The Foreign Account Tax Compliance Act’s (FATCA) withholding provisions are found in Internal Revenue Code Sections 1471-1472,1 enacted under the Hiring Incentives to Restore Employment Act, which was signed into law on March 18, 2010.2 These provisions are intended to strengthen the U.S. voluntary compliance tax system and prevent tax evasion by U.S. taxpayers who directly or indirectly, for example, through foreign entities, maintain foreign accounts. FATCA does this by requiring foreign entities—including certain foreign trusts and foreign trust companies—to identify, document and report their U.S. account holders to the Internal Revenue Service. If a foreign entity fails to comply with the reporting obligations, a 30 percent withholding tax may apply to certain U.S. source payments made to the foreign entity.
The FATCA withholding provisions weren’t drafted with trusts as a primary focus, yet they apply to foreign trust structures. Final Treasury regulations, issued on Jan. 28, 2013,3 provide guidance on FATCA’s applicability to foreign trusts and trustees, but still leave questions unanswered.4 This lack of clarity leaves room for different interpretations.
FATCA represents a dramatic change in the relationship between foreign entities, including foreign trusts, and the IRS. The rules are complex, and trustees of foreign trusts may be surprised to learn that not only they, but each of the trusts they serve, will have to comply with FATCA to avoid withholding.
Summary of FATCA Withholding
FATCA divides all foreign entities into two categories—foreign financial institutions (FFIs) and non-financial foreign entities (NFFEs)—and requires that all “withholding agents” withhold a 30 percent tax on any “withholdable payments” to them unless they have complied (or are deemed to have complied) with FATCA’s requirements.5
Under FATCA, a “withholding agent” is any person, whether U.S. or non-U.S., acting in any capacity, that has control, receipt, custody, disposal or payment of a withholdable payment or a foreign “passthru payment.”6 IRC Section 1473(1) defines a “withholdable payment” as, subject to certain exceptions: (1) any payment of interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments or other fixed or determinable annual or periodical (FDAP) gains, profits or income (FDAP income), if such payment is from sources within the United States;7 and (2) 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 (although pursuant to the final regulations, this second category of withholdable payment is effective only for sales or dispositions after Dec. 31, 2016).8 In other words, withholdable payments include a broad class of U.S.-sourced payments.
Since it’s the investment in U.S. source income that implicates these rules, shedding U.S. investors (or owners or beneficiaries, as the case may be) isn’t a way around FATCA compliance. Shedding U.S. investments also may not be a means of avoiding FATCA because if any foreign passthru payment is made, it likely will be subject to FATCA withholding. Generally, a passthru payment includes a payment indirectly attributable to U.S. sources.9 In addition, foreign entities that attempt to avoid FATCA may find it difficult to continue relationships with FFIs who are FATCA-compliant, since, as described below, those FFIs will have an obligation to collect and report certain information about their customers.
Intergovernmental agreements (IGAs) entered into between the United States and other countries establish a framework for the United States and those other countries to collect and automatically exchange information. Foreign entities resident in a country with which the United States has an IGA may rely on the procedures therein (and local law) to become FATCA-compliant. Importantly, IGAs don’t exempt resident entities from FATCA; instead, they streamline the process for FATCA compliance in those countries.
The IRC broadly defines FFIs to include three categories of foreign entities: (1) those that accept deposits in the ordinary course of a banking or similar business (also called “depository institutions” in the final regulations, which include not only entities commonly considered banks, but also, pursuant to the final regulations, foreign entities that provide trust or fiduciary services);10 (2) those that hold financial assets for the account of others as a substantial portion of their business (also called “custodial institutions” in the final regulations); or (3) those that are engaged in the business of investing, reinvesting or trading in securities, partnership interests, commodities or any interest (including futures, forward contracts or options) in such investments (this last category is called “investment entities” in the final regulations).11
The investment entity category includes any entity that primarily conducts as a business on behalf of a customer any of the following: (1) trading in money market instruments, foreign currency, foreign exchange instruments, interest rate instruments, index instruments, transferable securities or commodities futures; (2) managing individual or collective portfolios; or (3) otherwise investing, administering or managing funds, money or financial assets on behalf of other persons (we’ll refer to (1) through (3) as “investment entity activities”).12 Interestingly, a foreign entity (including a foreign trust) that’s “managed by” a depository institution, custodial institution, investment entity or insurance company that’s a financial institution also will be itself classified as an “investment entity,” if such entity’s gross income is primarily attributable to investing, reinvesting or trading in financial assets.13
To avoid the 30 percent withholding tax, an FFI must either enter into an agreement with the IRS (a participating FFI) or otherwise be deemed FATCA-compliant based on specific exceptions (a deemed-compliant FFI, discussed below).14 A participating FFI’s agreement with the IRS will require the FFI to gather information sufficient to enable it to identify which of its accounts are U.S. accounts, meaning those financial accounts held by one or more “specified United States persons” or “United States owned foreign entities” and to report information with respect to certain accounts annually.15 For this purpose, a financial account includes not only what one might typically think of as an account, but also any debt or equity interest in certain FFIs (other than interests regularly traded on an established securities market).16 The agreement further will require the participating FFI itself to withhold 30 percent of certain payments it makes to any account holder who fails to provide information or to any other FFI that isn’t FATCA-compliant.17
To identify and report any U.S. accounts, an FFI must determine which account holders are specified U.S. persons or U.S. owned foreign entities. A specified U.S. person is any U.S. person (determined in accordance with IRC Section 7701(a)(30)), other than certain exempt entities, such as corporations with stock regularly traded on an established securities market and organizations exempt from tax under IRC Section 501(a).18 Thus, all individuals who are U.S. persons will be specified U.S. persons. U.S. owned foreign entities are those that have one or more substantial U.S. owners, meaning, generally, those entities in which any specified U.S. person has more than a 10 percent (or in certain cases more than a 0 percent) direct or indirect ownership or beneficial interest.19
These are defined as any foreign entity that’s not an FFI.20 While the 30 percent withholding tax still generally applies to NFFEs, it won’t apply if the NFFE demonstrates to the withholding agent that: (1) it, or another NFFE, is the beneficial owner of the payment, and (2) it doesn’t have any substantial U.S. owners, or it hasn’t identified any substantial U.S. owners; and the withholding agent agrees to report the information it receives from the NFFE to the IRS.21 In other words, FATCA allows NFFEs a simpler way to avoid withholding, by providing information on their substantial U.S. owners to the withholding agents, rather than to the IRS.
There are broad exceptions from withholding for certain classes of NFFEs, the most relevant of which in the trust context may be the “active NFFE” exception, which is based on a less than 50 percent passive income and passive assets test.22 Under this test, it’s more likely that a typical family trust—if it qualifies as an NFFE—will be a passive, rather than an active, NFFE. However, it’s worth noting that if the trust is an active NFFE, it’s not subject to FATCA withholding, and it’s not required to report its substantial U.S. owners to the withholding agent.
Application to Foreign Trust Structure
A typical holding structure for a nonresident alien client who wishes to invest in U.S. securities involves the use of one or more wholly owned foreign corporations to hold the U.S. securities. Stock of a foreign corporation isn’t a U.S. situs asset for purposes of the U.S. estate tax—even if the assets of the foreign corporation consist entirely of U.S. situs assets (a “foreign blocker corporation”).23
A foreign trust often is used to hold the stock of the foreign blocker corporation to provide for succession planning. If the trust has any U.S. beneficiaries, it often will be structured as a grantor trust during the lifetime of the nonresident alien grantor, so that the grantor is treated as owning the assets of the trust, including the stock of any foreign blocker corporation, for U.S. income tax purposes. The foreign blocker corporation usually will be created in a jurisdiction that permits it to make a check-the-box election on the death of the grantor; that is, it won’t be treated as a “per se” corporation under the Treasury regulations.24 If a check-the-box election is made after the grantor’s death to treat the corporation as a pass-through for U.S. tax purposes, the Controlled Foreign Corporation (CFC) or Passive Foreign Investment Company (PFIC) rules can be avoided. These rules are tax anti-avoidance rules that can have harsh results for U.S. persons who have direct or indirect interests (for example, through a foreign non-grantor trust) in foreign corporations that earn primarily passive income or hold primarily passive assets.
In each case, a practitioner will need to examine the rules and the relevant facts and circumstances to determine the FFI or NFFE status of the trustee, the trust itself and the foreign blocker corporation.
