FATCA’s Withholding Requirements for Foreign Financial Institutions

By Philip T. Pasmanik, CPA, MST


  • Among the many provisions enacted by the Foreign Account Tax Compliance Act (FATCA) is 30% withholding on certain payments to nonparticipating foreign financial institutions (FFIs) and certain nonfinancial foreign entities (NFFEs).
  • The withholding tax is intended to encourage FFIs and NFFEs to report to the IRS information on U.S. persons holding foreign accounts and other specified financial assets. It is currently scheduled to begin for most withholdable payments made after Dec. 31, 2013.
  • The tax is waived where the payee FFI enters into an agreement with the IRS to report information about accounts held by U.S. persons (or U.S.-owned foreign entities), or the FFI, NFFE, or where the payment is otherwise exempted. For NFFEs, withholding can be waived if beneficial owners of payments report to the withholding agent certain information about their substantial U.S. owners or certify that they have none.
  • FFIs are defined broadly to include entities that perform a wide range of banking and investing activities.

T he Foreign Account Tax Compliance Act (FATCA), which was enacted as part of the Hiring Incentives to Restore Employment (HIRE) Act and signed into law on March 18, 2010, imposes rigid new account identification, reporting, and tax withholding requirements on foreign financial institutions (FFIs) and other withholding agents. 1 The withholding requirement applies to payments to FFIs and certain nonfinancial foreign entities (NFFEs).

FATCA also imposes requirements on U.S. financial institutions and applies to payments made with respect to accounts of individuals. In addition, it adds tax return reporting requirements for individual taxpayers (and specified entities once they are defined in regulations) with specified foreign financial assets. 2 This article addresses the withholding rules applicable to FFIs as payers and to accounts of and payments to FFIs and other foreign entities (rather than those of individuals).

FFIs that do not enter into an agreement (discussed below) with the IRS to comply with the FATCA requirements will be subject to a 30% withholding tax on certain types of payments to the FFI. FFIs that enter into such agreements are known as “participating FFIs.”

Specifically, FATCA imposes a new 30% withholding tax (which can be reduced or eliminated under a tax treaty 3 ) on withholdable payments (defined below) made to FFIs (defined below) unless the FFIs enter into an agreement with the IRS to, among other things, identify and disclose certain financial accounts of specified U.S. persons (defined later) to the IRS, provide information about substantial (generally more than 10%) U.S. owners of foreign entity account holders, and withhold on payments to FFIs and other foreign entities. The withholding requirement also applies to other payments known as “passthrough payments” (discussed later).

The IRS has taken several steps in defining FATCA’s many terms and facilitating its implementation by providing guidance in Notices 2010-60, 2011-34, and 2011-53 and, on Feb. 8, 2012, proposed regulations. 4

FATCA’s purpose is not so much to collect the withholding tax as to enable the IRS to obtain information about U.S. persons who directly or indirectly hold accounts or other investments abroad that earn income that has not been reported to the IRS. The withholding tax is designed to be a “stick” for FFIs to encourage U.S. persons to provide the required information and for other FFIs to participate in the FATCA regime.

New Withholding Requirements

Subject to grandfathering provisions, certain withholdable payments made after Dec. 31, 2013 (originally 2012, but delayed by Notice 2011-53), to FFIs or to other foreign entities (NFFEs) 5 will be subject to withholding at 30% if the payee FFI is not itself compliant with FATCA or the payee NFFE is not excepted from FATCA or does not provide the required owner information. In addition, FFIs will be required to report information on certain accounts that are connected to the United States (U.S. accounts) and other interests of U.S. persons. 6 The FATCA rules also may apply to payments made by an FFI’s U.S. branches. 7

For FATCA purposes, a withholdable payment means any payment of interest (including any original issue discount), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income, if such payment is from sources within the United States, and any gross proceeds from the sale or other disposition of any property of a type that can produce interest or dividends from sources within the United States. 8

A payment that is effectively connected with a U.S. trade or business of the payee is not a withholdable payment. 9 Accordingly, a withholdable payment received by a U.S. branch of an FFI that is reported as effectively connected income (ECI) would not be subject to withholding under the new withholding regime. Conversely, a withholdable payment that is not reported as ECI and is made to a U.S. branch of an FFI would be subject to withholding.

