FATCA's Due Diligence Expansion

A withholding agent under FATCA is any U.S. or foreign person making a withholdable payment to an FFI or NFFE, or one who credits such payments to an account at the withholding agent. For example, a withholding agent can be a U.S. borrower and its paying agent if one or more lenders are FFIs or NFFEs, or a U.S. fund with foreign investors and its paying agent. Another example would be a foreign partnership that is a withholding agent because it has assumed U.S. withholding responsibility for payments to the partnership. There are many scenarios where one can be a withholding agent under FATCA, and practitioners should inquire whether or not the entity they represent may be treated as a withholding agent.

In determining whether a payment of FDAP income or gross proceeds from the United States is subject to FATCA withholding, the withholding agent will need to determine whether the payee is a foreign entity and whether the payment is exempt from withholding under one of the exceptions provided in the Code. A withholding agent required to withhold under FATCA, but who fails to do so, is personally liable for the entire amount of tax not withheld.

Considerations for Corporate Counsel

With that general understanding of FATCA in mind, corporate counsel should consider how the Act affects their duties from a due diligence standpoint, and in serving in the following capacities:

Foreign Shareholders and Expanded Fiduciary Obligations to Shareholders

Given the current landscape of worldwide business, the likelihood that corporate counsel will need to consider procedures for shareholders overseas grows more concrete. An expansion of due diligence duties is likely in order to consider the tax ramifications of distributions to an entity's foreign shareholders.

In implementing procedures for FATCA compliance, corporate counsel should establish strict measures for reliance on the production of the payee's Forms W-8 or W-9, depending on the status of the payee. Corporate counsel should also establish procedures for the preparation of the withholding agent's FATCA Report (Form 8966). Implementation of these procedures will avoid confusion as to withholding, going forward.

International Financing

Another area of potential interest for corporate counsel concerns the international financing sector, as U.S. businesses seeking financing overseas will be faced with additional considerations under FATCA. Consider an example where a U.S. payee makes an interest payment to a non-participating FFI foreign lender that otherwise would qualify for the portfolio debt exemption. The new withholding requirements under FATCA may potentially subject these payments to the 30% withholding. Thus, the U.S. payee that fails to withhold tax for any reason draws the unfavorable scenario of paying a 30% withholding tax on amounts already owed to the FFI.

Private Equity and Fund Management

Private equity and hedge fund management remain key drivers of M&A activity in the market place and global economic growth. Hedge funds and private equity firms are surely within the gambit of being classified as “withholding agents” under FATCA. Needless to say, the private equity sector remains a prime target for FATCA, if it has not felt the shockwaves already.

We conclude this article next month with a continuation of our analysis of private equity and fund management, and a look at the effects that FATCA will have on Offshore Trust Companies.

Manuel Garcia-Linares is the managing shareholder and George L. Metcalfe, Jr. is an attorney with the Florida law firm of Richman Greer. They can be reached at [email protected] and [email protected], respectively.

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, FATCA 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.” Withholdable payments 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.

A withholding agent under FATCA is any U.S. or foreign person making a withholdable payment to an FFI or NFFE, or one who credits such payments to an account at the withholding agent. For example, a withholding agent can be a U.S. borrower and its paying agent if one or more lenders are FFIs or NFFEs, or a U.S. fund with foreign investors and its paying agent. Another example would be a foreign partnership that is a withholding agent because it has assumed U.S. withholding responsibility for payments to the partnership. There are many scenarios where one can be a withholding agent under FATCA, and practitioners should inquire whether or not the entity they represent may be treated as a withholding agent.

In determining whether a payment of FDAP income or gross proceeds from the United States is subject to FATCA withholding, the withholding agent will need to determine whether the payee is a foreign entity and whether the payment is exempt from withholding under one of the exceptions provided in the Code. A withholding agent required to withhold under FATCA, but who fails to do so, is personally liable for the entire amount of tax not withheld.

Considerations for Corporate Counsel

With that general understanding of FATCA in mind, corporate counsel should consider how the Act affects their duties from a due diligence standpoint, and in serving in the following capacities:

Foreign Shareholders and Expanded Fiduciary Obligations to Shareholders

Given the current landscape of worldwide business, the likelihood that corporate counsel will need to consider procedures for shareholders overseas grows more concrete. An expansion of due diligence duties is likely in order to consider the tax ramifications of distributions to an entity's foreign shareholders.

In implementing procedures for FATCA compliance, corporate counsel should establish strict measures for reliance on the production of the payee's Forms W-8 or W-9, depending on the status of the payee. Corporate counsel should also establish procedures for the preparation of the withholding agent's FATCA Report (Form 8966). Implementation of these procedures will avoid confusion as to withholding, going forward.

International Financing

Another area of potential interest for corporate counsel concerns the international financing sector, as U.S. businesses seeking financing overseas will be faced with additional considerations under FATCA. Consider an example where a U.S. payee makes an interest payment to a non-participating FFI foreign lender that otherwise would qualify for the portfolio debt exemption. The new withholding requirements under FATCA may potentially subject these payments to the 30% withholding. Thus, the U.S. payee that fails to withhold tax for any reason draws the unfavorable scenario of paying a 30% withholding tax on amounts already owed to the FFI.

Private Equity and Fund Management

Private equity and hedge fund management remain key drivers of M&A activity in the market place and global economic growth. Hedge funds and private equity firms are surely within the gambit of being classified as “withholding agents” under FATCA. Needless to say, the private equity sector remains a prime target for FATCA, if it has not felt the shockwaves already.

We conclude this article next month with a continuation of our analysis of private equity and fund management, and a look at the effects that FATCA will have on Offshore Trust Companies.

Manuel Garcia-Linares is the managing shareholder and George L. Metcalfe, Jr. is an attorney with the Florida law firm of Richman Greer. They can be reached at [email protected] and [email protected], respectively.