United States: FATCA And The Syndicated Loan Market Some More Breathing Space

INTRODUCTION

The IRS have recently announced certain modifications to the well-known US FATCA regime, including a postponement of the first date on which the regime can impose withholding tax on affected payments and an extension of grandfathering from that withholding tax. Participants in the international syndicated loan markets are likely to welcome these changes, which are described in more detail in the following paragraphs.

BACKGROUND

FATCA is a US tax legislation that the non-US syndicated loan market has been forced to take account of in recent years.

This is because FATCA can potentially impose a 30% withholding tax on a broad range of payments by non-US persons, including payments that do not have a US source. Such payments might include interest and principal payments that are made under a non-US facility agreement, for example, as well as disposal proceeds that are paid to a security agent during enforcement proceedings.

FATCA is extra-territorial legislation in other words that is increasingly being considered and provided for in non-US loan documentation - whether in the context of acquisition, project or other bank-driven financings.

RECENT DEVELOPMENTS

Given its scope and potential ambit, FATCA has been viewed as controversial by market participants from the legislation's inception.

To their credit, however, the IRS have repeatedly sought to soften the originally proposed harshness of the regime Their latest announcements in this regard, which they published on 12th July 2013, include the following:

  • A postponement to 1st July 2014 of the earliest date on which FATCA-related withholding can apply to affected payments (the applicable date was previously 1st January, 2014).
  • A general extension of grandfathering from FATCA withholding to any "obligation" (as defined for FATCA purposes) that is entered into on or before, and not materially modified after, 30th June 2014 (the applicable date was previously 31st December 2013).
  • A new fiction under which an intergovernmental agreement that the US has entered into with an overseas jurisdiction is treated as effective on the date on which it first appears on a list that the US Treasury will publish on its website for this purpose - that is, rather than the date on which the agreement becomes effective under the laws of the applicable jurisdiction.

RATIONALE

These announcements generally postpone the application of the FATCA regime, as can be seen.

More particularly, however, they can be seen as an attempt on the part of IRS to buy time in certain areas so that the regime can be implemented more fairly and efficiently. A highly important example of this relates to the intergovernmental agreements or IGAs that the US government have recently been negotiating with a range of countries. In essence, these agreements attempt to make effective the basic intent of FATCA, which is to increase transparency as regards accounts held by US persons in non-US foreign financial institutions.

FATCA does this as a general principle by requiring these foreign financial institutions to enter into agreements with the IRS under which they undertake to provide certain information in relation to US account holders and carry out related tasks.

Moreover, if the foreign financial institutions or FFIs do not enter into these agreements and otherwise comply with the regime, they potentially suffer withholding tax at 30% on a wide range of payments.

Such FFIs may not be able to comply with the above compliance obligations, however - under local law restrictions relating to customer confidentiality and data protection, for example. They might therefore be subject to a highly unpalatable 30% withholding tax on any affected payments that they receive.

With this in mind, the US has sought to enter into IGAs with overseas jurisdictions as a means of mitigating the burden that these compliance obligations would otherwise impose upon FFIs.

Only a handful of overseas jurisdictions have entered into IGAs to date, however, which will often take time to become effective under the laws of the applicable jurisdiction in any case.

In turn, each of the IRS's recent announcements can be seen as reflecting this lack of progress: either postponing the initial application of the regime, increasing the range of agreements that are grandfathered from FATCA withholding or accelerating the date on which an IGA becomes effective under the regime once the US enters into the agreement with an overseas government.

GRANDFATHERING

Of the IRS's recent announcements in relation to FATCA, the one relating to extended grandfathering from FATCA-related withholding tax is possibly the most impactful, at least as far as the international syndicated loan markets are concerned.

The effect of the extension is that any facility agreement that is entered into on or before the postponed grandfathering date (now 30th June 2014) will generally be exempt from FATCA withholding tax.

It will not matter, therefore, whether payments that are made under the agreement are capable of being subject to FATCA withholding tax. The withholding will not be relevant in the first place.

Admittedly, this grandfathering will be lost if the terms and conditions of the facility agreement undergo material modification after 30th June 2014.

Generally speaking, however, the market now has almost a year to enter into loan agreements that, initially at least, will be protected from FATCA withholding tax (to the extent that withholding tax would otherwise arise).

DOCUMENTATION

A further point to make as regards the IRS's recent announcements is their impact upon market standard documentation for non-US syndicated loan transactions. Market standard for these purposes usually means the FATCA-related riders that the Loan Market Association ("LMA") originally published last year, which provide for various means of imposing the risk of FATCA withholding tax on borrowers, agents and lenders.

As a slightly mundane point, the LMA has recently updated the common provisions in these riders to reflect the postponed first possible application date for FATCA withholding, i.e. 30th June 2014.

Of potentially more importance, however, the IRS's announcement of extended grandfathering from FATCA withholding impacts specifically upon "Rider 2" of the LMA's riders, which is premised upon the applicable facility agreement being initially grandfathered from FATCA withholding.

In this regard, Rider 2 imposes FATCA withholding tax risk on the lenders, but also enables them to veto modifications to the facility agreement if those modifications might sacrifice the expected grandfathering from that withholding tax and otherwise cause the withholding tax to apply to payments under the agreement. (The borrower can override this veto right in certain circumstances, it is worth noting.)

Originally, Rider 2 would have ceased to be relevant to facility agreements that were entered into after 31st December 2013, the previously scheduled date for grandfathering to cease. Under the IRS's proposals, however, the applicable grandfathering date will now be 30th June 2014, which obviously extends the potential application and relevance of Rider 2.

SUMMARY

FATCA has proven to be a thorny and contentious issue for participants in non-US syndicated loan markets.

In this regard, the IRS's recently published announcements do not radically change the regime's general application.

They do provide welcome postponements and other relaxations of that regime, however, as has been explained.

Moreover, given that these announcements are the latest in a series of FATCA-related modifications that the IRS have announced in recent years, one should not rule out further reform in the future.

Indeed, FATCA continues to be a moving target generally in terms of its scope and application - albeit one that is gradually becoming more acceptable to international financial markets.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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.

Authors
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions