Part III. Administrative, Procedural, and Miscellaneous

Extension of FATCA Transitional Rules for Gross Proceeds, Foreign Passthru Payments, Limited Branches and Limited FFIs, and Sponsored Entities; Modification to Grandfathered Obligation Rule with Respect to Collateral; and Reporting of 2014 Information under a Model 1 IGA

Notice 2015–66

I. PURPOSE

This notice announces that the Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) intend to amend the regulations under chapter 4 (sections 1471–1474) to extend the period of time that certain transitional rules will apply. Specifically, the amendments will extend: (1) the date for when withholding on gross proceeds and foreign passthru 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. In addition, in order to reduce compliance burdens on withholding agents that hold collateral as a secured party, this notice announces that Treasury and the IRS intend to amend the regulations under chapter 4 to modify the rules for grandfathered obligations with respect to collateral.

The transitional rules provided in this notice are intended to facilitate an orderly transition for withholding agents and FFIs regarding Foreign Account Tax Compliance Act (FATCA) compliance and respond to comments regarding how the phase-out of transitional rules may affect information reporting and withholding systems. In light of these comments and the successful engagement of Treasury and partner jurisdictions to conclude intergovernmental agreements to implement FATCA (IGAs), this notice provides 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.

Finally, this notice also provides information on the exchange of information by Model 1 IGA jurisdictions with respect to 2014.

II. BACKGROUND

A. The Final and Temporary Chapter 4 Regulations

1. Withholdable Payments

On March 18, 2010, the Hiring Incentives to Restore Employment Act of 2010, Pub. L. 111–147 (H.R. 2847), added chapter 4 to Subtitle A of the Internal Revenue Code (sections 1471–1474 (commonly known as “FATCA”)). Chapter 4 generally requires withholding agents to withhold 30 percent on certain payments to a foreign financial institution (FFI) unless the FFI has entered into an agreement (FFI agreement) to obtain status as a participating FFI and to, among other things, report certain information with respect to U.S. accounts. On January 17, 2013, Treasury and the IRS published final regulations under chapter 4 (T.D. 9610, 78 Fed. Reg. 5873). On February 20, 2014, Treasury and the IRS published temporary regulations under chapter 4 (T.D. 9657, 79 Fed. Reg. 12,812) that clarify and modify certain provisions of the final regulations (the temporary and final regulations, together, the chapter 4 regulations).

The amounts subject to withholding under chapter 4 are “withholdable payments.” Under § 1.1473–1(a), the term “withholdable payment” generally means any payment of U.S. source fixed or determinable annual or periodical (FDAP) income, and for sales or other dispositions occurring after December 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. Withholding on withholdable payments of U.S. source FDAP income generally began on July 1, 2014. The transitional rule that provides for gross proceeds withholding after December 31, 2016, allows FFIs and withholding agents to implement

FATCA in stages to minimize burdens consistent with ensuring that the information reporting objectives of FATCA are met and maintained.

Several transitional rules exist with respect to withholding under chapter 4 on withholdable payments of U.S. source FDAP income.

Under a transitional rule in § 1.1473– 1(a)(4)(vi), a payment made on or before December 31, 2016, with respect to an “offshore obligation” is not treated as a withholdable payment if the payment is made by a person that is not acting as an intermediary (including a qualified securities lender and excluding any insurance broker with respect to premiums), withholding foreign partnership, or withholding foreign trust with respect to the payment.

Under § 1.1471–2(b), a withholdable payment does not include a payment made under a “grandfathered obligation.” A grandfathered obligation includes any obligation, as defined in § 1.1471–2(b)(2)(ii), outstanding on July 1, 2014. Under § 1.1471–2(b)(2)(i)(A)( 3 ), a grandfathered obligation also includes an agreement requiring a secured party to make a payment with respect to collateral posted to secure a grandfathered obligation. If collateral secures both grandfathered and non-grandfathered obligations, the collateral posted to secure the grandfathered obligations must be determined by allocating, pro rata by value, the collateral to all outstanding obligations secured by the collateral (the pro rata rule).

