Procedures for Withholding Foreign Partnerships and Withholding Foreign Trusts Coordinated With FATCA

By Matthew S. Blum, J.D., Boston

Editor: Michael Dell, CPA

Foreign Income & Taxpayers

The IRS issued updated procedures in Rev. Proc. 2014-47 (released and effective Aug. 8, 2014) for "withholding foreign partnerships" (WPs) and "withholding foreign trusts" (WTs) that elect to assume certain U.S. withholding tax responsibilities. This guidance required existing WPs and WTs to renew their status with the IRS by Aug. 31, 2014, for their agreements to be effective as of June 30, 2014. WPs and WTs with a renewal approved by the IRS after Aug. 31, 2014, will have a WP or WT agreement effective as of the date the renewal is approved.

The revised agreements coordinate the existing rules for WPs and WTs with Foreign Account Tax Compliance Act (FATCA) withholding under Secs. 1471 and 1472 and make the following notable changes to the existing guidance:

  • As envisaged by the regulations, a WP or WT will take over primary FATCA withholding responsibilities to the same extent that it currently takes over primary withholding responsibilities under pre-FATCA law.
  • To the extent that a WP or WT that is not a U.S. financial institution, a U.S.-owned financial institution, or a financial institution acting through a U.S. branch performs account-level reporting on U.S. partners/beneficiaries under the FATCA rules, the WP/WT will no longer be required to perform payment-level Form 1099 reporting and backup withholding with respect to such U.S. partners/beneficiaries.
  • In some cases, a WP or WT may now assume primary withholding responsibilities with respect to a partner/beneficiary that is itself a foreign partnership or trust. Previously, a WP or WT could not do so and had to pass withholding tax documentation for the "indirect" partners/beneficiaries of such a partnership or trust through to its withholding agent, with two limited exceptions.
  • A WP or WT located in a jurisdiction where the IRS has approved the local "know your customer" (KYC) rules may now use KYC documentation to establish the status of its partners/beneficiaries in the same way that a qualified intermediary (QI) in that jurisdiction may do so. Previously WPs and WTs were only allowed to use IRS forms to document their partners/beneficiaries and were not allowed to use KYC documentation.
  • WPs and WTs will no longer have to be examined periodically by external auditors to demonstrate compliance with their agreements but instead will have to adopt internal compliance programs similar to those required of QIs (including the requirement for a periodic external review).
  • All WP/WT agreements will expire periodically and will need to be renewed.


U.S. persons making payments to non-U.S. persons of U.S.-source interest, dividends, and other income (excluding capital gains) must withhold a 30% tax under Secs. 1441 and 1442. Exemptions and reduced rates are available but generally require the beneficial owner to document its right to the exemption on the appropriate version of Form W-8. Such payments generally must be reported to the IRS on Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding, even if the payment is exempt from withholding. These rules are generally known as the chapter 3 rules.

U.S. persons making payments to U.S. persons (other than certain "exempt recipients") of interest, dividends, and other income from any source, including gross proceeds from the sale of securities, must report the payments to the IRS on the appropriate version of Form 1099. If a payment is subject to reporting on Form 1099, the U.S. payer must also perform 28% backup withholding under Sec. 3406 if the U.S. payee has not provided its taxpayer identification number on Form W-9, Request for Taxpayer Identification Number and Certification, and in certain other situations. These rules are generally known as the chapter 61 rules.

Ordinarily, a foreign partnership, foreign simple trust, or foreign grantor trust is looked through for chapter 3 and chapter 61 purposes. (A foreign complex trust is opaque for these tax purposes.) Such a foreign entity must pass through withholding tax documentation from its partners/beneficiaries (i.e., Form W-9 for U.S. persons/entities and the appropriate version of Form W-8 for non-U.S. persons and entities) to its upstream payer. The upstream payer must then perform chapter 3 and chapter 61 withholding/reporting as if the partners/beneficiaries of the foreign partnership/trust were the direct customers of the upstream payer. Dealing with such indirect customers could be burdensome for an upstream payer, especially if allocations were complex or could not be determined until the end of the year. In some cases it might be illegal under local law for a foreign partnership/trust to disclose information about its partners/beneficiaries without their consent.

