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FATCA's Due Diligence Expansion

BY Manuel Garcia-Linares
September 02, 2015

In 2010, Congress enacted the Foreign Account Tax Compliance Act (FATCA) in order to target U.S. taxpayers using offshore accounts to hide monies overseas. Although Congress' purpose and intent in passing FATCA was met, it has been achieved at a cost of imposing heavy burdens on those already compliant. The beauty of FATCA is that its grasp has no limits. That being said, FATCA poses new considerations for corporate counsel relating to their corporate clients and shareholders.

At the most general level, FATCA requires foreign financial institutions (FFI) to report to the IRS information about financial accounts held by U.S. taxpayers, or by foreign entities, in which a U.S. taxpayer holds a substantial ownership interest. Thus, it imposes a new system of information reporting and a new 30% withholding tax on withholdable payments made by U.S. persons and others to Foreign Financial Institutions (FFI) and certain Non-Foreign Financial Entities that do not meet specific reporting requirements.

It is crucial to remember that the withholding responsibility applies only to “withholdable payments.” These include U.S.-sourced dividends, rents, interest, royalties and compensation (also known as FDAP Income as defined in sections 871 and 881 of the Internal Revenue Code) to an FFI or NFFE, or credit payments of a similar type of income to an account held with the withholding agent. By 2017, the definition will be expanded to include gross proceeds from the sale, disposition, redemption, or repurchase of any property that produces U.S. source interest or dividends.

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