Two Notable FATCA Transition Rules Set to Expire January 1, 2017

The Foreign Account Tax Compliance Act (FATCA) provided several transition rules that are set to expire on January 1, 2017, one related to limited branches and limited foreign financial institutions (FFIs), and one related to the deadline for sponsoring entities to register their sponsored entities with the IRS.

Limited Branches and Limited FFIs

FATCA included a transition rule to temporarily ease compliance burdens for certain FFI groups with members otherwise unable to comply with FATCA that will no longer be available beginning January 1, 2017. Under Treas. Reg. § 1.1471-4(a)(4), an FFI that is a member of an expanded affiliated group (EAG) can become a participating FFI or a registered deemed-compliant FFI, but only if all FFIs in its EAG are participating FFIs, registered deemed-compliant FFIs, or exempt beneficial owners.

However, certain FFIs in an EAG may be located in a country that prevents them from becoming participating FFIs or registered deemed-compliant FFIs. This can arise when the country does not have an intergovernmental agreement (IGA) with the United States to implement FATCA, and when domestic law in that country prevents FFIs located within its borders from complying with FATCA (e.g., preventing FFIs from entering into FFI agreements with the IRS).

The IRS included a transition rule for so-called “limited branches” and “limited FFIs” that eased the often harsh consequences of this rule by providing temporary relief for EAGs that included FFIs otherwise prevented from complying with FATCA, but the transition rule was only intended to ease the burden while the countries either negotiated IGAs with the United States or modified its local laws to permit compliance with FATCA, or while the EAGs decided whether to stop operating in that country. While the IRS announced in Notice 2015-66 its intent to extend the transition rule originally set to expire December 31, 2015 through December 31, 2016, no additional extension has been announced.  Accordingly, this transition rule will expire on January 1, 2017.

EAGs with limited branches or limited FFIs doing business in countries with local laws that prevent compliance with FATCA may be faced with a choice. If the EAG has FFIs located in non-IGA jurisdictions, the EAG will either need to stop doing business in those countries or the FFIs within the EAG that are resident in non-IGA jurisdictions will be treated as noncompliant with FATCA even if they could otherwise comply as participating FFIs.  FFIs resident in countries that have entered into IGAs will generally be unaffected by a “related entity” (generally, an entity within the same EAG) or branch that is prevented from complying with FATCA by local law, so long as each other FFI in the EAG treats the related entity as a nonparticipating financial institution, among other requirements.

This provision is contained in Article IV, Section 5 of all iterations of Treasury’s model IGA (e.g., Reciprocal Model 1A with a preexisting tax agreement, Nonreciprocal Model 1B and Model 2 with no preexisting tax agreements).  The primary effect of this IGA provision is that only the nonparticipating FFIs become subject to FATCA withholding while the EAG as a whole can remain untainted.

Sponsored Entity Registration

Another transition rule set to expire is the ability of sponsored entities to use the sponsoring entity’s global intermediary identification number (GIIN) on Forms W-8. Under FATCA, withholding is not required on payments to certain entities that are “sponsored” by entities that are properly registered with the IRS, under the theory that all FATCA requirements imposed on the sponsored entity (due diligence, reporting, withholding, etc.) will be completed by the sponsoring entity.  Under the transition rule, sponsored entities have been able to use the sponsoring entity’s GIIN on forms such as the W-8BEN-E, but beginning on January 1, 2017, certain sponsored entities will need to include their own GIIN.  This means that the sponsoring entity must register the sponsored entity with the IRS before that date.  If a sponsored entity required to include its own GIIN after December 31, 2016, on a withholding certificate furnishes a form containing only the sponsoring entity’s GIIN, a withholding agent may not rely on that withholding certificate under FATCA’s due diligence requirements.  In such instance, the withholding agent will be required to withhold 30% of any payment made to the sponsored entity.  Originally, sponsored entities were required to be registered with the IRS by December 31, 2015, but the deadline was extended by Notice 2015-66.  The IRS has not announced any additional extension and the FATCA registration portal began allowing sponsoring entities to register sponsored entities earlier this year.