07 February 2014
By Alison N. Dougherty
When does the new FATCA withholding begin?
Effective July 1, 2014, withholdable payments of U.S.-source FDAP income will be subject to 30% FATCA (Foreign Account Tax Compliance Act) withholding. The new requirement applies to payments made to Foreign Financial Institutions (“FFIs”) and Non-Financial Foreign Entities (“NFFEs”). The types of income that are subject to the withholding include interest, dividends, rents, royalties, annuities and compensation. Withholding begins on January 1, 2017 for withholdable payments of gross proceeds from the disposition of property that produces FDAP income. To avoid the 30% FATCA withholding, FFIs and NFFEs must comply with certain information reporting and due diligence requirements. The FATCA withholding regime is designed to compel information reporting and disclosure with respect to the foreign accounts of U.S. persons and foreign entities with U.S. owners.
An FFI is a foreign entity that accepts deposits in the banking business, holds financial assets for the accounts of others as a substantial part of its business, or which is engaged in the business of investing, reinvesting or trading in securities, partnership interests, commodities or derivatives. An FFI may avoid being withheld upon if it enters into an FFI agreement with the U.S. Treasury Department. An FFI agreement requires the FFI to provide information to the U.S. government regarding its U.S. accounts. The FFI has certain obligations under the agreement including compliance with verification and due diligence procedures. The FFI also must agree to impose withholding with respect to recalcitrant account holders and other FFIs that do not participate. The U.S. Treasury Department is in the process of entering into Intergovermental Agreements with other countries to provide for cooperation by financial institutions in the respective foreign country.
An NFFE is any foreign entity that is not an FFI. An NFFE may avoid being withheld upon if it discloses substantial U.S. owners that own a 10% or greater interest in the entity. An NFFE also may avoid withholding if it certifies that it does not have any U.S. owners, if it is a publicly traded entity, or if it is an active NFFE. An NFFE is active if less than 50% of its gross income is passive and less than 50% of its assets produce passive income. The NFFE must provide the appropriate withholding certificate to the withholding agent to avoid the withholding.
The IRS has not yet issued the revised Form W-8BEN withholding certificate for purposes of FATCA, nor have they issued the revised Form 1042-S that will be utilized to report withholdable payments and FATCA withholding.
The Chapter 4 FATCA withholding regime under I.R.C. Sections 1471 to 1474 applies in addition to Chapter 3 U.S. nonresident tax withholding under I.R.C. Sections 1441 to 1446.
About the Author: Alison N. Dougherty is a tax manager in Aronson LLC’s Tax Services Group. Her responsibilities include federal and multi-state tax compliance for S corporations, C corporations, partnerships and individuals. She specializes in international tax compliance and planning as part of the international tax practice, and she provides transactional tax planning and structuring services.