IRS extends certain FATCA transition rules

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IRS extends certain FATCA transition rulesOn Sept. 18, the IRS released Notice 2015-66, which announced the IRS and Treasury’s intention to amend regulations under chapter 4 of the tax code related to the Foreign Account Tax Compliance Act (FATCA) to extend the period of time that certain transitional rules will apply.

The notice also announced forthcoming modifications to the rules for grandfathered obligations and provides information on the exchange of information by countries that have entered into a “Model 1” intergovernmental agreement (IGA) with the United States. The notice provides a welcome extension of time for certain withholding agents and foreign financial institutions (FFIs) implementing FATCA information reporting and withholding systems.  

Specifically, the notice announced amendments that will extend (1) the date for when withholding on gross proceeds and foreign pass-through payments will begin; (2) the use of limited branches and limited foreign financial institutions (limited FFIs); and (3) the deadline for a sponsoring entity to register its sponsored entities and redocument such entities with withholding agents.

The notice also adds provisions that deal with the treatment of collateral under the grandfathered obligation rule and provides information on the timing of information exchanges under a Model 1 IGA.

Perhaps the most helpful amendments are those that provide extensions of the inception date for required withholding on gross proceeds and foreign pass-through payments.

The notice extends the start date of gross proceeds withholding by providing that the definition of the term “withholdable payment” means any payment of U.S. source fixed, determinable, annual or periodical (FDAP) income, and for sales or other dispositions occurring after Dec. 31, 2018 (formerly Dec. 31, 2016), any gross proceeds from the sale or other disposition of any property of a type that can produce interest or dividends that are U.S. source FDAP income.

Additionally, the start date of withholding on foreign pass-through payments to provide that a participating FFI is not required to withhold tax on a foreign pass-through payment made to a recalcitrant account holder or a nonparticipating FFI before the later of Jan. 1, 2019 (formerly Jan. 1, 2017),  or the finalization of the regulations. These extensions will delay certain withholding and information reporting with respect to the transactions noted above, including Forms 1042/1042-S reporting, until 2020.

The updated transitional rules provided in the notice are intended to facilitate an orderly transition for withholding agents and FFIs regarding FATCA compliance and provide additional time for withholding agents and FFIs to modify their systems in stages as necessary to address the phase-out of the above-mentioned transitional rules consistent with the information reporting and compliance objectives of FATCA.

Douglas Wood
T +1 704-632-6837

Cory Perry
T +1 202-521-1509

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