On March 18, 2010, the Foreign Account Tax Compliance Act (FATCA) was enacted under Sections 1471 through 1474 of the U.S. Internal Revenue Code. If certain due diligence and reporting requirements are not satisfied, FATCA generally imposes a 30% withholding requirement on payments of certain types of U.S. source income to foreign financial institutions (FFIs) and non-financial foreign entities (NFFEs). On January 17, 2013, the U.S. Treasury Department and the IRS issued final regulations under FATCA. The final regulations provided for the phased implementation of FATCA requirements beginning on January 1, 2014, and continuing through 2017. The final regulations provided that withholding would be required to begin for payments made after December 31, 2013. Due diligence for documenting payees and account holders by participating FFIs and withholding agents was required to be phased in during 2014 and 2015. Annual reporting by participating FFIs was required to be phased in starting in 2015. Full scope FATCA reporting was required to begin in 2017.
On July 12, 2013, the IRS issued Notice 2013-43 which provides a revised FATCA implementation timeline. FATCA withholding is now required to begin for certain payments made after June 30, 2014. Withholding agents generally must begin withholding on withholdable payments to payees that are FFIs or NFFEs unless the payments can be associated with documentation to substantiate an exemption. The deadline is extended only for certain payments and does not apply to other types of payments.
For purposes of FATCA, payments subject to potential withholding are payments of U.S. source FDAP income which includes interest, dividends, rents, royalties and annuities. Other types of payments are also potentially subject to withholding including foreign pass-thru payments and gross proceeds from the sale of property that produces interest or dividends.
FFIs subject to FATCA requirements include banks, hedge funds, private equity funds, broker-dealers, certain holding companies, investment managers and other entities that hold, invest or trade securities on their own behalf or for another person. NFFEs subject to the FATCA requirements are passive foreign entities with U.S. owners and more than 50% of passive income or assets that produce or are held for the production of passive income. FFIs and NFFEs must comply with certain due diligence and reporting requirements to avoid the 30% FATCA withholding.
FATCA withholding is a separate requirement which will apply in addition to the 30% U.S. nonresident withholding that already applies to payments of U.S. source FDAP income to an individual or a company that is not a resident of the United States.
For more information, please contact our international tax advisor at 301.231.6200.