# Regulations Relating to Information Reporting by Foreign Financial Institutions and Withholding on Certain Payments to Foreign Financial Institutions and Other Foreign Entities > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2012-2979 ## Record - **Collection:** Federal Register - **Document type:** Proposed Rule - **Published:** February 15, 2012 - **Citation:** 77 FR 9022 ## Text DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Parts 1 and 301 [REG-121647-10] RIN 1545-BK68 Regulations Relating to Information Reporting by Foreign Financial Institutions and Withholding on Certain Payments to Foreign Financial Institutions and Other Foreign Entities AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemaking and notice of public hearing. SUMMARY: This document contains proposed regulations under chapter 4 of Subtitle A (sections 1471 through 1474) of the Internal Revenue Code of 1986 (Code) regarding information reporting by foreign financial institutions (FFIs) with respect to U.S. accounts and withholding on certain payments to FFIs and other foreign entities. These regulations affect persons making certain U.S.-related payments to FFIs and other foreign entities and payments by FFIs to other persons. This document also provides a notice of a public hearing on these proposed regulations. DATES: Written or electronic comments must be received by April 30, 2012. Requests to speak and outlines of topics to be discussed at the public hearing scheduled for May 15, 2012, at 10 a.m. must be received by May 1, 2012. ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-121647-10), room 5205, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-121647-10), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue NW., Washington, DC, or sent electronically via the Federal eRulemaking Portal at www.regulations.gov (IRS REG-121647-10). The public hearing will be held in the auditorium, Internal Revenue Building, 1111 Constitution Avenue NW., Washington, DC FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, John Sweeney, (202) 622-3840; concerning submissions of comments, the hearing, and/or to be placed on the building access list to attend the hearing, Oluwafunmilayo Taylor, Oluwafunmilayo.P.Taylor@irscounsel.treas.gov, (202) 622-7180 (not toll free numbers). SUPPLEMENTARY INFORMATION: Background I. In General This document contains proposed amendments to 26 CFR part 1 under sections 1471 through 1474 of the Code. On March 18, 2010, the Hiring Incentives to Restore Employment Act of 2010, Public Law 111-147 (the HIRE Act), added chapter 4 of Subtitle A (chapter 4), comprised of sections 1471 through 1474, to the Code. These provisions were originally introduced as part of the Foreign Account Tax Compliance Act of 2009 (H.R. 3933), commonly referred to as FATCA. Chapter 4 generally requires foreign financial institutions (FFIs) to provide information to the Internal Revenue Service (IRS) regarding their United States accounts (U.S. accounts). Chapter 4 also requires certain non-financial foreign entities (NFFEs) to provide information on their substantial United States owners (substantial U.S. owners) to withholding agents. Chapter 4 imposes a withholding tax on certain payments to FFIs and NFFEs that fail to comply with their obligations. Since the enactment of chapter 4, the Department of the Treasury (Treasury Department) and the IRS have issued preliminary guidance on the implementation of chapter 4. See Notice 2010-60, 2010-37 I.R.B. 329, Notice 2011-34, 2011-19 I.R.B. 765, and Notice 2011-53, 2011-32 I.R.B. 124 (collectively, the FATCA Notices). See § 601.601(d)(2)(ii)(b). The Treasury Department and the IRS received numerous comments in response to the FATCA Notices, as well as on chapter 4 more generally. These comments were carefully considered in developing these proposed regulations. II. Chapter 4 in the Context of the U.S. Federal Income Tax Laws Like the tax systems in many countries, the U.S. Federal income tax system relies on voluntary compliance. That is, taxpayers are expected to compute, report, and remit their Federal income tax liability each year. Also, as is the case in many countries, third-party payors of certain items are required to report these amounts to the IRS. Such reporting serves as an important and long-standing check on voluntary compliance. The reporting and diligence rules applicable to third-party payors are comprehensive. In particular, chapter 61 of subtitle A of the Code (chapter 61), comprised in relevant part of sections 6041 through 6049, requires certain payors to document their third-party payees and report certain types of payments (for example interest, dividends, and gross proceeds from broker transactions) made to those payees. These rules are subject to exceptions for certain non-U.S. payors (including many FFIs), certain payments of foreign source income, and certain payments to foreign persons. In addition, chapter 3 of subtitle A of the Code (chapter 3), comprised of sections 1441 through 1464, generally requires withholding agents to document their payees and to withhold and report with respect to certain U.S. source payments made to foreign persons. This third-party information reporting assists taxpayers in correctly computing and reporting their tax liabilities, increases compliance with tax obligations, reduces the incidence of and opportunities for tax evasion, and thus helps to maintain the fairness of the U.S. Federal income tax system. As a result of recent improvements in international communications and the associated globalization of the world economy, U.S. taxpayers' investments have become increasingly global in scope. FFIs now provide a significant proportion of the investment opportunities for, and act as intermediaries with respect to the investments of, U.S. taxpayers. Like U.S. financial institutions, FFIs are generally in the best position to identify and report with respect to their U.S. customers. Absent such reporting by FFIs, some U.S. taxpayers may attempt to evade U.S. tax by hiding money in offshore accounts. To prevent this abuse of the voluntary compliance system and address the use of offshore accounts to facilitate tax evasion, it is essential in today's global investment climate that reporting be available with respect to both the onshore and offshore accounts of U.S. taxpayers. This information reporting strengthens the integrity of the voluntary compliance system by placing U.S. taxpayers that have access to international investment opportunities on an equal footing with U.S. taxpayers that do not have such access or otherwise choose to invest within the United States. To this end, chapter 4 extends the scope of the U.S. information reporting regime to include FFIs that maintain U.S. accounts. Chapter 4 also imposes increased disclosure obligations on certain NFFEs that present a high risk of U.S. tax avoidance. In addition, chapter 4 provides for withholding on FFIs and NFFEs that do not comply with the reporting and other requirements of chapter 4. This withholding generally may be credited against the U.S. income tax liability of the beneficial owner of the payment to which the withholding is attributable, and generally may be refunded to the extent the withholding exceeds such liability. An FFI that does not comply with the requirements of section 1471(b), however, and that beneficially owns the payment from which tax is withheld under chapter 4, may not receive a credit or refund of such tax except to the extent required by a treaty obligation of the United States. Recognizing that there are costs associated with the implementation of any new reporting regime, the Treasury Department and the IRS have considered carefully all comments received and have met extensively with stakeholders to develop an implementation approach that achieves an appropriate balance between fulfilling the important policy objectives of chapter 4 and minimizing the burdens imposed on stakeholders. Further to this end, the Treasury Department and the IRS will continue to engage with interested stakeholders, including foreign governments, in connection with finalizing these proposed regulations regarding the efficient and effective implementation of chapter 4. In particular, to minimize burden, facilitate coordination with local law restrictions, and improve collaboration in the battle against offshore tax evasion, the Treasury Department and the IRS are considering, in consultation with foreign governments, an alternative approach to implementation whereby an FFI could satisfy the reporting requirements of chapter 4 if: (1) the FFI collects the information required under chapter 4 and reports this information to its residence country government; and (2) the residence country government enters into an agreement to report this information annually to the IRS, as required by chapter 4, pursuant to an income tax treaty, tax information exchange agreement, or other agreement with the United States. Moreover, consistent with the policies underlying chapter 4, the Treasury Department and the IRS remain committed to working cooperatively with foreign jurisdictions on multilateral efforts to improve transparency and information exchange on a global basis. III. Statutory Provisions and FATCA Notices A. Statutory Provisions Section 1471(a) requires any withholding agent to withhold 30 percent of any withholdable payment to an FFI that does not meet the requirements of section 1471(b). A withholdable payment is defined in section 1473(1) to mean, subject to certain exceptions: (i) any payment of interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income (FDAP income), if such payment is from sources within the United States; and (ii) any gross proceeds from the sale or other disposition of any property of a type which can produce interest or dividends from sources within the United States. An FFI meets the requirements of section 1471(b) if it either enters into an agreement (an FFI agreement) with the IRS under section 1471(b)(1) to perform certain obligations or meets requirements prescribed by the Treasury Department and the IRS to be deemed to comply with the requirements of section 1471(b). An FFI is defined as any financial institution that is a foreign entity, other than a financial institution organized under the laws of a possession of the United States (generally referred to as a U.S. territory in this preamble). For this purpose, section 1471(d)(5) defines a financial institution as, except to the extent provided by the Secretary, any entity that: (i) Accepts deposits in the ordinary course of a banking or similar business; (ii) as a substantial portion of its business, holds financial assets for the account of others; or (iii) is engaged (or holding itself out as being engaged) primarily in the business of investing, reinvesting, or trading in securities, partnership interests, commodities, or any interest in such securities, partnership interests, or commodities. Section 1471(b)(1)(A) and (B) requires an FFI that enters into an FFI agreement (a participating FFI) to identify its U.S. accounts and comply with verification and due diligence procedures prescribed by the Secretary. A U.S. account is defined under section 1471(d)(1) as any financial account held by one or more specified United States persons, as defined in section 1473(3), (specified U.S. persons) or United States owned foreign entities (U.S. owned foreign entities), subject to certain exceptions. Section 1471(d)(2) defines a financial account to mean, except as otherwise provided by the Secretary, any depository account, any custodial account, and any equity or debt interest in an FFI, other than interests that are regularly traded on an established securities market. A U.S. owned foreign entity is defined in section 1471(d)(3) as any foreign entity that has one or more substantial U.S. owners (as defined in section 1473(2)). A participating FFI is required under section 1471(b)(1)(C) and (E) to report certain information on an annual basis to the IRS with respect to each U.S. account and to comply with requests for additional information by the Secretary with respect to any U.S. account. The information that must be reported with respect to each U.S. account includes: (i) The name, address, and taxpayer identifying number (TIN) of each account holder who is a specified U.S. person (or, in the case of an account holder that is a U.S. owned foreign entity, the name, address, and TIN of each specified U.S. person that is a substantial U.S. owner of such entity); (ii) the account number; (iii) the account balance or value; and (iv) except to the extent provided by the Secretary, the gross receipts and gross withdrawals or payments from the account (determined for such period and in such manner as the Secretary may provide). In lieu of reporting account balance or value and reporting gross receipts and gross withdrawals or payments, a participating FFI may, subject to conditions provided by the Secretary, elect under section 1471(c)(2) to report the information required under sections 6041, 6042, 6045, and 6049 as if such institution were a U.S. person and each holder of such U.S. account that is a specified U.S. person or U.S. owned foreign entity were a natural person and citizen of the United States. If foreign law would prevent the FFI from reporting the required information absent a waiver from the account holder, and the account holder fails to provide a waiver within a reasonable period of time, the FFI is required under section 1471(b)(1)(F) to close the account. Section 1471(b)(1)(D)(i) requires a participating FFI to withhold 30 percent of any passthru payment to a recalcitrant account holder or to an FFI that does not meet the requirements of section 1471(b) (nonparticipating FFI). A passthru payment is defined in section 1471(d)(7) as any withholdable payment or other payment to the extent attributable to a withholdable payment. Section 1471(d)(6) defines a recalcitrant account holder as any account holder that fails to provide the information required to determine whether the account is a U.S. account, or the information required to be reported by the FFI, or that fails to provide a waiver of a foreign law that would prevent reporting. A participating FFI may, subject to such requirements as the Secretary may provide, elect under section 1471(b)(3) not to withhold on passthru payments, and