Grandfathered Obligations

Congress has recognized that implementing the compliance requirements of these complex rules requires substantial preparation. Accordingly, Notice 2010-60 provides that withholding is not required from a payment under an obligation outstanding on March 18, 2012, or from the gross proceeds from any disposition of such an obligation. The recently issued proposed regulations would extend that date to Jan. 1, 2013. 10

FFI Defined

An FFI is defined for FATCA purposes as any financial institution that is a foreign entity. An FFI does not include a financial institution that is organized under the laws of any possession of the United States. 11

A financial institution is any entity that:

  • Accepts deposits in the ordinary course of a banking or similar business;
  • As a substantial portion of its business, holds financial assets for the account of others; or
  • Is engaged (or holds itself out as being engaged) primarily in the business of investing, reinvesting, or trading in:
    • Securities;
    • Partnership interests;
    • Commodities; or
    • Any interest (including a futures or forward contract or option) in such securities, partnership interests, or commodities. 12

The above definitions are extremely broad and include:

entities that would qualify as banks under section 585(a)(2) (including banks as defined in section 581 and any corporation to which section 581 would apply except for the fact that it is a foreign corporation), savings banks, commercial banks, savings and loan associations, thrifts, credit unions, building societies and other cooperative banking institutions. The fact that an entity is subject to the banking and credit laws of the United States, a State, a political subdivision thereof, or a foreign country, or to supervision and examination by agencies having regulatory oversight of banking or similar institutions, is relevant to but not necessarily determinative of whether that entity qualifies as a financial institution. 13

In addition, under Sec. 1471(d)(5), entities that hold themselves out as being engaged primarily in the business of investing, reinvesting in securities, etc., as discussed above, include “mutual funds (or their foreign equivalent), funds of funds (and other similar investments), exchange-traded funds, hedge funds, private equity and venture capital funds, other managed funds, commodity pools, and other investment vehicles.” 14

NFFE Defined

An NFFE is any foreign entity that is not a financial institution as defined above. 15

Withholdable payments to NFFEs that do not fall within specific exceptions, are not engaged in an active nonfinancial business, or do not meet the requirements for the statutory waiver of withholding under Sec. 1472(b) are subject to FATCA withholding.

Requirements for Waiver of Withholding on Payments to NFFEs

To satisfy the above waiver requirements, the following three conditions must be satisfied: 16

1. The beneficial owner of the payment or the payee must provide the withholding agent with either:

a. Certification that the beneficial owner does not have any substantial U.S. owners; or

b. The name, address, and taxpayer identification number of each such substantial U.S. owner;

2. The withholding agent must not know, or have reason to know, that any of the foregoing information is wrong; and,

3. The withholding agent must report to the IRS the information about the substantial U.S. owners, if any.

A “substantial U.S. owner” means, in the case of any corporation, any specified U.S. person that owns, directly or indirectly, more than 10% of the corporation’s stock (by vote or value). For any partnership, it means any specified U.S. person that owns, directly or indirectly, more than 10% of the profits interests or capital interests in the partnership. For a trust, it means a specified U.S. person treated as an owner of any portion of the trust under the grantor trust rules and, to the extent provided by the IRS, any specified U.S. person that holds, directly or indirectly, more than 10% of the beneficial interests of the trust. 17

A specified U.S. person means any U.S. person other than: 18

  • Any corporation whose stock is regularly traded on an established securities market;
  • Any corporation that is a member of the same expanded affiliated group (as defined in Sec. 1471(e)(2)) 19 as a corporation whose stock is regularly traded on an established securities market;
  • Any organization exempt from taxation under Sec. 501(a) or an individual retirement plan;
  • The United States or any wholly owned agency or instrumentality of it;
  • Any state, the District of Columbia, any possession of the United States, any political subdivision of any of them, or any wholly owned agency or instrumentality of any one or more of them;
  • Any bank (as defined in Sec. 581);
  • Any real estate investment trust (as defined in Sec. 856);
  • Any regulated investment company (as defined in Sec. 851);
  • Any common trust fund (as defined in Sec. 584(a)); and
  • Any trust that is exempt from tax under Sec. 664(c) or is described in Sec. 4947(a)(1).

Exceptions to Withholding on Payments to NFFEs

As mentioned above, Notice 2010-60 provided that an NFFE that is engaged in an active nonfinancial business is not subject to FATCA requirements and, therefore, payments to it are not subject to withholding. Under the proposed regulations, an NFFE is an active NFFE if less than 50% of its gross income for the calendar year is passive income or less than 50% of its assets are assets that produce or are held for the production of dividends, interest, rents and royalties (other than those derived in the active conduct of a trade or business), annuities, or other passive income. 20 Under the proposed regulations, a withholding agent would be permitted to treat a payee as an active NFFE if it has a valid withholding certificate identifying the payee as an active NFFE. 21

In addition, the above withholding requirements do not apply to certain payments that are beneficially owned by any of the following NFFEs: 22

  • Any corporation whose stock is regularly traded on an established securities market;
  • Any corporation that is a member of the same expanded affiliated group as a corporation whose stock is regularly traded on an established securities market;
  • Any entity formed under the laws of a U.S. possession and that is wholly owned by one or more residents of that possession;
  • Any foreign government, its political subdivision, or a wholly owned agency or instrumentality;
  • Any international organization or its wholly owned agency;
  • Any foreign central bank of issue;
  • Any other class of persons specified by the IRS for FATCA purposes; or
  • Any class of payments identified by the IRS for FATCA purposes as posing a low risk of tax evasion.

