preexisting obligation as a preexisting obligation, provided that the agent or FFI maintaining the account treats the new obligation and the prior obligation as one obligation for certain other purposes. The Regulations permit this preexisting obligation treatment to apply on a group-wide basis for expanded affiliated groups and sponsored FFI groups.

Generally, unless the payee is a “prima facie FFI”, no withholding is required before 2015 on a payment on a preexisting obligation (even if the payor lacks documentation for the payee).7 Moreover, subject to a few exceptions, the Regulations generally permit a withholding agent to rely on information previously recorded in the withholding agent’s files in determining the FATCA status of a payee, without the need to obtain new forms or documentation. 

Relaxed diligence and documentation requirements

In addition to the favorable rules for preexisting obligations, the Regulations reduce some of the diligence and documentation requirements that would have applied based on the Proposed Regulations. For example, the Regulations permit reliance on pre-FATCA versions of Forms W-8 in certain circumstances, permit an “eyeball test” for identifying certain parties, and allow for electronic transmission of Forms W-8 in some circumstances. Moreover, the Regulations allow reliance, in certain circumstances, on FATCA determinations made by other parties such as introducing brokers, parties to mergers, and certain third-party data providers. The Regulations also adopt the timeframe from IRS Announcement 2012-42 that generally allows FFIs two years to perform the requisite diligence on financial accounts (other than accounts of prima facie FFIs). 

Grandfathered obligations

FATCA withholding is not required on payments (including gross proceeds) in respect of grandfathered obligations. The Regulations provide that grandfathered obligations consist of (i) any obligation outstanding on January 1, 2014, (ii) any obligation producing withholdable payments solely because the obligation is treated as giving rise to a dividend equivalent pursuant to Code section 871(m) if the obligation is entered into on or before six months after the date on which obligations of its type are first treated as giving rise to dividend equivalents, and (iii) collateral securing one or more obligations described in (i) or (ii). The Regulations further provide, as noted above, that an obligation will not give rise to a foreign passthru payment if it is entered into on or before six months after the date on which final regulations defining the term foreign passthru payment are promulgated. While grandfathered obligations are not subject to withholding under FATCA, grandfathered obligations that are “financial accounts” will nonetheless be subject to any applicable FATCA reporting.  

For purposes of the grandfathering rule, an obligation does not include an instrument that is treated as equity for U.S. tax purposes or lacks a stated maturity or term. For debt obligations, the date an obligation is outstanding is based on the issue date of the debt, so that a qualified reopening will be grandfathered if the original debt was issued prior to 2014. A material modification of an outstanding obligation, however, will result in the obligation being treated as newly issued or executed as of the effective date of such modification.

The “Portal”

FFIs registering with the IRS will be able to do so through a secure online web portal (the “Portal”). The Portal will permit an FFI to complete an entirely paperless registration process with the IRS from anywhere in the world. FFIs will be issued a GIIN through the Portal, which will be used for an FFI to establish its FATCA status for withholding purposes and to facilitate compliance. The Portal will also be the primary means for financial institutions to communicate with the IRS regarding their FATCA requirements. It will be accessible beginning no later than July 15, 2013, and FFIs will be required to register by October 25, 2013 to be included on an initial list of compliant FFIs to be published electronically by the IRS starting December 2013 (and updated monthly). 

Special considerations for CLO and repack issuers

Although the Regulations include a transitory deemed-compliant FFI exception for “Limited Life Debt Investment Entities” that were formed prior to 2012, this category only includes entities that require the consent of all investors to amend their organizational documents, including the trust indenture.8  Accordingly, collateralized loan obligation (“CLO”) issuers are not generally expected to qualify for this exemption. Certain CLO issuers, however, may be able to avoid FATCA compliance if: (i) their reinvestment period has ended; (ii) the issuer will not, or is not expected to, hold obligations that have been significantly modified after 2013; and (iii) there is no person that owns more than 50% of the interests treated as equity for U.S. tax purposes that would be adversely affected by non-compliance of the issuer. 

FATCA compliance is generally tested on an expanded affiliated group basis. Subject to limited exceptions, an FFI will not be treated as compliant with FATCA if another FFI in its expanded affiliated group is not compliant.9 Accordingly, owners of more than 50% of the equity interests in an issuer may wish to ensure that the relevant issuer is FATCA compliant, as failure of a majority equity-owned FFI to comply with FATCA could cause otherwise unrelated FFIs that are more than 50% held by the same person to be unable to comply with FATCA.10 Further to this point, under an anti-abuse rule, a change in ownership, voting rights, or form of an entity that results in an entity meeting or not meeting the ownership requirements to be part of an expanded affiliated group will be disregarded for purposes of determining whether an entity is a member of an expanded affiliated group if the change is pursuant to a plan a principal purpose of which is to avoid reporting or withholding that would otherwise be required under FATCA.

Special considerations for investment funds

The Regulations relax the requirements for deemed-compliant FFI qualification for “qualified collective investment vehicles” (“QCIVs”) and “Restricted Funds”. Under the Proposed Regulations, a QCIV would have been required to be regulated as an investment fund by its country of incorporation or organization. Under the Regulations, an FFI may be eligible for QCIV status if either its fund manager is regulated with respect to the fund or the fund is regulated in all of the countries in which it is registered and operates. In addition, the Regulations permit certain nonprofit organizations to invest in a QCIV.

