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Foreign Persons Investing in the United

States (Inbound Investments)

Practising Law Institute

Basics of International Taxation

July 22, 2015

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These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice.

2

Introduction

Marc Ganz

◦ Partner,

◦ International Tax Services (New York)

◦ 212 773 2229

Jeremy Naylor

◦ Partner

◦ Cooley, LLP (New York)

◦ 212 479 6580

3

Agenda

Inbound Taxation – Overview

Effectively Connected Income (ECI) and the Use of

Blockers

US Taxation of Capital Gains

US Taxation of Interest

◦ Earnings Stripping Rules

◦ Conduit Rules

U.S. Foreign Investment in Real Property Tax Act

U.S. Withholding and Reporting and Foreign Account

Tax Compliance Act (FATCA)

4

Inbound Taxation–Overview

US taxation of non–US persons

◦ Taxable activity or presence in the United

States

Income effectively connected with a US trade or

business (ECI)

Branch profits tax, branch–level interest tax

FIRPTA

◦ Certain types of “passive” US–source income

Fixed or determinable, annual or periodical income

(FDAP)

5

Inbound Taxation–Overview

FDAP

◦ Interest

But not bank deposit interest or portfolio interest

◦ Dividends

◦ Rents

◦ Royalties (not listed in statute)

◦ Generally not capital gains

6

Taxable Presence–Taxation of Non-US persons

Taxation differs depending on type of income earned

◦ Non-business (passive) income

30 percent tax on gross amount of certain US-source income

Collected through withholding at source

◦ US trade/business income

Net basis tax on ECI (at the graduated rates)

Application of US branch taxes

Tax return filing requirements

◦ Tax treaties may alter treatment of both types of income

7

ECI and the Use of Blockers

What is a Blocker Corporation?

◦ A corporation that is placed between the foreign investors and the source of ECI to

prevent pass through of ECI and the associated tax return filing obligation.

◦ Blocker corporations change the character of the underlying income or assets, or both.

The U.S. tax consequences of holding an investment through a blocker

corporation depend on the chosen structure.

Advantages to Blockers:

◦ Convert ECI into “FDAP-type” income which does not necessitate a direct US tax or

reporting obligation from the foreign investor;

◦ Shield foreign entities from US tax exposure; and,

◦ Help manage earnings more effectively.

Disadvantage: The Blocker will be subject to a 35% US federal tax rate and

possible state income tax.

8

ECI and the Use of Blockers

Foreign Investor

► Foreign Investor:

► 35% tax on effectively connected

income

► 30% tax on Branch Taxes (subject to

treaty reduction)

► Disposition – Wind-up of US

business should not be subject to US

tax

► Foreign Investor files US income tax

return

► Foreign Investor:

► 30% tax on interest, dividends and royalties (subject to treaty reduction)

► Disposition – sale of shares not subject to US tax unless US Corp is a US Real Property Holding Company

► Generally not necessary to file a US federal income tax return

► US Corp:

► 35% tax on net income

► US Corp files a US income tax return

Foreign Investor

USTB

US Corp

Interest Interest

The use of a blocker does not necessarily reduce the amount of US tax levied on ECI, but it

does limit the Foreign Investor’s liability and US filing obligations.

USTB

9

ECI and the Use of Blockers – US Blocker Corp

US Blocker Corp is subject to tax on a net basis at

graduated rates on its income from the USTB.

To the extent US Blocker Corp distributes dividends or

makes interest or royalty payments to Foreign Investor,

the payments are subject to a 30% withholding tax

(subject to reduction by treaty).

Pros

◦ Foreign Investor does not have to report ECI or file a US

tax return.

◦ Foreign Investors can limit the amount of income subject to

US tax by allocating limited risks and activities to Blocker

Corp.

◦ Leverage can reduce the US tax base as allowed by the

earnings stripping and thin capitalization rules.

◦ Foreign Investor not subject to US tax on disposition of

stock provided Blocker Corporation is not a US Real

Property Holding Company

Cons

◦ Blocker Corp is subject to US tax on a net basis at a 35%

rate and must meet US compliance obligations.

US Blocker Corp

Foreign

Investor

USTB

Loan

10

ECI and the Use of Blockers – Foreign Blocker

Corp Foreign Blocker Corp is subject to tax on a net basis at

graduated rates on its ECI.

