FATCA Update 2 - Withholding tax on US source income

IRS Extends Deadlines for FATCA Compliance for Foreign Financial and Non-Financial Institutions

August 8, 2011- The Internal Revenue Service issued Revised Notice 2011-53 (the "Notice"), which sets forth a timeline for the implementation of certain provisions of the Foreign Account Tax Compliance Act ("FATCA"). While FATCA technically is effective from January 1, 2013, the Notice extends various deadlines for withholding, reporting and other obligations under FATCA as described below.

The new law targets noncompliance by U.S. taxpayers through foreign accounts. Under the notice's phased implementation approach, foreign financial institutions (FFIs), Non-Financial Foreign Entities (NFFEs) and U.S. withholding agents are given adequate time to build the systems needed to fully comply with FATCA.

FATCA requires FFIs to report to the IRS information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. In order to avoid being withheld upon under FATCA, a participating FFI will have to enter into an agreement with the IRS to:

  • Identify U.S. accounts;
  • Report certain information to the IRS regarding U.S. accounts, and
  • Withhold a 30-percent tax on certain payments to non-participating FFIs and account holders who are unwilling to provide the required information.


FFIs that do not enter into an agreement with the IRS will be subject to withholding on certain types of payments, including U.S. source interest and dividends, gross proceeds from the disposition of U.S. securities, and passthru payments.

The notice phases in the implementation of FATCA in the following manner:

  • An FFI must enter an agreement with the IRS by June 30, 2013, to ensure that it will be identified as a participating FFI in sufficient time to allow withholding agents to refrain from withholding beginning on January 1, 2014.
  • Withholding on U.S. source dividends and interest paid to non-participating FFIs will begin on January 1, 2014, and withholding on all withholdable payments (including on gross proceeds) will be fully phased in on January 1, 2015.
  • Due diligence requirements for identifying new and pre-existing U.S. accounts (including certain high-risk accounts) will begin in 2014.
  • For purposes of the Notice, high risk accounts include private banking accounts with a balance that is equal to or greater than $500,000.
  • Due diligence for accounts less than $500,000 will have to be completed by December 31, 2014
  • Withholdable payments of fixed or determinable annual or periodic income (FDAP) to NFFEs classified as recalcitrant account holders will be phased-in beginning from January 1, 2014, and expanded to include withholdable payments of FDAP and gross proceeds from January 1, 2015.


What needs to be reported by a FFI to the IRS?

The Notice provides that the first deadline for reporting information under FATCA is September 30, 2014.

As a general matter, by this first reporting deadline, a participating FFI will be required to report to the IRS as a U.S. account, any account for which the FFI has received an IRS Form W-9. With respect to any such U.S. accounts, the participating FFI will be required to report the following information:

1. The name, address and U.S. TIN of each (i) "specified United States person" that is an account holder or (ii) if the account holder is a United States owned foreign entity, the name, address and U.S. TIN of each substantial United States owner of such entity.

2. The account balance as of December 31, 2013, or, if the account was closed after the effective date of the FFI's Agreement, the balance of such account immediately before closure.

3. The account number.

A participating FFI also will be required to report to the IRS by the September 30, 2014 deadline certain information regarding accounts held by recalcitrant account holders.