Based on the rules described above, we believe the following characterizations apply to foreign trustees:
• If the trustee is a foreign institution, the trustee will be an FFI.25
• If the trustee is a private trust company, it likely will be considered an FFI, although the answer isn’t free from doubt. The characterization ultimately depends on whether a private trust company satisfies the tests for a depository institution or for an investment entity under the regulations. The trust company is a depository institution if it’s “engaged in a banking or similar business,” meaning that in the ordinary course of its business with customers, it accepts deposits (or other similar investments) and regularly provides trust or fiduciary services.26 The trust company is an investment entity if, as a business, it’s engaged in trading, portfolio management, investing, administering or managing financial assets on behalf of a customer. A private trust company that acts solely as trustee of trusts created by a single family, arguably, may not be engaged in a manner that satisfies either test, but if it acts as trustee of trusts created by different branches of an extended family, it may. On balance, however, it appears likely that many private trust companies will be considered FFIs.
• If the trustee is an individual, the trustee should be neither an FFI nor an NFFE, since the definition of entity in the final regulations expressly excludes individuals.27
If a foreign trust’s gross income is primarily attributable to its investment assets and it’s managed by another FFI, then, with limited exceptions, the trust itself will be an FFI.28 An entity is managed by another FFI if the managing FFI performs, either directly or through another third-party service provider, any of the investment entity activities identified above.29 A foreign trust with a trust company serving as trustee managing the trust’s underlying investments will, therefore, be classified as an FFI.30
If all of the trustees and investment advisors of a foreign trust are individuals, the trust won’t be considered to be managed by an entity. Thus, it’s likely to qualify as an NFFE, even though the trust’s gross income may be primarily attributable to the investment and reinvestment of financial assets.31 An example in the final regulations confirms that a trust holding solely financial assets and having an individual trustee won’t be an FFI, so long as the trustee doesn’t hire any entity as a third-party service provider to perform any investment entity activities for the trust.32 Unfortunately, since individual trustees often hire a third-party service provider entity to manage the investments, this may cause a number of trusts with individual trustees to fail to qualify as NFFEs. However, if the trustees retained a third-party service provider entity to provide only advice with respect to the investments (with no direct authority to act with respect to the trust’s holdings), the trust still may qualify as an NFFE. This is because advice alone may not rise to the level of managing the trust, although this point isn’t clear in the final regulations.33
It’s not clear whether a foreign trust with a financial institution as trustee would be an FFI if the trust has no assets at the trust level other than the stock of the foreign blocker corporation (which, in turn, holds the investment assets). When dividends are paid regularly from the foreign blocker corporation to the trust, it’s likely the trust will be an FFI on the basis that the dividends paid from the blocker are income from investing in financial assets; therefore, the trust meets the test for an investment entity.34 However, during the nonresident grantor’s life, if the foreign blocker corporation accumulates income instead of paying regular dividends, it’s possible that the trust may not have income and may be classified as an NFFE. After the death of the nonresident alien grantor, when a check-the-box election has been made to treat the foreign blocker corporation as a pass-through for U.S. tax purposes, the trust should be treated as deriving the income of the blocker, thereby making it an FFI.
Foreign Blocker Corporations
Most foreign blocker corporations likely will be FFIs on the basis that they’re investment entities, either because their investments are actively managed by their directors (who, although they are individuals, generally are employees of the FFI trustee; therefore, the corporation may be considered indirectly managed by the FFI trustee) or by a third-party investment manager hired by the trustee.35
Determining Beneficial Interests
Foreign trusts. To comply with FATCA, a determination will have to be made as to whether any specified U.S. person has a beneficial interest in a foreign trust. While both the trustee and the trust itself may have due diligence and reporting obligations under FATCA, in practice, the burden of making the determination will fall on the trustee.