Foreign Blocker Corp is subject to branch taxes at a

rate of 30% (subject to reduction by treaty) on deemed

distributions and deemed interest payments from

USTB.

Pros

◦ Foreign Investor does not have to report ECI or file a US

tax return.

◦ Foreign Blocker Corp can limit the amount of income

subject to US tax by allocating limited risks and activities to

the USTB.

◦ Leverage can reduce the US tax base as allowed by the

earnings stripping and thin capitalization rules.

◦ Foreign Investor not subject to US tax on disposition of

Foreign Blocker Corp stock.

Cons

◦ Foreign Blocker Corp is subject to US tax on a net basis at

a 35% rate and must meet US compliance obligations.

Foreign Blocker

Corp

Foreign

Investor

USTB

Loan

11

ECI and the Use of Blockers - Partnership

This structure is often used when FP acquires a US Target with controlled foreign corporations (CFCs). In order to rationalize the structure, FP contributes its US operating companies to New FHC, and US Target (ECI Blocker) contributes its CFCs to New FHC.

Special allocation to New FHC partners results in ECI from the US Opcos being allocated to US Target (ECI Blocker). Non-ECI from the CFCs is allocated to FP.

US Target (ECI Blocker) can make its investment in New FHC in exchange for a preferred interest, which will effectively freeze US Target ‘s (ECI Blocker’s) interest in any future appreciation of the US and foreign operations.

◦ US Target should be eligible for CFCs’ deemed paid credits provided it constructively owns at least 10% of the CFCs’ voting stock.

FP

US Target

(ECI Blocker)

ECI Income

Non-ECI

Income

US

Operations

Foreign

Operations

New

FHC

12

PE

Fund

ECI and the Use of Blockers – Private

Equity Fund “Downstream” Blocker

Private equity fund has US taxable investors and non-US investors and wants to invest into tax-transparent portfolio company (such as an LLC).

Non-US investors want to avoid incurring ECI

US investors want to maintain flow-through tax treatment.

Fund bifurcates investment – partially through blocker corporation.

◦ ECI converted into dividend income; Special allocations at Fund level

Basic structure shown. Additional features include:

◦ Structuring General Partner carry “pre-tax”

◦ Requirement to exit via sale of blocker shares – maximize returns to non-US investors

◦ Internal leverage to reduce tax at blocker level (subject to earnings stripping and thin capitalization rules)

◦ Separate blocker for each LLC investment – maximize tax efficiency on exit – can be complicated to implement depending on fund economics

Non-US

Investors

US Investors

(including GP)

US Investors’

capital

US

Operations

Portfolio

Company (LLC)

(ECI Blocker)

Non-US

Investors’

capital

13

AIV

ECI and the Use of Blockers –

Private Equity AIV Another common structure for private equity

– alternative investment vehicles (AIVs)

Non-ECI generating investments made through “main” fund

ECI investments made through AIV

Blocker interposed between Non-US investors and AIV (typically, but not always, onshore)

In some respects simpler than traditional “downstream” blocker structure

◦ GP’s carried interest already structurally below the blocker

◦ No need to deal with special allocations and whether substantiality test is met

Some additional risks, however

◦ Aggregation risk with main fund

◦ More complicated to exit via sale of blocker shares

◦ Separate blockers for each deal to avoid dividend withholding tax on exits

Non-US

Investors

US Investors

(including GP)

Portfolio

Company (LLC)

(ECI Blocker)

Main

Fund

Portfolio

Companies

(C Corps)

All Investors

(including GP)

14

Parallel

Fund

ECI and the Use of Blockers –

Private Equity Parallel Fund

Finally, PE fund sponsor could consider a

parallel fund for Non-US investors

Parallel fund invests “in parallel” with main

fund directly into C Corp investments, but

through blockers into LLCs

Main fund invests directly in everything

Essentially dowstream blocker structure

done through separate fund vehicle

◦ No § 875 tax filing issue for Non-US

investors

◦ Still need additional structuring for GP

to tax carried interest pre-tax for

blocked investments

Non-US

Investors

Portfolio

Company (LLC)

(ECI Blocker)

Main

Fund

Portfolio

Companies

(C Corps)

US Investors

15

Taxation of US- Source Capital Gains

US Domestic Law:

◦ US-source capital gain that is not effectively connected with a trade or business in the US

is exempt from taxation in the US, unless it is related to the disposition of a US real

property interest.