Furthermore, under a transitional rule in § 1.1473–1(a)(4)(vii), a payment made on or before December 31, 2016, by a secured party, or to a secured party other than a nonparticipating FFI, with respect to collateral securing one or more transactions under a collateral arrangement is not treated as a withholdable payment, provided that only a commercially reasonable amount of collateral is held by the secured party (or by a third party for the benefit of the secured party) as part of the collateral arrangement.

2. Foreign Passthru Payments

Chapter 4 provides that, in order for an FFI to obtain the status of a participating

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FFI, it must agree to all the requirements of being a participating FFI, including withholding on passthru payments made to recalcitrant account holders and nonparticipating FFIs. See section 1471(b)(1)(D)(i). A passthru payment is defined in the regulations to mean a withholdable payment and any foreign passthru payment. The chapter 4 regulations reserve on the definition of the term “foreign passthru payment.” See § 1.1471–5(h)(2). A transitional rule in § 1.1471–4(b)(4) provides that a participating FFI is not required to withhold tax on a foreign passthru payment made to a recalcitrant account holder or a nonparticipating FFI before the later of January 1, 2017, or the date of publication in the Federal Register of final regulations defining foreign passthru payment.

3. Limited Branches and Limited FFIs

In order for an FFI that is a member of an expanded affiliated group (EAG) to obtain the status of a participating FFI or registered deemed-compliant FFI, § 1.1471– 4(a)(4) requires that each FFI that is a member of the EAG have the chapter 4 status of a participating FFI, deemedcompliant FFI, or exempt beneficial owner. The final regulations include two transitional rules to provide limited relief to FFIs with branches or affiliates that are located in jurisdictions whose laws prohibit such branches or affiliates from complying with an FFI agreement. These transitional rules are intended to provide jurisdictions additional time to enter into an IGA with the United States or to modify their domestic laws to allow FFIs not covered by an IGA to be able to comply with the terms of the FFI agreement.

Under the transitional rule for a “limited branch,” an FFI that otherwise satisfies the requirements for participating FFI status can become a participating FFI, notwithstanding that one or more branches cannot satisfy the requirements of a participating FFI, provided that all noncompliant branches satisfy the conditions for limited branch status and the FFI meets the other requirements described in § 1.1471–4(e)(2)(i). Under the transitional rule for a “limited FFI,” an FFI can become either a participating FFI or a registered deemed-compliant FFI, notwithstanding that one or more other FFIs

in its EAG cannot comply with all of the requirements of a participating FFI, provided that any such noncompliant FFIs meet the definition of a “limited FFI” under § 1.1471–4(e)(3). Under §§ 1.1471– 4(e)(2)(v) and (3)(iv), limited branch and limited FFI statuses will be unavailable after December 31, 2015.

4. Sponsored Entity GIINs

Under section 1471, a withholding agent is not generally required to withhold on payments to an FFI that is deemed to comply with the requirements of section 1471(b) (a deemed-compliant FFI). The chapter 4 regulations provide that a registered deemed-compliant FFI includes an FFI that satisfies the requirements of § 1.1471–5(f)(1)(i)(F)( 1 ) or ( 2 ) to qualify as either a sponsored investment entity or a sponsored controlled foreign corporation (a sponsored registered deemedcompliant FFI). A sponsoring entity of a sponsored registered deemed-compliant FFI must agree to perform, on behalf of the FFI, all due diligence, withholding, reporting, and other requirements that the FFI would have been required to perform if it were a participating FFI. A sponsoring entity must register with the IRS as a sponsoring entity and must also register the sponsored registered deemedcompliant FFI by the later of January 1, 2016, or the date that the FFI identifies itself as qualifying as a registered deemed-compliant FFI under § 1.1471– 5(f)(1)(i)(F)( 1 ) or ( 2 ). The chapter 4 regulations include a transitional due diligence rule providing that for payments prior to January 1, 2016, a withholding agent may rely on a withholding certificate provided by a sponsored registered deemed-compliant FFI that includes only the global intermediary identification number (GIIN) of the FFI’s sponsoring entity. See § 1.1471–3(e)(3)(iv)(B) (crossreferenced in § 1.1471–3(d)(4)(i)) for additional due diligence requirements that apply in such cases.