For a trustee to be a participating FFI, it will be required to collect information and report with respect to its U.S. accounts, meaning those financial accounts maintained by the trustee and held by one or more specified U.S. persons or U.S. owned foreign entities. A trust is a U.S. owned foreign entity if: (1) the trust is treated as owned by any specified U.S. person under IRC Sections 671-679, or (2) any specified U.S. person has more than a 10 percent (or, in certain cases, more than a 0 percent) direct or indirect ownership or beneficial interest in the trust, determined as discussed below.36
Additionally, a foreign trust that’s an FFI will be required to collect information and report with respect to its U.S. accounts and, for this purpose, an account includes an equity interest in the trust.37 A person has an equity interest in a trust that’s an FFI if he: (1) is treated as owning any portion of the trust under Sections 671-679, or (2) has received a discretionary distribution during the year or is entitled to mandatory distributions from the trust.38 A beneficiary who’s eligible to receive a discretionary distribution but doesn’t, in fact, receive one, won’t be considered as holding an equity interest in the trust for these purposes.39
A foreign trust that’s an NFFE will have to report its substantial U.S. owners, meaning those specified U.S. persons who are: (1) treated as owning any portion of the trust under Sections 671-679, or (2) holding, directly or indirectly, more than 10 percent of the beneficial interests of the trust.40 For this purpose, ownership or beneficial interests of related persons must be aggregated.41
The first step in determining beneficial interests in a foreign trust is to determine the grantor trust status of the trust and, if the trust is a grantor trust, whether the grantor is a U.S. person. If it’s a grantor trust in its entirety as to a specified U.S. person and if the trust is an NFFE, no other U.S. beneficiaries are treated as owning beneficial interests.42 It’s not entirely clear whether this rule applies to a direct interest in a trust that’s an FFI.43 Nevertheless, if the trust is a grantor trust in its entirety as to a nonresident alien, or if any portion of the trust isn’t a grantor trust, then the interests of the beneficiaries must be considered in each case.
The second step is to determine the percentage interests of the beneficiaries in the trust. A specified U.S. person has a beneficial interest in a foreign trust if such person has (directly or indirectly) the right to receive a mandatory distribution or receives a discretionary distribution from the trust.44 To determine whether the greater of 0 percent or 10 percent threshold is satisfied, consider:
• If a U.S. person has a right to receive any mandatory distributions from a trust, the value of such person’s beneficial interest in the trust is determined in accordance with IRC Section 7520.45
• If a U.S. person is a discretionary beneficiary of a trust, the value of the U.S. person’s beneficial interest in the trust is equal to the fair market value of all of the distributions from the trust to him: (1) during the prior calendar year if the trust is an NFFE, or
(2) during the current calendar year if the trust is an FFI.46 The relevant percentage threshold is met if such distributions exceed 10 percent for a trust that’s an NFFE or 0 percent for a trust that’s an FFI, based on either the value of all of the distributions made by the trust during that year or the value of the assets held by the trust at the end of that year.47
• If a U.S. person is both entitled to any mandatory distributions and receives discretionary distributions, the value the U.S. person’s beneficial interest is the sum of the value of the mandatory interest determined under Section 7520 and the value of all discretionary distributions made to such person during the prior year. In this situation, the relevant percentage threshold is met if that total value exceeds either
10 percent (or 0 percent) of the value of distributions made by the trust during the prior calendar year or 10 percent (or 0 percent) of the value of the assets held by the trust at the end of the year.48
• There’s a de minimis amount or value exception under which a U.S. person isn’t treated as a substantial U.S. owner. This exception applies if: (1) the U.S. person receives $5,000 or less during the year from the trust; and (2) the U.S. person is entitled to receive mandatory distributions and the value of such person’s interest in the trust is $50,000 or less.49
Foreign blocker corporations. To the extent that a foreign blocker corporation is used in a foreign trust structure to hold investments and is an FFI, the corporation will have to collect information and report on its U.S. accounts (including any U.S. person treated as owning an equity interest in them). If the foreign blocker corporation is owned by a trust that’s a participating FFI or a deemed-compliant FFI (other than a type of deemed-compliant FFI known as an “owner-documented FFI”), then even if U.S. persons have beneficial interests in the trust, they shouldn’t be deemed to have interests in the corporation for reporting purposes.50 In that case, it appears that the corporation (as a participating FFI) wouldn’t have to report to the IRS information on U.S. persons based on their interests in the trust.51
In every other case, including if the trust that owns the blocker corporation is an NFFE, the foreign blocker corporation will have to look through the trust to report its substantial U.S. owners. In determining the persons who will be considered to have equity interests in the foreign blocker corporation, indirect ownership rules will apply and interests of related parties will be aggregated.52 Any grantor treated as the owner of the trust (under Sections 671-679) and the beneficiaries of the trust will be deemed to own the stock of the corporation in proportion to their interest in the trust.53 However, in determining the proportionate interest of the grantor and beneficiaries in this case, the rules for determining beneficial ownership in trusts described above, which rely on past distributions or mandatory rights to distributions, wouldn’t apply. Instead, a facts-and-circumstances test is employed to determine a U.S. person’s proportionate interest in the trust (and therefore, indirectly, in the foreign blocker corporation), and arrangements that artificially decrease such person’s interest are disregarded.54 Such a test is difficult to apply in case of a wholly discretionary trust, which is the most common form of foreign trust. Indeed, in other contexts, including the application of the CFC and PFIC rules, the facts and circumstances test has been criticized as being unworkable in practice.