◦ Capital Gain is subject to US net basis income tax if it is effectively connected with

taxpayer’s US trade or business (US T/B).

Gain is considered effectively connected only if the asset is used in or held for use in the conduct

of a US T/B or the activities of a US trade were a material factor in the realization of the gain.

US Income Tax Treaties:

◦ The 2006 US Model Treaty allocates taxing rights on capital gains to the source state if

the gains are attributable to the sale of: (i) real property; (ii) moveable property that is

part of a PE; (iii) ships or aircraft used in international traffic; and, (iv) containers unless

they are used solely for transport between places in the state of residency.

◦ Otherwise, taxing jurisdiction is ceded to the state of residency.

16

Taxation of US- Source Capital Gains

Example

Sale of: Taxed by:

US Opco shares Foreign Parent Jurisdiction

Foreign Opco shares Unclear, but not US

US HoldCo shares US

US Real Property US

USTB (or PE) Assets US

Foreign

Parent

US

Opco Foreign

Opco US

HoldCo

US Real

Property

USTB

Assets

US Real

Property

17

Taxation of US- Source Interest FDAP income is defined broadly and generally includes all US-source

income that is not ECI

◦ FDAP includes passive investment income — interest, dividends, rents, royalties, etc.

◦ FDAP does not include capital gain on the sale of real or personal property.

◦ FDAP interest excludes portfolio interest and interest on deposits in US banks.

Requirements for qualification as portfolio interest – registered form; not 10% shareholder; not

contingent interest; bank not lender

Nonresident individuals and corporations are taxed at a 30% flat (or lower

treaty) rate on the gross amount of FDAP income that is NOT effectively

connected with USTB.

Tax is paid through withholding at source by the payor (Withholding

Agent) who remits the withheld tax to the IRS. § § 881 and 1441.

18

Compliance for US - Source Interest

Nonresident corporations receiving FDAP income may be required

to file the following forms to the extent that they qualify for treaty

benefits:

◦ Form SS-4 Application for Employer Identification Number

◦ Form W-8BEN-E Certificate of Foreign Status of Beneficial Owner for United

States Tax Withholding and Reporting (Entities)

Withholding Agents are required to file the following forms:

◦ Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons

,must be filed by the Withholding Agent by March 15th following the calendar

year in which the income subject to reporting was paid, unless an extension of

time to file is obtained.

◦ Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, must be

filed by the Withholding Agent for every foreign payee with respect to which it

paid FDAP income. On each Form 1042-S, the withholding agent must indicate

the amount of each category of income paid to the foreign payee (e.g., dividends,

interest, etc.) and the amount of tax withheld.

19

Section 163(j)–policy Debt capitalization

Equity

capitalization

FP

US

Interest

Loan

FP

US

$ Dividend

► E&P stripped out of US Sub as

deductible interest

► Interest may not be subject to

withholding tax under treaty

► Overall US tax cost is reduced

► Dividend is non–deductible

► Dividend taxable to FP under §1441 (but

may be reduced or eliminated by treaty)

20

Section 163(j)–overview Limits the deductibility of disqualified interest which is:

◦ Interest paid to a related foreign person; or,

◦ Interest paid to an unrelated person on debt guaranteed by a related foreign person.

On interest paid by a US corporation, partnership or branch if the interest income is not subject to US tax or is subject to reduced tax.

Applies if:

◦ Debtor’s debt–to–equity ratio > 1.5:1; and,

◦ Debtor’s net interest expense > 50% of adjusted taxable income (Excess Interest Expense).

The interest expense deduction is deferred by the lesser of the Excess Interest Expense or the disqualified interest.

Excess limitation can be carried forward three years.

21

1991 Proposed Regulations

Contain broad anti–avoidance rules.

Interest income and expense

◦ Determined under §§61 and 163

◦ Nonfunctional currency rules of §988 applicable

◦ Reserved on Interest equivalents

ATI increased by decrease in accounts

receivables and increase in accounts payable.

Contain fixed–stock write–off election.

