FATCA stands for the Foreign Account Tax Compliance Act. It colloquially refers to provisions included in the Hiring Incentives to Restore Employment Act signed into law on March 18, 2010 and effective January 1, 2013 (although, as explained in more detailed below, withholding and other requirements do not start until July 1, 2014 at the earliest). It adds a new chapter to the Internal Revenue Code (Chapter 4) aimed at addressing perceived tax abuse by U.S. persons through the use of offshore accounts. The new rules require:
The definitions above are to be interpreted in accordance with the provisions of the U.S. Internal Revenue Code. U.S. persons generally have an obligation to file annual tax returns and other information with the U.S. government. For more information about these obligations, visit the IRS website: http://www.irs.gov or consult a tax advisor.
U.S. Final Regulations lists seven indicia of U.S. status:
Having one of these indicia does not mean that the account is owned by a U.S. person, only that it must be given closer scrutiny.
FATCA provisions apply to "withholdable payments". "Withholdable payments" are defined as:
Income effectively connected with a United State business is generally exempt from withholding under FATCA.
Certain "foreign passthru" payments will also be subject to FATCA. Foreign passthru payment is a payment that is attributable to U.S. source income. Notice 2011-34 introduced the concept of the passthru payment percentage and provided details and examples of its calculation and application within the FATCA framework. The IGAs contain a commitment of the U.S. and the signatory countries to work together to develop a practical and effective alternative approach to achieve the policy objectives of foreign passthru payment and gross proceeds withholding that minimizes burden.
Foreign Exchange (FX) payments are not withholdable payments. Although gain on such contracts is generally reported as gross proceeds, the FATCA rules appear to only apply to proceeds from the sale or other disposition of any property of a type which can produce interest or dividends from sources within the United States. This could be changed by regulations.
No, the mere transfer of money from someone in the U.S. to someone in a foreign country will not trigger FATCA withholding. However, money transferred into, and income earned in, a U.S. account may be subject to the FATCA reporting requirements. Further, instructions to transfer money to an account within the U.S. are one of the indicia of U.S. status.
U.S. source income is income that arises from sources within the U.S. The source of income is determined based on the type of income. The source of compensation income is where the services giving rise to the income were performed. The source of certain income, such as dividends and interest, is based on residence of the payer. The source of income from property is based on where the property is used. Significant additional rules apply.
A joint account which has one U.S. owner is treated as a U.S. account and the entire account is subject to reporting as a U.S. account.
Yes. Bank deposit interest, including interest paid by a non-U.S. branch of a U.S. bank is a withholdable payment under the FATCA rules.
No. Only gross proceeds from the sale or disposition of U.S. property of a type that can produce interest or dividends are subject to withholding under FATCA rules. This would include not only stocks and bonds but also repayment of loans.
No. Generally, any individual account holder whose account is at least $50,000 that does not comply with reasonable requests for information necessary to determine whether its account is a United States account will be a "recalcitrant account holder" and will be subject to 30% withholding on withholdable payments and gross proceeds from the sale or disposition of U.S. assets which can produce interest or dividends.
FATCA withholding only applies to withholdable payments which are defined as certain income and gross proceeds from "sources within the United States". It will also apply to foreign passthru payments which may include non-U.S. source income.
Provided the partnership itself is not an FFI, if the U.S. person is revealed as an substantial U.S. owner, then that is the only owner who will be reported to the U.S. Government. The non-U.S. persons will not be subjected to FATCA reporting or withholding. However, if the U.S. person is recalcitrant, then all U.S. source withholdable payments will be subjected to 30% withholding.
A Trust will only be considered an FFI if is managed by an individual (it does not hire any entity as a third-party service provider to perform any activity related to trading, portfolio management or investment, administering or managing funds, money or financial assets), the trust's assets consist solely of financial assets, and its income consists solely of income for those financial assets.
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