instead be subject to withholding on payments it receives, to the extent those payments are allocable to recalcitrant account holders or nonparticipating FFIs. Section 1471(b)(1)(D)(ii) requires a participating FFI that does not make such an election to withhold on passthru payments it makes to any participating FFI that makes such an election. Section 1471(e) provides that the requirements of the FFI agreement shall apply to the U.S. accounts of the participating FFI and, except as otherwise provided by the Secretary, to the U.S. accounts of each other FFI that is a member of the same expanded affiliated group, as defined in section 1471(e)(2). Section 1471(f) exempts from withholding under section 1471(a) certain payments beneficially owned by certain persons, including any foreign government, international organization, foreign central bank of issue, or any other class of persons identified by the Secretary as posing a low risk of tax evasion. Section 1472(a) requires a withholding agent to withhold 30 percent of any withholdable payment to an NFFE if the payment is beneficially owned by the NFFE or another NFFE, unless the requirements of section 1472(b) are met with respect to the beneficial owner of the payment. Section 1472(d) defines an NFFE as any foreign entity that is not a financial institution as defined in section 1471(d)(5). The requirements of section 1472(b) are met with respect to the beneficial owner of a payment if: (i) The beneficial owner or payee provides the withholding agent with either a certification that such beneficial owner does not have any substantial U.S. owners, or the name, address, and TIN of each substantial U.S. owner; (ii) the withholding agent does not know or have reason to know that any information provided by the beneficial owner or payee is incorrect; and (iii) the withholding agent reports the information provided to the Secretary. Section 1472(c)(1) provides that withholding under section 1472(a) does not apply to payments beneficially owned by certain classes of persons, including any class of persons identified by the Secretary. In addition, section 1472(c)(2) provides that withholding under section 1472(a) does not apply to any class of payment identified by the Secretary for purposes of section 1472(c) as posing a low risk of tax evasion. Section 1474(a) provides that every person required to withhold and deduct any tax under chapter 4 is made liable for such tax and is indemnified against the claims and demands of any person for the amount of any payments made in accordance with the provisions of chapter 4. In general, the beneficial owner of a payment is entitled to a refund for any overpayment of tax actually due under other provisions of the Code. However, with respect to any tax properly deducted and withheld under section 1471 from a payment beneficially owned by an FFI, section 1474(b)(2) provides that the FFI is not entitled to a credit or refund, except to the extent required by a treaty obligation of the United States (and, if a credit or refund is required by a treaty obligation of the United States, no interest shall be allowed or paid with respect to such credit or refund). In addition, section 1474(b)(3) provides that no credit or refund shall be allowed or paid with respect to any tax properly deducted and withheld under chapter 4 unless the beneficial owner of the payment provides the Secretary with such information as the Secretary may require to determine whether such beneficial owner is a U.S. owned foreign entity and the identity of any substantial U.S. owners of such entity. Section 1474(c) provides that information provided under chapter 4 is confidential under rules similar to section 3406(f), except that the identity of an FFI that meets the requirements of section 1471(b) is not treated as return information for purposes of section 6103. Section 1474(d) provides that the Secretary shall provide for the coordination of chapter 4 with other withholding provisions under the Code, including providing for the proper crediting of amounts deducted and withheld under chapter 4 against amounts required to be deducted and withheld under other provisions. Section 1474(f) provides that the Secretary shall prescribe such regulations or other guidance as may be necessary or appropriate to carry out the purposes of, and prevent the avoidance of, chapter 4. B. FATCA Notices On August 29, 2010, the Treasury Department and the IRS released Notice 2010-60, which provided preliminary guidance regarding the implementation of chapter 4. In particular, Notice 2010-60: (i) Defined the scope of certain grandfathered obligations; (ii) provided initial guidance on what entities would be considered FFIs and NFFEs; (iii) set forth the account due diligence procedures for FFIs and U.S. financial institutions