What is FATCA?

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:

  • Foreign financial institutions (FFI's) to provide the Internal Revenue Service (IRS) with information on certain U.S. persons invested in accounts outside of the U.S.; and
  • Certain non-U.S. entities to provide information about any U.S. owners

Who is considered as a U.S. Person for purposes of FATCA?

  • For the purposes of FATCA, a U.S. Person means:
    • A citizen or lawful permanent resident (including U.S. green card holder) of the U.S.; or
    • A partnership or corporation organized in the U.S. or under the laws of the U.S. or any State thereof, or a trust if: (i) a court within the U.S. would have authority under the applicable law to render orders or judgments concerning substantially all issues regarding the administration of the trust; and (ii) one or more U.S. persons have the authority to control all substantial decisions of the trust, or an estate of a decedent that is a citizen or resident of the U.S.

    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. Person
    • U.S. Nationals (e.g. Individuals born in the U.S. or in U.S. territories), individual permanently resides in the U.S. (green card holders), or U.S. persons/residents under the substantial presence test; or
    • U.S. corporations, partnerships and trusts created under U.S. law – Exceptions include:
      • Publicly traded corporations and members of their expanded affiliated groups;
      • Any organization exempt from taxation or an individual retirement plan;
      • The United States or any wholly owned agency or an individual retirement plan;
      • Any State, the district of Columbia, any possession of the United States, any political subdivision of any of the foregoing, or any wholly owned agency or instrumentality of any one or more of the foregoing;
      • Any bank;
      • Any Real Estate investment trust
      • Any regulated Investment Company
      • Any common trust fund
      • Any trust which is tax exempt or is a charitable trust

What is considered indicia of U.S. status?

U.S. Final Regulations lists seven indicia of U.S. status:

  • U.S. citizenship or lawful permanent resident (green card) status;
  • A U.S. birthplace;
  • A U.S. residence address or a U.S. correspondence address (including a U.S. P.O box);
  • A U.S. telephone number (regardless of whether such number is the only telephone number associated with the account holder);
  • Standing instructions to pay any amounts from the account to an account maintained in the U.S.;
  • An "in care of" address or a "hold mail" address that is the sole address with respect to the client; or
  • A power of attorney or signatory authority granted to a person with a U.S. address

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.

What types of payments are subject to FATCA?

FATCA provisions apply to "withholdable payments". "Withholdable payments" are defined as:

  • Any payment of interest (including any portfolio interest and original issue discount), dividends, rents, royalties, salaries, wages, annuities, licensing fees and other FDAP income, gains, and profits, if such payment is from sources within the United States.
  • Any gross proceeds from the sale or disposition of U.S. property of a type that can produce interest or dividends.
    • Interest paid by foreign branches of U.S. banks

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.

Are foreign exchange transactions subject to FATCA?

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.

Are remittances subject to FATCA (i.e. someone in U.S. sends money to a family member in my country)?

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.

What is the definition of a U.S. source payment?

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.

If a joint account is held by a U.S. person and a non-U.S. person, is it considered 50% U.S. or 100% U.S.? Does it make a difference if they are not U.S. residents?

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.

Is bank deposit interest, which is exempt under tax treaties, subject to withholding under FATCA?

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.

Are all gross proceeds subject to withholding under FATCA, or only those related to the sale of stocks and bonds?

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.

We have some non-U.S. clients who will not give us the documentation needed for FATCA. For example, in the smaller towns we have customers who do not have a passport or driver's license. It seems that under FATCA they will be classified as "recalcitrant" and subjected to withholding. Is there a process to exclude these people from the documentation requirement?

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.

Does FATCA withholding apply only to U.S. source income and proceeds?

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.

If a partnership has one U.S. person with 25% ownership and 3 foreign persons with 75%, how would dividend income be reported?

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.

I read that a trust is considered an FFI but can this be true for an account set up by a parent in trust for their child? In this case who is documented, the grantor or grantee? Does it matter if the trust is irrevocable?

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.


  • Bureau of Internal Revenue (BIR) FATCA Frequently Asked Questions (FAQs)
  • CTBC Bank (Philippines Corp.) FATCA Policy
  • Deloitte FATCA Frequently Asked Questions (FAQs), Closing the Distance