FATCA: Final Regulations: Treasury Issues Long-Awaited Final Regulations on FATCA; U.S. Enters into Related Intergovernmental Agreement with Switzerland

Sullivan & Cromwell LLP - February 26, 2013

On January 17, 2013, the Treasury Department issued final regulations (the “Final Regulations”) under the foreign account tax compliance (“FATCA”) provisions of the Internal Revenue Code of 1986, as amended (the “Code”). The Final Regulations update and modify proposed regulations issued on February 8, 2012 (the “Proposed Regulations”), and provide significant detail regarding the implementation of FATCA, including coordinating FATCA withholding and information reporting with both the current withholding rules and the new system of IGAs designed to achieve FATCA’s goals.

The Final Regulations finalized the “grandfathering” dates, clarified many points that caused confusion in the Proposed Regulations and made a number of other welcome changes, as follows: 

  • Extending the grandfathering date to exempt from FATCA withholding “obligations” outstanding on January 1, 2014;
  • Specifying that, absent actual knowledge, a withholding agent may rely on a written statement from the issuer to determine if an obligation meets the requirements for grandfathered treatment, and further, that with respect to a determination of whether there has been a material modification of an “obligation,” such knowledge can come in the form of disclosure from the issuer that such a modification has occurred;
  • Specifying that, for purposes of determining whether a debt obligation is grandfathered, debt issued in a qualified reopening will have the same issue date as the original debt;
  • Allowing for a consolidated compliance program for affiliated entities;
  • Allowing a financial institution to apply for a collective refund on behalf of account holders;
  • Expanding the category of “excepted NFFE” to include certain financial institutions that only provide financial services within an affiliated group of entities and non-profit organizations recognized as such in their country of residence;
  • Incorporating and making allowances for entities within jurisdictions that have signed IGAs; and
  • Conforming the definition of “financial institution” to the provisions of the IGAs, which will change the reporting obligations of many investment entities and investment advisors.

To facilitate the ongoing interaction between the IRS and financial entities worldwide that FATCA and the IGAs will require, the IRS intends to launch the FATCA Registration Portal (the “Portal”) no later than July 15, 2013. Global intermediary identification numbers (“GIINs”) will be assigned for the purpose of identifying registering entities to withholding agents. The IRS will then publish a list (the “IRS FFI list”) of the names and GIINs of all participating FFIs, registered deemed-compliant FFIs, and reporting Model 1 FFIs, which will be used by withholding agents and participating FFIs in their respective due diligence processes.

This memorandum highlights areas of the law that have been of particular interest to stakeholders and that include important transitional rules, of which financial institutions should be aware as they develop their plans for FATCA compliance. Specifically, we discuss the finalized rules relating to grandfathered obligations, withholding, reporting of payments, and special transitional categories for entities in countries with laws that currently prevent full compliance with FATCA. This is followed by an explanation of the categorization of entities under FATCA and the basic obligations of the two major groups in this scheme, withholding agents and FFIs.

On February 14, 2013, the United States also entered into an intergovernmental agreement (“IGA”) with Switzerland to facilitate compliance with FATCA in that country. This memorandum briefly highlights some notable differences between the Switzerland IGA and the Model 2 IGA.