Definition of affiliated group.

22

To follow or not to follow … the

proposed regs? Not an affiliated group under §1504(a) Affiliated group under proposed regulations

ForCo

Sub 2

US

Sub1

US

Sub2

US

Sub1

US

ForCo

F is not ‘includible corporation’

under §1504(b)(3) Sub1 is seen as indirectly owning 100%

of Sub2, and vice versa, under §318(a)

Interest Interest

23

Section 163(j) Planning Strategies

Substitute interest with other expenses

Increase ATI

Minimize disqualified interest

24

The Conduit Rules: A basic example

Foreign Parent is in a non–US treaty jurisdiction.

FinCo is in a treaty jurisdiction with 0% WHT rates with the US

The result, based on form alone, is 0% WHT on the interest payments from USCo to FinCo

Conduit case law recasts the transaction based on Substance over Form and Business Purpose Doctrines

◦ Case law looks to see if FinCo has “dominion and control” over the funds

Foreign

parent

USCo FinCo

Loan

Loan

25

The Conduit Regulations

Treasury issued the Conduit Regulations under Treas. Reg. §1.881–3 in 1995.

There are four requirements for transactions to fall afoul of the conduit

rules.

1) Is the transaction a “financing arrangement” as defined in the regulations? (financing

arrangement has a broad definition).

2) If yes to 1, does the participation of an intermediate entity reduce the tax imposed

by §881? (30% withholding tax on FDAP).

3) If yes to 2, is the participation of the intermediate entity pursuant to a tax

avoidance plan?

4) If yes to 3, District Director may ignore the existence of the intermediate entity

(or entities) for purposes of §881, if the intermediate entity is:

Related to other parties to the transaction, or

Would not have participated in the arrangement on substantially the same terms but

for the fact that the financing entity engaged in the transaction with the intermediate

entity.

If the arrangement fails the tests set forth above, the loan is recast as being

between the financed entity and the financing entity.

26

FIRPTA – Foreign Investment in US Real Property Tax Act

§897

Congress enacted the Foreign Investment in Real Property Tax Act of 1980

(“FIRPTA”) to prevent abuse of certain rules on taxation of effectively

connected income (“ECI”) of a foreign person.

Prior to enactment it was possible for a foreign investor to avoid US tax on

both operating income and gains on sale of a US real property interest

(“USRPI”), creating a perceived unfair advantage over US investors.

Impact of FIRPTA

◦ Subjects foreign investors to US tax on disposition of a USRPI

The gain is treated as ECI under §897(a).

Such ECI gain, net of allowable deductions allocated to such ECI, is

taxed at graduated rates of regular income tax (§§871(b) and

882(a)(1)).

Enforcement is done in two ways:

Withholding regime.

Reporting requirements.

27

FIRPTA - USRPI

The definition of a USRPI is broad. It includes:

Real Property - Treasury Regulation §1.897–1(b)

◦ Land and unsevered natural products of the land

◦ Improvements to land

◦ Personal property associated with certain uses of real property

Interests other than an interest solely as a creditor (e.g., leasehold interests) - Treasury

Regulation §1.897–1(d)(2).

US Real Property Holding Companies (USRPHC) - Treasury Regulation §1.897–2.

◦ A Corporation is a USRPHC if on any determination date during the lesser of the holding period or 5

years ending on the date of disposition the FMV of its USRPI’s is greater than or equal to 50% of the

FMV of its: (i) USRPI; (ii) foreign real property interests; and, (iii) assets held for use in a trade or

business.

◦ Determination dates include: (i) the last day of the taxable year; and, (ii) any other date that could

trigger USRPHC status.

◦ Alternative - Book value testing.

Exceptions:

◦ Regularly traded interest in a USRPHC– §897(c)(3); and,

◦ Real Estate Investment Trusts (REIT).

28

FIRPTA - Non–recognition exchanges

Section 897(d) and (e) strictly limit the ability of USRPHCs to engage in non-recognition transactions.

The general intent of these rules and exceptions is to preserve the ability of the US government to impose at least one level of tax on USRPI gains.

However, non-recognition treatment is still available if:

◦ USRPI for USRPI requirement (suspended for most foreign to foreign exchanges);

◦ The USRPI received would be subject to tax on its disposition; and,

◦ The foreign transferor complies with the filing requirements of Treas. Reg. §1.897–5T(d)(1)(iii) as modified by Notice 89–57.