Since 2003, the IRS has allowed certain foreign partnerships, foreign simple trusts, and foreign grantor trusts to become WPs/WTs and take over chapter 3 and chapter 61 reporting/withholding with respect to certain partners/beneficiaries. (To the extent a WP or WT must perform withholding under chapter 3 or chapter 61, it must perform the withholding itself and may not request an upstream payer to perform the withholding instead. In other words, a WP/WT must assume "primary" withholding responsibilities.) To the extent that a WP/WT does so, it does not have to pass through partner/beneficiary documentation to upstream payers. In some cases, a WP/WT may report information about non-U.S. partners/beneficiaries on Form 1042-S on a pooled basis to the IRS, rather than disclosing each one on individual Forms 1042-S.

Under prior law, if a partner/beneficiary of a WP/WT was itself a foreign partnership, foreign simple trust, or foreign grantor trust and the second-tier entity did not itself elect to be a WP/WT, a WP/WT could not assume these primary chapter 3 and chapter 61 responsibilities with respect to the second-tier entity and its partners/beneficiaries. Such a second-tier partnership/trust is referred to as a flowthrough entity, and its partners/beneficiaries are referred to as indirect partners/beneficiaries. Thus, the WP/WT had to pass through documentation and information about the indirect partners/beneficiaries to the WP/WT's upstream payer, which would report and withhold as if the indirect partners/beneficiaries were direct customers of the upstream payer.

Two exceptions allowed a WP/WT to assume chapter 3/chapter 61 responsibilities with respect to the indirect partners/beneficiaries of a flowthrough entity. The first was if the WP/WT and the flowthrough entity agreed to treat the flowthrough entity's account as a joint account for reporting and withholding purposes (the joint account option). The second was if the flowthrough entity agreed to act as an agent of the WP/WT for certain purposes (the agency option).

The FATCA provisions of Secs. 1471-1474 (also referred to as the chapter 4 rules) provide for the imposition of a 30% withholding tax on certain U.S.-source payments to any foreign financial institution (FFI) unless the FFI either (1) agrees with the IRS to perform due diligence, reporting, and withholding with respect to accounts held by certain U.S. persons/entities and U.S.-owned foreign entities (a participating FFI, or PFFI), or (2) complies with the provisions of an intergovernmental agreement (IGA) between the jurisdiction where it is located and the United States (an IGA FFI). Reporting is done on an account-by-account basis on Form 8966, FATCA Report. Withholding tax also applies to such payments to a non-U.S. entity that is not an FFI (nonfinancial foreign entity, or NFFE) unless the NFFE either certifies that it has no 10% U.S. shareholders or identifies them. In the latter case, the payer would report the payments on Form 8966.

The guidance under FATCA envisaged that the WP and WT procedures would be retained in a modified form and integrated with FATCA.

Rev. Proc. 2014-47

Rev. Proc. 2014-47 provides the text of the new agreements that WPs and WTs will enter into with the IRS and supersedes the prior guidance (Rev. Proc. 2003-64, as amended by Rev. Proc. 2004-21 and Rev. Proc. 2005-77). Rev. Proc. 2014-47 provides that all existing WP and WT agreements were terminated as of June 30, 2014, and must be renewed, although an existing WP/WT that had its application to renew its agreement approved by Aug. 31, 2014, was treated as a WP/WT for all of 2014.

A foreign partnership/trust can become a WP/WT if it is a PFFI, IGA FFI, or NFFE. A foreign partnership/trust that is deemed to be in compliance with FATCA because it is a "registered deemed-compliant FFI" also can become a WP/WT. Finally, a retirement fund that is treated as an "exempt FFI" under either the regulations or an IGA can become a WP/WT. A WP/WT that is not a retirement fund is responsible for performing chapter 4 due diligence, reporting, and withholding with respect to its partners/beneficiaries to the same extent that it currently does under chapter 3. (A retirement fund that becomes a WP/WT has no such responsibilities.)

In a change from prior law, a WP/WT may, but is not required to, elect to assume chapter 3 and chapter 4 responsibilities for any partner/beneficiary that is itself a partnership or trust and the associated indirect partners/beneficiaries, unless the partnership or trust has a partner/beneficiary that is subject to chapter 61 reporting. This is in addition to the prior-law joint account and agency options for indirect partners/beneficiaries, which remain available.