Avoiding FATCA Withholding
NFFE: A trust that’s an NFFE may find it relatively straightforward to avoid FATCA withholding by certifying that it has no substantial U.S. owners or by identifying them to all of its withholding agents.55
FFI: A trust or blocker foreign corporation that’s an FFI can avoid FATCA withholding by becoming a participating FFI or a deemed-compliant FFI. An additional incentive for a trust to become a participating (or deemed-compliant) FFI is that it may apply for a refund of any overwithheld tax, as there’s no mechanism under FATCA for a complex trust that’s not FATCA-compliant to claim a credit or refund of withheld tax (except to the extent otherwise required by a treaty obligation of the United States).56
Among the categories of deemed-compliant FFIs, the most relevant for foreign trusts and foreign blocker corporations that aren’t resident in a FATCA partner jurisdiction (see “IGAs,” p. 32) are the owner-documented FFI, the sponsored FFI and the sponsored, closely held investment vehicle. To qualify, a trust or corporation must meet the specific requirements provided in the final regulations requiring, in each case, the agreement of another entity (either a withholding agent or sponsoring entity) to do the FATCA reporting on its behalf.57 However, these categories may provide options to streamline the reporting within a foreign trust structure.
IGAs entered into between the United States and the governments of other countries (a partner jurisdiction) are meant to streamline the implementation of FATCA and reduce compliance impediments and costs for FFIs in those partner jurisdictions. Currently, the United States has entered into IGAs with the United Kingdom, Ireland, Mexico, Denmark, Switzerland and Norway and is negotiating with more than 50 additional countries, including commonly used offshore trust jurisdictions, such as the Cayman Islands, Guernsey, the Isle of Man and Jersey. Also, the Spanish government has recently authorized the signing of an IGA with the United States.
There are two types of IGAs: Model 1 IGAs, in which the FFI in the partner jurisdiction collects information in accordance with rules adopted by that jurisdiction and reports the information so collected to the tax authority of that jurisdiction rather than to the IRS directly; and Model 2 IGAs, which require reporting directly to the IRS, albeit on a modified basis than that which exists under the final regulations. At this time, Switzerland is the only country with a Model 2 IGA.
The Model 1 IGA is more generous in that FFIs covered by it may be treated as satisfying the reporting requirements of FATCA and aren’t required to engage in withholding.58 The Model 2 IGA is less generous in that it requires resident FFIs to comply with the requirements of an FFI agreement or else withhold. Both forms contain an “Annex II” listing categories of institutions in the partner jurisdiction that will be treated as exempt beneficial owners and deemed-compliant financial institutions. For example, under the United States-Mexico IGA, a typical Mexican property-holding trust (fideicomiso) holding only real property is a non-reporting, deemed-compliant FFI.
FATCA withholding will become effective in several stages. Generally, FATCA withholding on FDAP income begins as of Jan. 1, 2014, although withholding on most obligations outstanding as of that date is further deferred to a later date determined by the status of the payee.59 Withholding on gross proceeds applies to sales and dispositions occurring on or after Jan. 1, 2017, and withholding on foreign passthru payments won’t begin until Jan. 1, 2017, at the earliest. (Treasury regulations with respect to such payments haven’t yet been issued.)
The IRS has stated that it will open a portal for participating FFIs to register, including registration as sponsoring entities, by July 15, 2013 and issued a draft of the paper version of the FATCA registration form (Form 8957) on April 5, 2013. Participating FFIs and deemed-compliant FFIs (other than owner-documented FFIs) will be issued a Global Intermediary Identification Number to provide to payors. Form W-8BEN-E (issued in draft form in May 2012) will replace the existing Form W-8BEN and will be used to identify an entity’s classification under FATCA. Proper completion of the form, therefore, requires that an entity know its FATCA status. Form 8966 will be issued to participating FFIs to report annually with respect to specified U.S. persons.
—The authors wish to thank Theresa Clardy, an associate at Loeb & Loeb LLP in Los Angeles, for her assistance in the preparation of this article and Ellen K. Harrison, a partner at Pillsbury Winthrop Shaw Pittman LLP in Washington, D.C. and Amy E. Heller, a partner at McDermott Will & Emery in New York, for their comments on earlier drafts.
