United States: IRS Issues Follow-Up Guidance On FATCA Reporting And Withholding Requirements

On April 8, 2011, the Internal Revenue Service ("IRS") and Treasury Department ("Treasury") issued Notice 2011-34 (the "Notice") setting forth additional guidance with respect to the reporting and withholding requirements under the Foreign Account Tax Compliance Act ("FATCA").1 FATCA introduced a new 30% withholding tax on any "withholdable payment" made to either a foreign financial institution ("FFI") or a non-financial foreign entity ("NFFE") unless the FFI meets certain reporting obligations or the NFFE discloses certain information regarding substantial U.S. owners. A "withholdable payment" generally includes any payment of interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income from sources within the U.S. It also includes gross proceeds from the sale of property that is of a type that can produce U.S.-source dividends or interest, such as stock or debt issued by domestic corporations. The new 30% withholding tax on any "withholdable payment" made to an FFI (whether or not beneficially owned by such institution) applies unless the FFI agrees, pursuant to an agreement entered into with Treasury ("FFI Agreement"), to provide information with respect to each "financial account" held by "specified U.S. persons" and "U.S.-owned foreign entities."

The new reporting and withholding provisions apply to payments made after December 31, 2012 and obligations outstanding on March 18, 2012 are grandfathered.

The IRS and Treasury published preliminary guidance in Notice 2010-60, issued on August 27, 2010, regarding (1) the grandfather provision, (2) the definition of an FFI, (3) the scope of required information collection and identification of persons by FFIs, and (4) the manner and type of information that FFIs must provide to the IRS with respect to U.S. accounts.2

The Notice addresses seven areas of concern with respect to FFIs, which we discuss below, including (1) the procedures to be followed by FFIs in identifying U.S. accounts among their preexisting individual accounts, (2) the definition of the term "passthru payment," (3) certain categories of FFIs that will be deemed compliant, (4) reporting obligations on U.S. accounts, (5) requirements for FFIs that are Qualified Intermediaries ("QIs"), (6) the requirements for expanded affiliated groups of FFIs, and (7) the effective date of FFI Agreements. The Notice further indicates that the IRS and Treasury intend to issue regulations incorporating the guidance described in the Notice along with other relevant matters. The IRS and Treasury additionally intend to publish draft FFI Agreements and draft information reporting and certification forms.


In the case of "preexisting individual accounts" (defined as any financial account held by an individual as of the date that an FFI Agreement becomes effective), the FFI is required to determine whether such accounts are to be treated as (1) U.S. accounts, (2) accounts of recalcitrant account holders ("recalcitrant accounts"), or (3) accounts that are other than U.S. accounts ("non-U.S. accounts"). The Notice provides procedures to assist the FFI in this determination. Once the process is complete, the FFI's chief compliance officer must certify such completion to the IRS (no deadline has been set as of yet but the IRS has indicated one is forthcoming). The steps to be taken in this process are as follows:

Step 1: Account holders documented as U.S. persons for other U.S. tax purposes will be treated as holding U.S. accounts. However, unless the FFI elects otherwise, an account is a non-U.S. account if (i) the account is a depository account; (ii) each holder is a natural person; and (iii) the balance at the end of the year preceding the FFI Agreement's effective date does not exceed $50,000 (or the equivalent foreign currency).

Step 2: Accounts not identified as U.S. accounts pursuant to Step 1 may be treated as a non-U.S. account if the balance at the end of the year preceding the FFI Agreement's effective date does not exceed $50,000 (or the equivalent foreign currency). The FFI may elect out of applying this step.

Step 3: The Notice provides detailed guidelines with respect to private banking accounts3 maintained by the FFI that are not categorized as a U.S. or non-U.S. account pursuant to Step 1 or 2. The Notice gives relationship managers at private banks the responsibility of finding indicia of U.S. accounts.