Under section IV(B)(3)(c) of Annex II of the Model 1 IGA, if the sponsoring entity of a sponsored investment entity or sponsored controlled foreign corporation identifies any U.S. reportable accounts, the sponsoring entity must register the sponsored entity with the IRS on or before

the later of December 31, 2015, and the date that is 90 days after such account is first identified. Under section IV(B)(3)(c) of Annex II of the Model 2 IGA, the sponsoring entity must register the sponsored entity prior to December 31, 2015.

Under section 1472, a withholding agent generally is required to withhold on payments to a nonfinancial foreign entity (NFFE) unless the NFFE provides the withholding agent with certain information identifying the NFFE’s substantial U.S. owners (or a certification that the NFFE does not have any such owners), and the withholding agent reports such information to the IRS. The final regulations except withholding agents from withholding or reporting under section 1472 with respect to payments beneficially owned by entities qualifying as excepted NFFEs. The temporary regulations issued under chapter 4 add direct reporting NFFEs as a class of excepted NFFEs. A direct reporting NFFE is an NFFE that elects to report information about its substantial U.S. owners directly to the IRS (rather than to its withholding agent) and that meets the requirements of § 1.1472– 1(c)(3). A direct reporting NFFE must register with the IRS and obtain a GIIN.

A direct reporting NFFE may elect to be treated as a sponsored direct reporting NFFE if another entity, other than a nonparticipating FFI, agrees to act as its sponsoring entity for performing all of the due diligence, reporting, and other requirements that the NFFE would have been required to perform as a direct reporting NFFE. A sponsoring entity of a sponsored direct reporting NFFE must register with the IRS as a sponsoring entity and must register the NFFE. The temporary regulations include a transitional due diligence rule for payments prior to January 1, 2016, that allows a withholding agent to rely on a withholding certificate provided by a sponsored direct reporting NFFE that includes only the GIIN of the NFFE’s sponsoring entity. See § 1.1471– 3(e)(3)(iv)(B) for additional due diligence requirements that apply in such cases.

B. IGAs

During 2012, Treasury released the Model 1 IGA and the Model 2 IGA to facilitate the implementation of FATCA and to address foreign legal impediments that otherwise would limit an FFI’s ability

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to comply with FATCA. On April 2, 2014, Treasury and the IRS published Announcement 2014–17 (2014–18 I.R.B. 1001), providing that jurisdictions treated as having an IGA in effect would include jurisdictions that, before July 1, 2014, reached agreements in substance with the United States on the terms of an IGA and consented to be included on the list of such jurisdictions, in addition to jurisdictions that had already signed IGAs. An FFI that is resident in, or organized under the laws of, a jurisdiction that is treated as having an IGA in effect is permitted to register on the FATCA registration website and to certify to a withholding agent its status as an FFI covered by an IGA. On December 1, 2014, Treasury and the IRS published Announcement 2014–38 (2014–51 I.R.B. 951), providing that certain jurisdictions that reached an agreement in substance after June 30, 2014, and before November 30, 2014, also would be treated as having an IGA in effect. Furthermore, Announcement 2014–38 provided that jurisdictions that are treated as if they have an IGA in effect would retain such status, provided that the jurisdiction continues to demonstrate firm resolve to sign the IGA as soon as possible.

As of the publication of this notice, 112 jurisdictions are treated as having an IGA in effect. A complete list can be found on Treasury’s website, available at http:// www.treasury.gov/resource-center/tax- policy/treaties/Pages/FATCA.aspx .

1. Treatment of Limited Branches and Limited FFIs under IGAs