Positive Changes under FATCA for withholding foreign partnerships and trusts

Updates to Chapter 3 Rules for withholding foreign partnerships and trusts under FATCA.

Jeffrey S. Freeman, J.D., LL.M

The IRS required all withholding foreign partnerships (WFPs) and withholding foreign trusts (WFTs) to renew their status with the IRS by the end of August 2014. This is the first of several changes that effect WFPs and WFTs under the commonly referred to FATCA “Chapter 3” rules.

Existing FATCA Rules

When a US person makes a payment to a foreign person of US source interest, dividends, or other income (excluding capital gains) they must withhold a 30% tax. Exemptions and reduced rates exist, but would require the beneficial owner to document on the appropriate Form W-8 their right to the exemption. Payments must be reported to the IRS on Form 1042-S even is the payment is exempt from withholding.

Changes under new procedures

Change is good and the changes that WFP/WFT are seeing give them more requirements that line up with those of qualified intermediaries. Logical and reducing procedural paperwork, the six changes listed below are positive changes for WFP and WFT alike.

– Withholding Responsibilities: The WFP or WFT is responsible for primary FATCA withholdings just as it was responsible for primary withholding responsibilities pre-FATCA.

Account-level reporting: WFP or WFT that are not US, US-owned, or acting through a US branch will no longer need to perform payment-level 1099 reporting or backup withholding on US partners/beneficiaries accounts.

Assuming Primary Withholding Responsibilities: For a partner or beneficiary that is a foreign partnership or trust the WFP or WFT can now assume primary withholding responsibilities. Previously this was restricted and the WFP/WFT had to pass withholding tax documentation for “indirect” partners/beneficiaries to its withholding agent. Two limited exceptions existed, but now WFP/WFT have this ability.

Use “Know Your Customer” Rules: WFP/WFT were previously restricted from using the “know your customer” (KYC) documentation and were only allowed to use IRS forms to document their partners or beneficiaries. This restriction has been lifted, for WFP/WFT located in a jurisdiction approved by the IRS to utilize KYC documentation to establish the status of its partners/beneficiaries in the same manner that a “qualified intermediary” (QI) is able to do so.

No More Audits: Read that again, WFPs and WFT will not have to undergo periodic external audits to prove compliance to their agreements. They will now have to adopt programs similar to QI where they develop internal foreign compliance programs. There is a catch, these compliance programs will still have the requirement in them for periodic external review.

Renew: Hence the reason for all WFP/WFT renewing their status with the IRS in August 2014, all WFP/WFT agreements will expire periodically and will need to be renewed to maintain their status.

About Freeman Tax Law

Freeman Tax Law (FTL) is a boutique law firm consisting of a multi-disciplinary team of tax professionals including tax attorneys, CPAs and a professional staff that have vast experience with foreign tax compliance and regulatory matters for financial institutions. FTL consults with both FFIs and USFIs with regard to Foreign Account Tax Compliance Act (FATCA) and related regulatory matters and assists them developing procedures on how to comply with these laws.

Compliance with FATCA needs a distinctive approach. A simple change of processes or leveraging new IT infrastructure may not suffice. FTL has partnered with Newgen Software (Newgen) to offer a unique end to end solution for our clients to offer a comprehensive compliance strategy. Newgen buildings on two decades of domain expertise in Banking and Compliance along with its market leading BPM, Case Management, ECM and CCM applications. Utilizing Newgen’s FATCA Compliance Software along with the creation of proper procedures and training offered by FTL of the financial organization staff, allows for the creation of systematized approach to negotiating the finer aspects of FATCA.

With FATCA, the stakes of non-compliance are simply too high. Contact us today for a consultation to discuss how to further integrate your technology with the legal requirements of FATCA.

Freeman Tax Law

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