1. All references to the “IRC” are references to the Internal Revenue Code of 1986, as amended. All references to “regulations” or to “Treas. Regs.” are references to the regulations codified in Title 26 of the Code of Regulations.
2. Pub. L. No. 111-147, Sections 501–541, 124 Stat. 71, 97-106 (2010).
3. 78 Fed. Reg. 5874 (Jan. 28, 2013).
4. Both the American College of Trust and Estate Counsel and the International Tax Planning Committee of the Real Property, Trust and Estate Law Section of the American Bar Association submitted comments on the proposed regulations illustrating the difficulties of determining how to apply them to trusts. The final regulations addressed some, but not all, of these comments.
5. IRC Sections 1471(a), 1472(a); Treas. Regs. Section 1.1472-1(b).
6. IRC Section 1473(4); Treas. Regs. Section 1.1473-1(d)(1).
7. This definition of fixed or determinable annual or periodical gains, profits and income includes bank deposit interest and portfolio interest, which aren’t subject to U.S. income tax if earned by a nonresident alien. Similarly, it includes gross proceeds of sale of U.S. securities, which aren’t generally taxable to a nonresident alien.
8. Treas. Regs. Section 1.1473-1(a)(1)(ii).
9. IRC Section 1471(d)(7). The final regulations refer to a “foreign passthru
payment,” but the definition of the term is expressly reserved for a future date. See Treas. Regs. Sections 1.1471-1(b)(49), 1-1471-5(h)(2).
10. Treas. Regs. Section 1.1471-5(e)(2)(i)(D).
11. IRC Section 1471(d)(5); Treas. Regs. Section 1.1471-5(e)(1), (e)(4).
12. Treas. Regs. Section 1.1471-5(e)(4)(i)(A). An entity primarily conducts the investment or management of funds or financial assets on behalf of other persons as a business if the entity’s gross income from such activities equals or exceeds 50 percent of its gross income during the shorter of: (1) the prior three calendar years, or (2) the period of the entity’s existence. Treas. Regs. Section 1.1471-5(e)(4)(iii)(A).
13. Treas. Regs. Section 1.1471-5(e)(4)(i)(B). To be managed by one of the entities listed is also referred to as being “professionally managed” in the preamble to the final regulations.
14. See IRC Section 1471(a), (b). There are limited exclusions for certain non-profit entities and nonfinancial group entities from the definition of “financial institution.” Treas. Regs. Section 1.1471-5(e)(5).
15. IRC Section 1471(b), (c).
16. Treas. Regs. Section 1.1471-5(b)(1)(iii)(A).
17. IRC Section 1471(b)(1)(D).
18. IRC Section 1473(3); Treas. Regs. Section 1.1473-1(c).
19. IRC Sections 1471(d)(3), 1473(2); Treas. Regs. Sections 1.1471-5(c),
20. IRC Section 1472(d).
21. Treas. Regs. Section 1.1472-1(b)(1).
22. Treas. Regs. Section 1.1472-1(c)(1), (iv).
23. See Treas. Regs. Section 20.2105-1(f).
24. See Treas. Regs. Section 301.7701-2(b)(8) (for a list of entities that are per se corporations).
25. See Treas. Regs. Section 1.1471-5(e)(2)(i)(D).
26. Treas. Regs. Section 1.1471-5(e)(2)(i)(D).
27. Treas. Regs. Section 1.1471-1(b)(35).
28. See Treas. Regs. Section 1.1471-5(e)(4)(i)(B).
29. See ibid.
30. See Treas. Regs. Section 1.1471-5(e)(4)(v), Example 6.
31. See Treas. Regs. Section 1.1471-5(e)(4)(i)(B).
32. Treas. Regs. Section 1.1471-5(e)(4)(v), Example 5.
33. See ibid, Examples 1, 2. See also Lee A. Shepherd, “News Analysis: Who is a Manager Under FATCA?” Tax Analysts, at p. 3 (March 4, 2013).
34. See Treas. Regs. Section 1.1471-5(e)(4)(i)(B).
35. Ibid. It’s possible that the foreign blocker also may qualify as an investment entity under Treas. Regs. Section 1.1471-5(e)(4)(i)(C).