Step 4: If an account has not yet been identified as a U.S. account, non-U.S. account, or private banking account pursuant to Steps 1 through 3, the FFI must determine whether an account has specified U.S. indicia from electronically maintained information. For those accounts that contain U.S. indicia, the FFI is required within one year of the effective date of its FFI Agreement to request certain documentation to establish whether such account is a U.S. account.

Step 5: The FFI must review high value accounts (accounts with a balance of $500,000 or more at the end of the year preceding the effective date of the FFI Agreement) with respect to accounts that have not been categorized under Steps 1 through 4. To the extent such accounts contain U.S. indicia, the FFI must obtain certain documentation within two years following the effective date of its FFI Agreement. Account holders that do not provide appropriate documentation will be classified as "recalcitrant account holders."

Step 6: For those accounts that did not previously meet the requirements to be treated as a high value account but would have been treated as high value accounts based on the account balance on the last day of the preceding year, the FFI is required to annually apply the high value account procedure commencing the third year following the effective date of its FFI Agreement. Those accounts identified as high value accounts under this retesting process will be treated as recalcitrant if required documentation is not provided by the end of the year identified.4


The Notice provides guidance with regards to the obligation of an FFI to withhold on a passthru payment. An FFI is required to deduct and withhold 30% of any passthru payment made to a recalcitrant account holder or non-participating FFI. A passthru payment includes (i) any withholdable payment, and (ii) other payments to the extent attributable to a withholdable payment. With respect to this second category of passthru payments, the Notice indicates that the IRS and Treasury intend to issue regulations that payments "attributable to a withholdable payment" are amounts of non-withholdable payments multiplied by a fraction (the "passthru payment percentage").5

An FFI's pasthru payment percentage is determined by dividing the sum of the FFI's U.S. assets6 held on each of the last four quarterly testing dates,7 by the sum of the FFI's total assets held on those dates.8 Each FFI will be required to make available its quarterly passthru payment percentage information within three months of the relative quarterly testing date. Grandfathered obligations will not be factored into an entity's passthru payment percentage.


The Notice provides that certain categories of FFIs will be deemed compliant with the requirements of FATCA. An FFI that is deemed compliant must (i) apply for deemed-compliant status with the IRS, (ii) obtain an FFI identification number from the IRS, and (iii) certify every three years that it meets the requirements for deemed-compliant treatment.

The IRS and Treasury intend to issue regulations that FFIs in an expanded affiliated group9 will be treated as a deemed compliant FFI if: (i) each FFI is, under the laws of its country of organization, licensed and regulated as a bank or similar organization authorized to accept deposits in the ordinary course of its business; (ii) all of the FFIs are organized in the same country; (iii) no FFI maintains operations outside the country of organization; (iv) no FFI solicits account holders outside its country of organization; and (v) each FFI implements policies and procedures to ensure that it does not open or maintain accounts for non-residents, non-participating FFIs, or NFFEs (other than excepted NFFEs that are organized and operating in the jurisdiction where all members of the expanded affiliated group are organized).

In addition, the IRS and Treasury intend to issue similar regulations in which any FFI that is a member of an expanded affiliated group that includes one participating FFI may be treated as a deemed-compliant FFI,10 as well as regulations under which certain collective investment vehicles and other investment funds would be treated as deemed-compliant.11 Treasury and the IRS are still considering under what circumstances certain foreign entities, all the interests in which are regularly traded on an established securities market (e.g., exchange-traded funds), as well as whether certain foreign retirement plans could be deemed compliant.


Notice 2010-60 provided preliminary guidance regarding the manner and type of information FFIs would be required to report with respect to their U.S. accounts. The Notice indicates that the IRS and Treasury intend to issue regulations limiting FFIs' account balance reporting obligations to year-end account balances or values.