If the non-recognition provisions apply, the transferee receives a carryover basis in the property.

29

FIRPTA – Non-Recognition Transaction

Example Steps

► Both Distributing and Controlled are USRPHCs

1. Distributing distributes Controlled to FP under Section 355(a)

2. FP drops Controlled into foreign Newco (“FNewCo”) and waits 12 months

3. FP then distributes FNewCo to Public

Considerations

1. If Controlled is a USRPHC, under the rules of Reg. §1.897-6T(a), the nonrecognition provisions of Section 355(a) apply, and FP does not recognize gain on the deemed exchange of Distributing shares for Controlled shares in step 1. FP’s basis in Controlled is 40M; FP’s basis in Distributing after step 1 is 60M.

2. No gain recognized on the §351 contribution under Reg. §1.897-6T(b)(1)(iii); under that rule, FNewCo must not dispose of Controlled within 3 years of date of receipt. However, Notice 2006-46 reduces this holding period to 1 year. FP’s basis in FNewCo stock is 40M.

3. No gain recognition under Section 355(a); no FIRPTA implications so long as FNewCo holds Controlled for at least 1 year prior to this spin.

Timing

IRS ruling on step 1: 4-6 months; step 2 waiting period: 12 months. Total waiting period approximately 16-18 months

FP

Distributing (USRPHC)

Controlled

(USRPHC)

Public

1 FNewCo

2

Controlled

(USRPHC)

Controlled

stock

3

FNewCo

stock

Distributing

stock

v: $500M

b: $100M

Controlled

stock

v: $200M

30

FIRPTA – Non-Recognition Requirements Failed

FP

Distributing (USRPHC)

Controlled

Public

Transaction

1. Distributing is a USRPHC; Controlled is not a USRPHC.

Distributing distributes Controlled to FP under Section

355(a).

Considerations

► If Controlled is not a USRPHC, under Reg. §1.897-

6T(a)(4), FP is considered to have exchanged

Distributing stock with a FMV of 200M and an adjusted

basis of 40M for Controlled stock with a FMV of 200M.

► FP must recognize gain of 160M under Section 897(a) on

the distribution. FP takes a basis of 200M in the

Controlled stock. FP's basis in the Distributing stock is

reduced to 60M pursuant to Section 358(c).

► Unless an exception applies, or a withholding certificate

is obtained, Distributing is required to withhold 10% of

the amount realized by FP - $20M.

Strategies to make Controlled a USRPHC:

► Have Controlled sell non-USRP assets until USRPHC

determination fraction is > 50%.

► Have Distributing contribute additional USRPI assets to

Controlled.

1

Controlled

Distributing

stock

v: $500M

b: $100M

Controlled

stock

v: $200M

31

1. Operating income and gain from the sale of real estate is ECI to Foreign

Corporation. Foreign corporation must file US corporate income tax

return. State taxes may apply.

2. Foreign Corporation may be subject to an additional 30% US “branch

profits tax” (if not reduced by treaty and exceptions do not apply), which

may increase the 35% federal rate by about 19.5%, such that the total US

federal tax impact may be approximately 54.5%. (BPT might not apply to

certain gains on sale.)

3. No US withholding tax on dividends paid to foreign investors.

4. No US estate tax consequences for foreign individual investors.

5. No filing obligations for investors.

6. Gain on sale of foreign corporation shares not subject to US tax (although

it may be difficult to locate a purchaser of stock).

7. Any US taxes paid by the foreign corporation may be creditable in own

jurisdiction.

8. 897(i) election?

Foreign investors

Foreign

corporation

US real property

Investment Through Foreign Corporation

32

Funds With Domestic and Foreign Investors –

Use of REITs

Domestic

investors

US fund

REIT

Foreign

investors

US real property

Domestic investors

► Avoid expense associated with REIT.

► Any losses will flow through to domestic investors.

► Purchaser of interest can get basis step up in assets.

► No worries about violating REIT rules.

Foreign investors

► Need to pool investors.

► Fund must agree to manage business to comply with REIT rules.

► No US tax return filings for operating income.

