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Final FATCA Regulations Have Been Issued

The Foreign Account Tax Compliance Act (FATCA) provisions were introduced in response to instances where foreign assets of U.S. taxpayers were discovered to have been hidden in offshore accounts and held through foreign entities. This resulted in a substantial amount of tax being evaded. FATCA was enacted on March 18, 2010 as part of the HIRE Act and, generally, creates a regime designed to identify and report income earned by U.S. persons through offshore financial and non-financial entities. The regime requires foreign financial institutions (“FFIs”) to register and undertake the responsibility to perform due diligence to identify U.S. persons’ accounts and to report the income earned by them. It also imposes 30% withholding penalties on account holders who do not provide appropriate documentation or are not otherwise exempt from these rules. FFIs are required to be withholding agents for IRS and Treasury for this purpose.

The final regulations were released on January 17, 2013 and cover 544 pages designed to implement this new regime.

The following highlights key aspects of these regulations:

Foreign Financial Institutions (FFIs)

FFIs include:

  1. Depositary banks or similar businesses,

  2. Entities holding financial assets for the account of others as a substantial portion of its business, or

  3. Entities engaged (or holds itself out as being engaged) primarily in the business of investing, reinvesting, or trading in securities, partnership interests, commodities, or any interest in such securities, partnership interests, or commodities.

Therefore, foreign hedge funds, mutual funds and similar vehicles come within the FATCA regime.

The IRS will have a secure electronic portal for FFIs to register and maintain their compliance with the rules globally.

The IRS and Treasury have also been negotiating Intergovernmental Agreements (“IGAs”) with foreign governments which provide alternative means for FFIs to comply, and allow for the exchange of information with respect to residents of the U.S. and counterparty countries.

Registered FFIs will receive a Global Intermediary Identification Number (“GIIN”) and the agreements (“FFI agreements”) to comply with the FATCA requirements become effective 1/1/2014.

Withholding (30%)

  1. On “withholdable payments” (generally U.S. FDAP) becomes effective 1/1/2014 on noncompliant FFIs and recalcitrant account holders. Obligations (generally bonds or other fixed debt, derivatives, and contracts) outstanding as of 12/31/13 are “Grandfathered obligations” that are exempt.

  2. On gross proceeds from the sale of instruments that produce withholdable payments begins 1/1/2017.

  3. On “Foreign Passthru Payments” begins 1/1/2017- the final regulations have reserved with respect to the definition of what constitutes these payments.

  4. Obligations that produce dividend equivalent payments are grandfathered if they are executed before the date that is six months after being identified as such type of obligation by the Treasury.


  1. Preexisting accounts (those maintained by an FFI prior to 1/1/2014) other than Prima Facie FFIs- withholding agents and Participating FFIs have until 12/31/2015 to document these accounts.

  2. Preexisting accounts below a threshold (individuals $50,000; entities $250,000) are exempt from review.

  3. Documentation will be valid indefinitely absent a “change in circumstances.”

  4. Certain entities are exempted (including certain retirement plans).


  1. On withholdable income payments (Form 1042-S) begins 3/15/2015.

  2. U.S. Accounts and Owners-3/31/2015.

  3. On gross proceeds-3/15/2018.

These highlights are meant to provide only basic information.  If you are interested in learning more about the regulations, Grassi & Co.’s Financial Services Tax professionals are available to assist you in answering any questions as to the applicability of these rules to specific entities and situations.

For more information on this or other related topics, please contact Eliot Goldberg (212-223-1704; egoldberg@grassicpas.com) or Robert S. Schachter, Tax Partner-In-Charge–Financial Services (212-223-1724; rschachter@grassicpas.com). 

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