A WP/WT's chapter 4 responsibilities are coordinated with the WP/WT's existing chapter 3 responsibilities in the same way as they are for other entities. Amounts that a WP/WT withholds under chapter 4 may be credited against any amount that the WP/WT must withhold under chapter 3. A WP/WT may combine chapter 3 and chapter 4 reporting on the same Form 1042-S. In addition, as with other entities, if a WP/WT that is not a U.S. entity, a branch of a U.S. entity, or a U.S.-controlled foreign entity reports a U.S. account on Form 8966, the WP/WT no longer has chapter 61 responsibilities for the account. (The regulations provide an option for entities other than WPs and WTs to elect out of chapter 4 responsibilities and into an expanded version of chapter 61 responsibilities.)

As under prior law, a WP/WT must obtain valid documentation from all of its partners/beneficiaries, or else the agreement will be automatically terminated (unless the error is suitably cured). Under prior law, all partners/beneficiaries had to be documented with W-8/W-9 forms. In a change from prior law, a WP/WT located in a jurisdiction with KYC rules that have been approved by the IRS may use approved KYC documentation instead of IRS forms to document certain customers. (In the past, the use of KYC documentation was available only to intermediaries that were qualified intermediaries, under rules that are not discussed here. A list of jurisdictions with KYC rules that the IRS has approved is available at

Under prior law, the compliance of WPs/WTs had to be checked by an audit performed by an external auditor, and the audit report was submitted to the IRS for approval. WPs/WTs that had elected to perform chapter 3 reporting on a pooled basis were required to obtain an audit based on a schedule. Other WPs/WTs were not required to obtain an audit unless the IRS specifically requested one. The new agreement eliminates the former audit requirement. Instead, each WP/WT must designate a responsible officer and implement a compliance program. The responsible officer must make periodic certifications to the IRS that the WP/WT complies with its obligations under the agreement. The WP/WT must obtain a periodic review by either an external adviser (which need not be an auditor) or the entity's internal audit function before making the periodic certifications. The results of this periodic review are not to be submitted automatically to the IRS. However, the IRS can request to review the results of the periodic review and make further inquiries if it sees fit.

Although the information called for under the periodic review in the new WP/WT agreement is extensive, this was also the case with the external audit under the old agreement. The IRS issued guidance under the old agreement that only certain matters needed to be examined as part of the audit unless the IRS requested otherwise. It is unknown whether the IRS will have a similar rule to the effect that the periodic review needs to examine only certain matters unless the IRS requests otherwise.

Under the former guidance, a WP/WT agreement continued in force indefinitely unless the WP/WT elected to report payments to foreign partners on Form 1042-S on a pooled basis. In the latter case, a WP/WT could choose between a renewable agreement with a six-year initial term and a nonrenewable agreement with a term of up to 15 years. All new or renewed agreements under the new guidance will expire at the end of 2016 and can be renewed.


The provisions coordinating the WP/WT rules with chapter 4 are consistent with the provisions in the regulations and other guidance previously issued. It is not possible to assess all of the implications of the new compliance regime, which is similar to that prescribed for QIs, until the IRS issues further guidance.

In the early years of the WP/WT regime, the WP regime was little-used, and the WT regime was almost never used. There is anecdotal evidence that the WP regime subsequently has become more popular. The changes to the new agreement might make WP/WT status more popular, since they loosen the restrictions on when a WP/WT can assume chapter 3, chapter 4, and chapter 61 responsibility with respect to indirect partners/beneficiaries and allow WPs/WTs in certain jurisdictions to document partners/beneficiaries with approved KYC documentation. (The IRS occasionally was willing to permit both of these under the old agreement, but each such WP/WT agreement had to be specially negotiated.) It remains to be seen whether these new rules will make WP/WT status more attractive than it was in the past.

A version of this item appeared in Ernst & Young's Global Tax Alert.


Michael Dell is a partner at Ernst & Young LLP in Washington.

For additional information about these items, contact Mr. Dell at 202-327-8788 or

Unless otherwise noted, contributors are members of or associated with Ernst & Young LLP.

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