The Regulations change or clarify a number of provisions that apply to Restricted Funds. A Restricted Fund now has until the later of June 30, 2014 or six months after the date the fund registers as a deemed-compliant FFI to renegotiate its distribution agreements. A Restricted Fund is also permitted under the Regulations to sell to U.S. persons other than specified U.S. persons.11 The Regulations clarify that interests in a Restricted Fund may be issued by the fund directly if the investor can only dispose of those interests by having them redeemed or transferred by the fund, and not by selling them on a secondary market. 

It is worth noting that the Regulations do not disqualify funds with outstanding bearer shares issued before 2013 from qualifying as a QCIV or Restricted Fund as long as those shares are redeemed or “immobilized” before 2017.12

Next steps for FFIs

FFIs are generally not required to take any immediate action as a result of the promulgation of the Regulations. CIVs and Restricted Funds should ensure that they do not issue bearer shares unless such shares will be treated as issued in registered form for U.S. tax purposes. Trustees and investment fund managers should begin considering whether, and for which FFIs, they will act as a sponsoring entity. FFIs may wish to consider the feasibility of qualifying for a deemed-compliant category. Furthermore, FFIs may wish to consider delegating FATCA diligence and reporting obligations to third-party service providers (for example, fund administrators).

FFIs should note that they will be required to register by October 25, 2013 to be included in the initial published list of compliant FFIs. In the meantime, the Preamble to the Regulations states that the IRS will publish a revenue procedure containing all the terms and conditions applicable to FFIs for FATCA purposes before July 15, 2013 (when the Portal is expected to become accessible). We also expect that Treasury will conclude a substantial number of IGAs with partner jurisdictions before the October 25, 2013 deadline, which may ease the burdens of FATCA compliance substantially for FFIs resident in those jurisdictions. 

Draft versions of certain revised IRS Forms W-8 have already been released, and a draft Form W-8BEN-E for foreign entities is expected to be released shortly. In addition, the IRS also intends to release shortly a new Form 8966, “FATCA Report,” that will be used by FFIs and, in limited circumstances, withholding agents to comply with their FATCA reporting obligations.


1 A withholdable payment generally includes (i) passive U.S. source income such as U.S. source interest, dividends, and other fixed or determinable annual or periodical gains, profits, and income, and (ii) any gross proceeds from the sale or other disposition of any property of a type which can produce U.S. source interest or dividends.

2 A recalcitrant account holder includes any account holder that fails to provide (i) the information required to determine whether an account is a U.S. account or the information required to be reported by the FFI, or (ii) a waiver of any foreign law that would prevent reporting.

3 “U.S. accounts” for which reporting is required under FATCA generally include accounts held by U.S. persons (as defined for U.S. federal income tax purposes) and also accounts of certain non-U.S. entities that have U.S. persons as owners.

4 As of January 31, 2013, Treasury had concluded four IGAs (with the United Kingdom, Denmark, Mexico and Ireland), although many more IGAs are expected.

5 The Regulations do not define “foreign passthru payments”. Consistent with the Proposed Regulations, the effective date for withholding on foreign passthru payments has been delayed until the later of January 1, 2017 or six months after the publication of final regulations defining the term foreign passthru payments.

6 The term “preexisting account” means any financial account that included within a preexisting obligation.

7 A “prima facie FFI” includes: (i) an entity for which the withholding agent has available as part of its electronically searchable information a designation for the payee as an intermediary, or (ii)  for an account maintained in the U.S., (A) the payee is presumed to be a foreign entity or is documented as a foreign entity for other withholding purposes, and (B) the withholding agent has recorded as part of its electronically searchable information certain codes indicating that the payee is a financial institution.

8 A further complication is that the FFI must be a collective investment vehicle formed pursuant to a trust indenture or similar fiduciary arrangement.

9 In general, an “expanded affiliated group” includes a chain of corporations connected through stock ownership with a common parent corporation if the common parent possesses directly at least 50% of the voting power and value of at least one of the corporations in the chain and each of the corporations in the chain is owned by one or more corporations in the chain that possess directly at least 50% of the voting power and value of such corporation. Partnerships and other entities are members of an expanded affiliated group if they are controlled by members of the group.

10 Similarly, a failure of an FFI more than 50% of the equity of which is held by an owner could have adverse FATCA effects that impact other majority owned investments held by that person.

11 Under the Proposed Regulations, no sales to U.S. persons would have been permitted. A “specified U.S. person” includes a U.S. person other than a regularly-traded corporation, US tax-exempt investor, bank, REIT, RIC, registered dealer, broker, or certain individual retirement plans. Non-U.S. persons other than noncompliant FFIs are generally permitted to invest in a Restricted Fund. 

12 Although not referenced in the Regulations, a recent IRS Notice provides guidance on when certain bearer instruments will be treated as “immobilized.” See Notice 2012-20 (March 7, 2012).

To browse our library of legal updates, please visit

For more information on Dechert's International and Domestic Tax Group, please click here.


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.

© Dechert LLP | Attorney Advertising

Written by:

Dechert LLP

Dechert LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.