With regards to FATCA's requirement of the reporting of gross receipts and gross withdrawals or payments made to and from U.S. accounts, the IRS and Treasury intend to issue regulations providing that an FFI must annually report the following information with respect to a U.S. account: (i) the gross amount of dividends paid or credited to such account, (ii) the gross amount of interest paid or credited to such account, (iii) other income paid or credited to such account, and (iv) gross proceeds from the sale or redemption of property paid or credited to such account with respect to which the FFI acted as custodian, broker, nominee, or otherwise as an agreement for the account holder. In the case of a U.S. account that is an equity or debt interest in the FFI, the FFI will be required to report with respect to such interest, the gross amount of: (i) all distributions, interest, and similar amounts credited during the year, and (ii) each redemption payment made during the year. The IRS and Treasury intend to issue additional guidance with respect to reporting tax basis information for FFIs that are not U.S. payors and branch and affiliate reporting for FFIs that do not elect branch-by-branch reporting.


Since QIs that are FFIs will be subject to the FATCA requirements in addition to the existing reporting and other requirements imposed on QIs, the IRS and Treasury intend to issue guidance requiring all FFIs currently acting as QIs to consent to include in their QI agreements the requirement to become participating FFIs (unless it is deemed-compliant).


FATCA provides that the withholding, reporting, and other requirements imposed on an FFI shall apply with respect to U.S. accounts maintained by the FFI, including U.S. accounts maintained by each other FFI that is a member of the same expanded affiliated group that includes the FFI. The IRS and Treasury intend to issue regulations requiring each FFI included in the affiliated group to be either a participating or deemed-compliant FFI. This would be achieved through a coordinated application, rather than individual, process. The FFI affiliated group will designate a "lead FFI" to execute the FFI agreement for all participating FFIs and certifications for deemed-compliant FFIs.


The Notice provides that FFI Agreements will become effective on the later of (i) the date they are executed, or (ii) January 1, 2013.


1 FATCA was included in the Hiring Incentives to Restore Employment Act of 2010. See our prior client alert discussing the FATCA provisions at http://www.mofo.com//files//Uploads/Images/100322FATCA.pdf .

2 See our prior client alert discussing Notice 2010-60 at http://www.mofo.com/files/Uploads/Images/100910FACTA.pdf

3 These are generally accounts maintained or serviced by an FFI's private banking department.

4 Completion of annual retesting (i.e., Step 6) is not required to be certified to the IRS by the chief compliance officer.

5 As indicated in the Notice, the purpose of the passthru payment rule is to encourage FFIs to enter into FFI Agreements (without this rule, it may be possible for non-participating FFIs to hold indirect U.S. investments through participating FFIs without being subject to a withholding tax while avoiding entering into an FFI Agreement).

6 A U.S. asset will be defined to include any asset to the extent that it is of a type that could give rise to a passthru payment and any debt or equity interest in a U.S. corporation but does not include any grandfathered obligations. A debt or equity interest in an NFFE will be treated as a non-U.S. asset.

7 The quarterly testing date for an FFI will generally be the last business day of the quarter (or the last redemption date of the quarter if the FFI conducts redemptions at least quarterly).

8 Custodial payments are determined by reference to the passthru payment percentage of the issuer of the instrument and not of the FFI making the payment.

9 Defined as "an 'affiliated group' as defined by section 1504(a), determined by substituting 'more than 50 percent' for 'at least 80 percent' in each place it appears in section 1504(a) and without regard to paragraphs (2) and (3) of section 1504(b)." A partnership or any other entity (other than a corporation) is treated as a member of an expanded affiliated group if such entity is controlled (within the meaning of section 954(d)(3)) by members of such group (including any entity treated as a member of such group by reason of this rule).

10 The FFI may not maintain operations or solicit account holders outside its country of organization and must implement the pre-existing account and customer identification procedures of participating FFIs.

11 Provided that (i) all holders of direct interests in the fund are participating FFIs or deemed-compliant FFIs holding on behalf of other investors, (ii) the fund prohibits the subscription for or acquisition of interests in the fund by any other person, and (iii) the fund certifies that any passthru payment percentages it calculates and publishes will be done in accordance to the procedures described above.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.