36. Treas. Regs. Sections 1.1471-5(c), 1.1473-1(b)(1)(iii), (b)(5). Although an account held in the name of a trust that’s a grantor trust in its entirety is deemed held by the grantor under Treas. Regs. Section 1.1471-5(a)(3)(ii), when the trust isn’t a participating foreign financial institution (FFI) or a deemed-compliant FFI then, with respect to certain withholdable payments, the payee is the trust itself. See Ellen K. Harrison, “FATCA Withholding Rules for Trusts and Estates,” 9 Inst. on Int’l Est. Plan., at pp. 7-8 and nn. 44-46 (2013).
37. IRC Section 1471(d)(2)(c); Treas. Regs. Section 1.1471-5(b)(1)(iii).
38. Treas. Regs. Section 1.1471-5(b)(3)(iii)(B); Treas. Regs. Section 1.1473-1(b)(1)-(5). There’s a special rule applicable to FFIs that are investment entities. Under this rule, in determining the interest of a beneficiary of a trust that’s an investment entity, if any specified U.S. person holds directly or indirectly any beneficial interest in such investment entity, then a greater than 0 percent threshold applies.
39. Treas. Regs. Section 1.1471-5(b)(3)(iii)(B).
40. IRC Sections 1472(a)-(b), 1473(2)(A)(iii); Treas. Regs. Section 1.1473-1(b)(1)(iii).
41. Treas. Regs. Section 1.1473-1(b)(2)(v).
42. Treas. Regs. Section 1.1473-1(b)(4)(ii).
43. Treas. Regs. Section 1.1471-5(b)(3)(iii)(B) states that the equity interests of beneficiaries in a trust that’s a financial institution are determined in accordance with Treas. Regs. Section 1.1473-1(b)(3). Treas. Regs. Section 1.1473-1(b)(4) contains the exception that allows U.S. beneficiaries not to be treated as owning beneficial interests if the trust is a grantor trust in its entirety with respect to a specified U.S. person, and it’s not clear if the exception also applies for purposes of Treas. Regs. Section 1.1471-5(b)(3)(iii)(B). We believe that the better interpretation is that these provisions should be construed together.
44. Treas. Regs. Section 1.1473-1(b)(3)(i).
45. Treas. Regs. Section 1.1473-1(b)(3)(ii)(B).
46. Treas. Regs. Section 1.1473-1(b)(3)(ii)(A), (b)(5).
48. Treas. Regs. Sections 1.1473-1(b)(3)(ii)(C), (b)(5).
49. Treas. Regs. Section 1.1473-1(b)(4)(i). It’s not entirely clear the de minimis exception applies to direct interests in trusts that are FFIs. See supra note 43.
50. Treas. Regs. Sections 1.1473-1(b)(2)(i), 1.1471-5(a)(3)(i).
51. Treas. Regs. Section 1.1471-4(d)(2)(ii)(A), (d)(3), (d)(9), Example 2. The annual reporting form for participating FFIs (Form 8966) hasn’t yet been released, so it’s not yet clear what, exactly, it will require.
52. Treas. Regs. Section 1.1473-1(b)(2)(v).
53. Treas. Regs. Section 1.1473-1(b)(2)(i).
54. Treas. Regs. Section 1.1473-1(b)(2)(iv).
55. Treas. Regs. Section 1.1472-1(b).
56. Treas. Regs. Section 1.1474-2(a)(1), 1.1473-1(d). See Harrison, supra note 36,
at pp. 6-8.
57. The requirements for an owner-documented FFI appear in Treas. Regs. Section 1.1471-5(f)(3), and a withholding agent may treat a payee as an owner-documented FFI if it receives the documentation and meets the due diligence requirements as provided in Treas. Regs. Section 1.1471-3(d)(6). The requirements for a sponsored FFI appear in Treas. Regs. Section 1.1471-5(f)(1)(i)(F) (sponsored investment entities) and Treas. Regs. Sections 1.1471-5(f)(2)(iii) (sponsored, closely held investment vehicles). A withholding agent may treat a payee as a sponsored FFI if it receives the documentation and meets the due diligence requirements as provided in Treas. Regs. Section 1.1471-3(d)(4) (sponsored investment entities) and Treas. Regs. Section 1.1471-3(d)(5)(ii) (sponsored, closely held investment vehicles).
58. Model 1 Intergovernmental Agreement to Implement FATCA, art. 4 (July 26, 2012), www.treasury.gov/resource-center/tax-policy/treaties/Documents/FATCA-Model-1A-Agreement-to-Implement-Reciprocal-11-14-2012.pdf.
59. Treas. Regs. Section 1.1471-2(a)(4)(ii).