Exception From Withholding on Payments to FFIs

As with NFFEs, the withholding requirement provided by Sec. 1471(a) on payments to FFIs does not apply to the extent that the payment’s beneficial owner is any foreign government, any political subdivision of a foreign government, or their wholly owned agencies or instrumentalities; any international organization or its wholly owned agency or instrumentality; any foreign central bank of issue; or a class of persons specified by the IRS as having a low risk of tax evasion. 23

Notice 2010-60 provides that certain entities that would otherwise be FFIs or NFFEs will be exempt from the withholding (and other) provisions of Secs. 1471 and 1472. For example, foreign nonfinancial holding companies, startup companies, hedging and financial centers of a nonfinancial group, and entities in the process of liquidating or reorganizing with the intent to continue or recommence operations as nonfinancial institutions all may be excluded from the definition of FFI and thus not be required to comply with FATCA’s withholding and other requirements. The notice also states that such entities will not be subjected to the disclosure and other requirements applicable to NFFEs.

Notice 2010-60 also provides guidance on the fairly limited situations in which insurance companies will be treated as FFIs. For example, insurance companies issuing solely property and casualty or term life insurance likely will not be treated as FFIs. Finally, the notice provides guidance for certain U.S. branches of FFIs and controlled foreign corporations.

The FFI Agreement

FFIs and other withholding agents will have to deduct withholding tax on withholdable payments made to FFIs unless the payee FFI enters into a withholding agreement with the IRS. Under that agreement, an FFI must agree, among other conditions, that it will obtain certain information regarding each account holder to determine which accounts are U.S. accounts and to comply with verification and due-diligence procedures that the IRS may require for identifying both new and existing U.S. accounts. 24 The FFI must also report U.S. account information annually and deduct and withhold the 30% withholding tax on any passthrough payment it makes to a “recalcitrant” (nonresponsive or resistant) account holder or to another FFI that does not meet certain requirements; and to follow certain other rules for passthrough payments.

FFI registration is scheduled to begin Jan. 1, 2013, and the IRS will accept FFI applications under its electronic submissions process. An FFI must enter into an FFI agreement by June 30, 2013, to ensure that it will not be subjected to withholding beginning on Jan. 1, 2014. 25 FFIs that enter into FFI agreements after June 30, 2013, but before Jan. 1, 2014, will be participating FFIs with respect to 2014, but they might not be identified as such in time to prevent withholding beginning on Jan. 1, 2014. 26

Other Guidance Details

On April 8, 2011, the IRS issued Notice 2011-34 providing guidance regarding, among other things, (1) the procedures for participating FFIs to identify U.S. accounts among their preexisting individual accounts; 27 (2) the obligation of participating FFIs to withhold on passthrough payments; (3) certain categories of FFIs that will be deemed compliant under Sec. 1471(b)(2) (and therefore subject to reduced FATCA obligations); 28 and (4) the obligation of participating FFIs to report with respect to U.S. accounts. The notice also addresses the treatment under Sec. 1471 of qualified intermediaries and the application of Sec. 1471 to expanded affiliated groups of FFIs.

As a result of numerous comments the IRS received in response to Notices 2010-60 and 2011-34, it issued Notice 2011-53, which phases in FATCA withholding and other provisions. The IRS stated in Notice 2011-53 the revised implementation timeline was needed “for significant modifications to the information management systems of FFIs, withholding agents, and the IRS.”

Notice 2011-53 provides that a participating FFI will be required to put in place account opening procedures described in Notice 2010-60, as implemented in regulations, to identify U.S. accounts among accounts opened on or after the effective date of its FFI agreement. For preexisting accounts, the notice provides timeframes for completing the due-diligence procedures for identifying U.S. accounts set out in Notice 2011-34. 29

The notice further provides that regulations will implement withholding in two phases, on U.S.-source FDAP (fixed or determinable, annual or periodical) income beginning Jan. 1, 2014, and on all other withholdable payments, including gross proceeds, on Jan. 1, 2015. In addition, the notice provides that all qualified intermediary agreements, withholding foreign partnership agreements, and withholding foreign trust agreements of entities qualifying as FFIs that expire on Dec. 31, 2012, are automatically extended until Dec. 31, 2013, and gives guidelines for certain grandfathered obligations.

