The Foreign Account Tax Compliance Act (FATCA) imposes a new layer of withholding rules on U.S. persons making payments of U.S. source income to foreign entities. The FATCA withholding rules require a 30% nonrefundable withholding tax on certain payments of U.S. source income to foreign entities that fall within specifically defined categories. Payors of U.S. source income to foreign entities need to obtain the new Form W-8BEN-E from the foreign payee in order to document the payee’s FATCA status and substantiate exemptions from this withholding obligation.
The requirement to document the status of each payee (U.S. versus foreign) is not a new requirement and was previously satisfied using the Form W-9 (for U.S. individuals and U.S. entities) or Form W-8BEN (for foreign individuals and foreign entities). The documentation procedures for U.S. persons and foreign individuals has not changed, and the Forms W-9 and W-8BEN are still used. However, the Form W-8BEN is no longer used for payments to foreign entities. The FATCA obligations now require U.S. payors to obtain the Form W-8BEN-E (or other W-8 series form if appropriate) from payees that are foreign entities.
All foreign payees will be classified as either a foreign financial institution (FFI) or non-financial foreign entity (NFFE). FFIs include (but are not limited to):
- Depository institutions (banks)
- Custodial institutions (mutual funds)
- Investment entities (hedge funds or private equity funds)
- Insurance companies that offer cash value products or annuities (typically life insurance companies)
NFFEs are foreign entities that are not FFIs.
Once the foreign payee is determined to be either an FFI or NFFE, then the categories within each classification must be determined. A description of the most common types of entities in each category are provided below along with the FATCA withholding obligation associated with each category.
If making payments of U.S. source passive income to foreign entities, the following must be done:
- Determine who is being paid (foreign or U.S. person)
- Get documentation to support that conclusion (either a W-9 or W-8 form)
- If paying a foreign entity, get an updated W-8BEN-E that confirms the payee’s FATCA status. If the payee is a participating FFI, check the published monthly list of participating FFIs to confirm their status.
- Determine (based on the FATCA status) if it is necessary to withhold the 30% FATCA obligation. If not, determine if other withholding rules would apply. It is important to note that payments exempt from FATCA withholding are still subject to the long-standing withholding rules under Internal Revenue Code Sections 1441 through 1446.
If you (or a member of your consolidated group) are considered an FFI or NFFE, and such foreign entity is receiving payments of U.S. source income subject to FATCA withholding, the following must be done to ensure that you are registered and in compliance with FATCA:
- FFIs need to register on the FATCA website and sign the FFI agreement. If they are in a Model 1 country, they must do so by 12/31/14. If they are in a Model 2 country or a country with no IGA, they must do so immediately.
- Passive NFFEs (defined below) need to determine which category of NFFE they will be.
- A passive direct reporting NFFE (defined below) needs to register on the FATCA website and report their substantial direct and indirect U.S. owners on Form 8966 by March 31.
- A passive indirect reporting NFFE (defined below) must list their substantial direct and indirect U.S. owners on the W-8BEN-E they provide to potential withholding agents.
- There is no action required with respect to active NFFEs (defined below).
The FATCA registration website can be found at https://sa.www4.irs.gov/fatca-rup/.
The official FFI list can be found at http://www.irs.gov/Businesses/Corporations/FATCA-Foreign-Financial-Institution-List-Search-and-Download-Tool.
Common FATCA Entity Types
- Foreign Financial Institution (FFI):
- Exempt FFI: Exempt FFIs include most governmental entities, most non-profit organizations, certain small or local financial institutions, and certain retirement entities. No FATCA withholding is required.
- Participating FFI: FFIs that have registered with the IRS using the online registration or through filing a Form 8957. They appear on the official FFI list (that is issued monthly) with a valid Global Intermediary Number (GIIN). Participating FFIs have signed an FFI agreement to provide the IRS with information about U.S. account holders (name, identifying number, address, maximum balance, etc.). FFIs that are in a country that has signed a Model 2 Intergovernmental Agreement (IGA) are also included as a participating FFI. No FATCA withholding is required.
- Nonparticipating FFI: FFIs that do not register with the IRS and are subject to a 30% withholding tax on all payments of U.S. sourced income that is fixed or determinable, annual or periodic income (generally passive income such as interest, dividends, rents, royalties, etc.).
- Deemed Compliant FFI: Deemed compliant FFIs include certain local banks, qualified collective investment vehicles, restricted funds, retirement plans, FFIs with only low value accounts, and FFIs that are in a country that has signed a Model 1 Intergovernmental Agreement (IGA). No FATCA withholding is required.
- Non-Financial Foreign Entity (NFFE):
- Excepted NFFE: Excepted NFFEs include publicly traded companies and their affiliates, certain entities organized in U.S. territories, and certain non-financial entities (holding companies, treasury centers, etc.). No FATCA withholding is required.
- Active NFFE: An Active NFFE is an NFFE where less than 50% of its gross income for the preceding calendar year is passive type income and less than 50% of its assets for the preceding calendar year are assets that generate passive type income. No FATCA withholding is required.
- Passive NFFE: A passive NFFE is an NFFE that isn’t excepted or active. It could fall into three different categories:
- Direct Reporting NFFE: A direct reporting NFFE registers with the IRS and gets a GIIN number. It reports its direct or indirect substantial U.S. owners on Form 8966. No FATCA withholding is required.
- Passive indirect reporting NFFE: An NFFE that does not directly report its U.S. owners to the IRS, but does report its U.S. owners on the W-8BEN-E. No FATCA withholding is required.
- Passive non-reporting NFFE: A passive NFFE that does not report its direct or indirect substantial U.S. owners (directly or indirectly). These NFFEs are subject to a 30% withholding tax on all payments of U.S. source income that is fixed or determinable, annual or periodic income (generally passive income such as interest, dividends, rents, royalties, etc.).
About the Author
Ryan Miller is a partner in Katz, Sapper & Miller’s Tax Services Group. Ryan provides consulting services on a variety of technical tax matters, with an emphasis on international tax. He also oversees tax compliance and handles tax controversies.
About the Author
Katherine Malarsky is a director in Katz, Sapper & Miller's Tax Services Group. Katherine provides consulting services on technical tax matters. She has experience in cost allocation methodologies, export incentive calculations, and international earnings and profits. Connect with her on LinkedIn.