Investments in REITs

► Dividend distributions of operating income and non-USRPI sales proceeds

are subject to 30% US withholding tax (subject to treaty reduction).

► Distributions attributable to USRPI gains are subject to FIRPTA. A 35%

withholding tax is imposed, and the investor has a filing obligation. If a REIT

is a USRPHC, its stock generally is a USRPI. These gains recognized by a

foreign corporate investor are subject to branch profits tax.

► A 5% or less holder of a regularly traded class of stock is not taxable under

FIRPTA on a disposition, and the USRPI-gain distributions are not taxable

under FIRPTA (re-characterized as an regular dividend).

► A holder of “domestically controlled” REIT stock is not taxable under

FIRPTA on a disposition of such stock, unless the disposition is part of a

liquidation.

33

Creating Domestically Controlled REIT?

REIT

Foreign

investors

US real property

Domestically Controlled REITs

► Gain on sale of stock of a domestically controlled REIT not generally taxable under

FIRPTA

► Notice 2007-55 overturns this rule in the case of liquidating distribution of

domestically controlled REIT

► “Domestically controlled” = Less than 50% of stock (by value) held “directly or

indirectly” by foreign persons

► “Directly or indirectly” not specifically defined for this purpose

► PLR 200923001 – Effect of using a US corporate “blocker” to establish domestic

control

► Some doubt that the government would again issue this ruling

► Facts of ruling different than accompanying chart, but question at issue is the

same – does indirect ownership of a REIT by non-US persons through a

taxable C corporation count toward the 50% test?

► If ruling is correct, Non-US investors can escape tax on ~ 49% of gain on exit

► US buyer would agree to buy REIT shares and can obtain a basis step-up

upon liquidation of the REIT immediately after acquisition

► US “blocker” would be subject to corporate level gain on exit

► But subsequent liquidating distribution of US blocker could be tax-

free under FIRPTA cleansing sale rule

US “Blocker”

Corp

49% 51%

34

Funds With Domestic and Foreign Investors –

Leveraged Blocker Structure Issue?

► Underlying assets may not be REIT compliant (e.g., dealer

property)

► REITs may not materially reduce tax and filing exposures

Solution?

► Blocker corporation previously discussed

► Shareholder debt provided by foreign investors to reduce tax

leakage within blocker

Issues?

► Debt/equity classification issues (thin capitalization)

► 163(j) – need diversification among investors

► Withholding on interest

► May be reduced under treaty

► Or structure interest to qualify for portfolio interest

exemption

► 10% voting stock limitation

► Dividends subject to 30% FDAP withholding (reduced per treaties)

► Distributions in excess of basis subject to FIRPTA withholding

► Liquidating distribution of blocker following fully taxable

disposition of underlying real estate = tax-free

► Multiple blockers for multiple investments?

Domestic

investors

US fund

Leveraged

Blocker

Foreign

investors

US real property

Debt + Equity

Equity Equity

35

Foreign Account Tax Compliance Act (FATCA)

Foreign Account Reporting – FATCA

◦ Enacted in 2010 – Combat tax evasion by U.S. persons holding offshore accounts

◦ New 30% withholding tax on U.S. source payments to “Foreign Financial Institutions” who fail to disclose U.S. account holders Banks, brokers, dealers, custodians, investment funds, insurance

companies, etc.

◦ First step toward worldwide intergovernmental assistance to combat tax evasion Many jurisdictions now have their own version of FATCA (without

the tax “stick”)

◦ Individual Reporting and Entity Withholding

36



◦ Institutional –FFI reporting 2 regimes – FFI Agreement/Intergovernmental agreement

FFI Agreement regime – direct reporting to IRS

IGA regime

Model 1 – reporting to local tax authorities – bilateral cooperation

Model 2 – reporting to IRS

Nearly 70 signed IGAs currently in force

◦ Individual – Account reporting IRC 6038D; IRS Form 8938

◦ Compliance Issues Certifications under US FATCA; self-certifications under local

law FATCA

Not well coordinated

37



◦ FFI reporting Disclose to IRS or local tax authority information

regarding U.S. account holders

Name

Address

TIN

Account number

Value of Account

Redemptions/withdrawals

Timeline of reporting different under Final Regulations and IGAs

Form 8966; Local law for Model 1 Reporting FFIs

38


Foreign Account Reporting – FATCA ◦ Individual Reporting – Foreign Financial Assets