Notice 2011-53 also provides that withholding on withholdable payments will be delayed until Jan. 1, 2014. It also delays until Jan. 1, 2015, withholding on foreign passthrough payments. 30 Foreign passthrough payments are defined as all other payments made by an FFI other than withholdable payments. Thus, passthrough payments may include certain foreign-source payments and payments that are not taxable for U.S. federal income tax purposes. The scope of the passthrough payment concept and the portion of such payments subject to FATCA withholding are complex issues that the IRS is continuing to explore and will address in future guidance.


The FATCA provisions are broad and far-reaching. They will have a significant impact on many cross-border transactions and can affect both individuals and businesses. Financial businesses, in particular, should carefully review all current and proposed activities and cross-border transactions to evaluate the impact of FATCA on their activities, business, and transactions. Now is the time for taxpayers to start evaluating the effect of FATCA on their current tax positions and the steps that must be taken to be in compliance with FATCA when its various provisions go into effect.



1 Secs. 1471 through 1474, added by the Hiring Incentives to Restore Employment (HIRE) Act, P.L. 111-147, §501.

2 Sec. 6038D, added by the HIRE Act, §511. See Mattson, “FATCA Adds Layer of Complexity, Penalty Exposure to Offshore Asset Reporting,” 43 The Tax Adviser 263 (April 2012).

3 Staff of the Joint Committee on Taxation, Technical Explanation of the Revenue Provisions Contained in Senate Amendment 3310, the “Hiring Incentives to Restore Employment Act,” Under Consideration by the Senate (JCX-4-10), p. 47 (2/23/10). The U.S. person may be entitled to a refund or credit under a treaty or under the Code. See Carman, “International Exempt Organizations and FATCA,” 23(2) Taxation of Exempts 32 (September/October 2010). See also Sec. 1474(b).

4 Notice 2010-60, 2010-37 I.R.B. 329; Notice 2011-34, 2011-19 I.R.B. 765; Notice 2011-53, 2011-32 I.R.B. 124; REG-121647-10.

5 The term “foreign entity” means any entity that is not a U.S. person (Sec. 1473(5)). It includes corporations and partnerships organized under the laws of any jurisdiction other than the United States, a U.S. state, or the District of Columbia, and trusts that are not U.S. persons (Secs. 7701(a)(4), (5), and (30)).

6 Sec. 1471(a). “U.S. person” is defined under Sec. 7701(a)(30).

7 Notice 2010-60, §II.D.

8 Sec. 1473(1)(A).

9 Sec. 1473(1)(B).

10 Prop. Regs. Sec. 1.1471-2(b)(2)(i).

11 Sec. 1471(d)(4).

12 Sec. 1471(d)(5). Prop. Regs. Sec. 1.1471-5(e)(iii) would add notional principal contracts and insurance and annuity contracts to this definition.

13 Notice 2010-60.

14 Id.

15 Sec. 1472(d).

16 Sec. 1472(b).

17 Sec. 1473(2).

18 Sec. 1473(3).

19 An affiliated group as defined in Sec. 1504(a) (owning less than 80% in vote and value) determined by substituting “more than 50%” for “at least 80%” each place it appears, and without regard to the Secs. 1504(b)(2) and (3) exclusions (of insurance companies subject to taxation under Sec. 801 and foreign corporations).

20 Prop. Regs. Sec. 1.1472-1(c)(1)(v).

21 Prop. Regs. Sec. 1.1471-3(d)(10)(iv).

22 Sec. 1472(c).

23 Sec. 1471(f).

24 Sec. 1471(d)(2) defines a financial account as any depository account, any custodial account, and any equity or debt interest in an FFI, other than interests that are regularly traded on established securities markets. The proposed regulations would refine the definition of financial accounts to focus on traditional bank, brokerage, money market accounts, and interests in investment vehicles, and to exclude most debt and equity securities issued by banks and brokerage firms, subject to an anti-abuse rule.

25 Sec. 1471(b) and Notice 2011-53.

26 Id.

27 The proposed regulations would modify the U.S.-account identification procedures, replacing the enhanced review of private banking accounts set out in Notice 2011-34 with an additional enhanced review of high-value accounts.

28 The category of deemed compliant FFIs would be further expanded by the proposed regulations.

29 The revisions made by the proposed regulations to the account identification procedures described in n. 27 would also revise the timelines for when the procedures would be required to be completed.

30 The proposed regulations would further postpone withholding on passthrough payments until Jan. 1, 2017, but would require participating FFIs to annually report the aggregate amount of payments made to nonparticipating FFIs.


Philip Pasmanik is a senior tax manager with Crowe Horwath LLP in New York. He is co-chair of the AICPA International Tax Withholding Task Force and a former member of the AICPA International Tax Resource Panel. For more information about this article, please contact Mr. Pasmanik at philip.pasmanik@crowehorwath.com.












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