FATCA Provisions Enacted Into Law

New Withholding Tax, Ban on Bearer Bonds, and Withholding on "Dividend Equivalents"

On March 18, 2010, President Obama signed into law the Hiring Incentives to Restore Employment Act (the "Act"). The Act incorporates the Foreign Account Tax Compliance Act including provisions which: (i) introduce a new 30% withholding tax on certain payments made to foreign entities that fail to comply with specified reporting or certification requirements, (ii) end the practice whereby U.S. issuers sell bearer bonds to foreign investors by repealing the U.S. bearer bond exception, and (iii) impose a withholding tax on "dividend equivalents" paid under equity swaps. This alert addresses these provisions of the Act and certain other provisions aimed at preventing offshore tax avoidance by U.S. persons. The new withholding tax applies to relevant payments made after December 31, 2012. Importantly, debt obligations outstanding on March 18, 2012 are "grandfathered" from the new withholding tax and from the repeal of the U.S. bearer bond exception.

NEW WITHHOLDING TAX

The Act introduces a new 30% withholding tax on any "withholdable payment" made to a foreign entity unless such entity complies with certain reporting requirements or otherwise qualifies for an exemption. A "withholdable payment" generally includes any payment of interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income from sources within the U.S. It also includes gross proceeds from the sale of property that is of a type that can produce U.S.-source dividends or interest, such as stock or debt issued by domestic corporations. Different rules apply to foreign "financial institutions" ("FFIs") and to other foreign entities.

Foreign Financial Institutions

The new 30% withholding tax on any "withholdable payment" made to an FFI (whether or not beneficially owned by such institution) applies unless the FFI agrees, pursuant to an agreement entered into with Treasury, to provide information with respect to each "financial account" held by "specified U.S. persons" and "U.S.-owned foreign entities." The new disclosure requirements are in addition to requirements imposed by a "Qualified Intermediary" agreement.

The term FFI includes banks, brokers, and investment funds, including private equity funds and hedge funds. A "financial account" includes bank accounts, brokerage accounts, and other custodial accounts, or an equity or debt interest in the FFI (unless such interest is regularly traded). The term "specified U.S. person" is any U.S. person other than certain categories of entities such as publicly-traded corporations and their affiliates, banks, mutual funds, real estate investment trusts, and charitable trusts. A "U.S.-owned foreign entity" for this purpose is any entity that has one or more "substantial U.S. owners," which generally means (i) in the case of a corporation, if a specified U.S. person, directly or indirectly, owns more than 10% of the stock, by vote or value, (ii) in the case of a partnership, if a specified U.S. person, directly or indirectly, owns more than 10% of the profits or capital interests, or (iii) in the case of a trust, if a specified U.S. person is treated as an owner of any portion of the trust under the grantor trust rules.

By entering into the agreement with Treasury1, the FFI agrees to (i) obtain information necessary to determine which accounts are U.S. accounts, (ii) comply with verification and due diligence procedures as required by Treasury, (iii) annually report certain information regarding U.S. accounts (including U.S. accountholder identification information and annual account activity information), (iv) withhold on "passthru payments" made to (1) recalcitrant account holders, (2) other FFIs that do not enter into an agreement with Treasury, and (3) FFIs that have elected to be withheld upon (as further described below), (v) comply with requests by Treasury for additional information with respect to any U.S. accounts, and (vi) attempt to obtain a waiver from the U.S. accountholder if any foreign law would otherwise prevent the reporting of...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT