After months of waiting, the Treasury Department (“Treasury”) released proposed Foreign Account Tax Compliance Act (“FATCA”) “withholdable payment” regulations on February 8, 2012. FATCA, contained in Sections 1471 through 1474 of the Code, was originally enacted as part of the Hiring Incentives to Restore Employment Act (the “HIRE Act”) in 2010. Within the past two years, Treasury and the Internal Revenue Service (the “IRS”) have issued preliminary FATCA guidance in the form of three Notices (collectively, the “FATCA Notices”), with the repeated promise of proposed regulations. The newly issued proposed regulations incorporate the guidance provided in the FATCA Notices in a revised and refined manner. While the proposed regulations go into excruciating detail on the many facets of FATCA, this client alert highlights the significant modifications and additions to prior FATCA guidance.

As originally enacted in the HIRE Act, “obligations” outstanding on March 18, 2012 were grandfathered and not subject to FATCA reporting and withholding. An “obligation” for purposes of the grandfather provision is any legal agreement that produces or could produce a withholdable payment or “passthru payment,” other than an instrument that is treated as equity for U.S. tax purposes or that lacks a stated expiration or term. The proposed regulations expand the definition of a grandfathered obligation to include obligations outstanding on January 1, 2013. Withholding is not required with respect to any payment under a grandfathered obligation or from the gross proceeds from any disposition of such an obligation.

Despite grandfathered obligations being exempt from FATCA reporting and withholding, any material modification of a grandfathered obligation will result in such obligation being treated as newly issued on the date of the material modification. In the case of an obligation that is a debt instrument for U.S. tax purposes, a material modification means a significant modification pursuant to Treasury regulations. In all other cases, whether a modification of an obligation is material will be determined based upon all relevant facts and circumstances.

Please see full alert below for more information.