On July 14, 2011, Treasury and the Internal Revenue Service (IRS) released Notice 2011-53 (the Notice), which provides transition rules for implementation of the Foreign Account Tax Compliance Act (FATCA). Although the statutory effective date of the FATCA provisions is January 1, 2013, the transition rules provide for phased implementation of the withholding and reporting requirements imposed by the law. The tables set forth below summarize the phased implementation provided by the Notice.

In general, no withholding will be required under FATCA until January 1, 2014, and even then withholding will be required only with respect to payments that constitute U.S. source fixed or determinable, annual or periodic (FDAP) income. Withholding on gross proceeds from the sale of an asset that produces U.S. source FDAP and passthru payments will not begin until January 1, 2015 (unless a passthru payment includes U.S. source FDAP, in which case the U.S. source FDAP portion of the passthru payment will be subject to withholding on January 1, 2014). Other transition rules are summarized in the tables below.

Although the purpose of the Notice is to provide transition implementation rules, the Notice also provides some substantive guidance as to the application of the rules. For example, certain obligations are grandfathered with respect to the withholding tax requirements under FATCA, and the Notice specifically indicates that legal agreements that produce passthru payments are included in the grandfathering provisions. For insurance companies, this likely means that passthru payments made with respect to qualifying grandfathered policies and annuities should be eligible for the exemption from withholding. (Information reporting still will be required for all grandfathered obligations, however.)

Part III of the Notice announces that proposed regulations will incorporate the guidance provided in Notice 2010-60, as amended and supplemented by Notice 2011-34. The implication is that the procedures provided in that guidance may not be substantially changed in the proposed regulations; consequently, the regulations may not offer a more limited review of account files, as some foreign financial institutions (FFIs) had requested. The implications of this portion of the Notice with respect to requests by the insurance industry to limit electronic searches to policies and annuities with a cash value of $1 million or more are not clear.