◦ IRC 6038D, enacted in conjunction with FATCA

◦ Effective starting 2011

◦ Reporting of “specified foreign financial assets” above $50,000

◦ Form 8938

◦ Limited to individuals Contrast with reporting of entity account holders by

FFIs

Proposed regulations extend to entities formed or availed of for purposes of holding specified financial assets

39



◦ Who must report – Reporting Thresholds Living in the United States

Unmarried - $50,000 at end of year or $75,000 at any time during year (same thresholds for marrieds filing separately)

Married filing joint return - $100,000 at end of year or $150,000 at any time during year

Living outside United States

Unmarried - $200,000/$300,000

Married filing joint return - $400,000/$600,000

Thresholds subject to change

Specific tests for determining residency for these purposes

40

Foreign Account Reporting – FATCA ◦ Specified Foreign Financial Assets Cross-references to FATCA definitions

Any “financial account” maintained by an FFI or by financial institution organized under laws of U.S. possession; and

Following assets held for investment and not maintained in a financial institution: Stock or securities of a foreign issuer

Interests in “foreign entities”

Financial instruments/contracts with foreign issuer/counterparty

Temporary regulations contain examples

Held for investment vs. held in trade or business


41


Withholding – FATCA

◦ U.S. Withholding agents are required to withhold the 30% FATCA tax on certain payments to certain foreign financial institutions and NFFEs Several questions embedded here – FATCA compliance for

withholding agents essentially a series of Q&As

◦ First question: Who is a U.S. withholding agent under FATCA? U.S. person

Having control, receipt or custody over the disposal or payment of

A “withholdable payment”

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Withholding – FATCA

Second question: What is a withholdable payment? ◦ Starting 7/1/2014, U.S. source FDAP income

Interest;

Dividends;

Rents and royalties;

Compensation and other fixed or determinable income; and

◦ Starting 1/1/2017, Gross proceeds from the sale or other disposition of property of a type which can produce interest or dividends from U.S. sources.

◦ Exceptions:

“Grandfathered obligations”

Short-term obligations

ECI

“Excluded nonfinancial payments”

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Third question: who is the payee?

◦ Identification of payee

In general, payee is the recipient

Look beyond recipient in following situations:

Certain payments through agents/intermediaries

Payments to many non-U.S. flow-through entities

Participating or Deemed-Compliant FFIs (same treatment as

under Chapter 3)

Payments to foreign branches of U.S. persons and certain U.S.

branches of foreign persons

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Fourth question: how do you categorize the payee? ◦ Need to determine whether the payee is U.S. or non-U.S. and if

non-U.S., whether an FFI, etc. Categorization of payee – U.S. or foreign person?

Determine whether payments are made to intermediaries

Reliance on documentation – W-8 and W-9 forms de facto acceptable

Permanent validity of W-8 forms provided by participating FFIs (“PFFIs”) and Registered Deemed-Compliant FFIs (but not Certified Deemed-Compliant FFIs) if no change in circumstances

3 year period otherwise – obligation to update.

Categorization of payee – status under FATCA In general withholding agents will need to obtain new W-8BEN-E forms unless

recipient is a foreign individual, foreign government or international organization

New W-8BEN-E provides specific categories of each type of entity under FATCA

Specific standards of knowledge can override forms Indicia of U.S. residence, e.g., - mainly common-sense rules

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Fifth question: must I withhold? ◦ Withhold 30% on withholdable payments to:

Non-participating FFIs;

Participating FFIs that are non-qualified intermediaries if sufficient documentation is not received (i.e., W-8BEN that establishes all of the beneficial owners are exempt under FATCA – similar to current Chapter 3 rules for non-U.S. flow-through entities); or

FFIs that elect to be withheld upon

◦ Timing of payment When amount would be includible in income of beneficial owner

under cash method of accounting principles

For flow-through entities, when amounts subject to withholding are distributed, or if amounts are not distributed, generally when K-1s are issued (similar to Chapter 3 principles)

◦ File 1042 and 1042-S – similar to Chapter 3 withholding

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Questions

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Thank you For your participation and feedback!

Documents

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