with respect to new and preexisting accounts held by individuals and entities; (iv) provided initial guidance on the information required to be reported by FFIs with respect to their U.S. accounts and recalcitrant account holders; and (v) requested further comments on a number of issues. On April 8, 2011, the Treasury Department and the IRS released Notice 2011-34, which modified and supplemented the guidance in Notice 2010-60. Specifically, Notice 2011-34: (i) Modified the account due diligence procedures for preexisting accounts held by individuals; (ii) provided initial guidance regarding the definition and identification of passthru payments; (iii) provided guidance on initial categories of FFIs that would be deemed compliant with the requirements of section 1471(b); (iv) modified and supplemented the guidance in Notice 2010-60 regarding the reporting required of FFIs with respect to their U.S. accounts; (v) provided initial guidance regarding the interaction of the qualified intermediary (QI) regime and chapter 4; and (vi) provided initial guidance regarding the application of section 1471(b) to expanded affiliated groups. On July 14, 2011, the Treasury Department and the IRS released Notice 2011-53, which provides for phased implementation of certain requirements under chapter 4, and discusses certain substantive and procedural matters. Explanation of Provisions I. Executive Summary These proposed regulations seek to implement the chapter 4 reporting and withholding regime efficiently and effectively by establishing adequate lead times to allow system development and by minimizing the overall compliance burdens in a manner that is consistent with chapter 4's enforcement goals. To accomplish this goal, the proposed regulations incorporate the guidance described in the FATCA Notices and, in response to comments and further consideration, revise and refine the rules discussed therein. The proposed regulations also provide guidance on topics that were not addressed in the FATCA Notices. The proposed regulations take into account the numerous helpful comments received, provide extensive guidance on all major aspects of the implementation of chapter 4, and, in response to requests received by the Treasury Department and the IRS, provide detail and certainty on the scope of obligations required under chapter 4. To facilitate review of this detailed operational guidance, the following section provides a summary of the most significant modifications and additions the proposed regulations make to the guidance provided in the FATCA Notices, an overview of the obligations of FFIs, and the timeline for phased implementation as currently proposed. A. Modifications and Additions to FATCA Notices Significant modifications and additions to the guidance in the FATCA Notices include the following: 1. Expanded Scope of “Grandfathered Obligations.” Section 501(d)(2) of the HIRE Act provides that no amount shall be required to be deducted or withheld from any payment under any obligation outstanding on March 18, 2012, or from the gross proceeds from any disposition of such an obligation. To facilitate implementation of chapter 4 by withholding agents and FFIs, the proposed regulations exclude from the definition of withholdable payment and passthru payment any payment made under an obligation outstanding on January 1, 2013, and any gross proceeds from the disposition of such an obligation. 2. Transitional Rules for Affiliates with Legal Prohibitions on Compliance. Section 1471(e) provides that the requirements of the FFI agreement shall apply to the U.S. accounts of the participating FFI and, except as otherwise provided by the Secretary, to the U.S. accounts of each other FFI that is a member of the same expanded affiliated group. Notice 2011-34 states that the Treasury Department and the IRS intend to require that each FFI that is a member of an expanded affiliated group must be a participating FFI or deemed-compliant FFI in order for any FFI in the expanded affiliated group to become a participating FFI. Recognizing that some jurisdictions have in place laws that prohibit an FFI's compliance with certain of chapter 4's requirements, the proposed regulations, pursuant to the authority granted in section 1471(e), provide a two-year transition, until January 1, 2016, for the full implementation of this requirement. During this transitional period, an FFI affiliate in a jurisdiction that prohibits the reporting or withholding required by chapter 4 will not prevent the other FFIs within the same expanded affiliated group from entering into an FFI agreement, provided that the FFI in the restrictive jurisdiction agrees to perform due diligence to identify its U.S. accounts, maintain certain records, and meet certain other requirements. Similar rules apply to branches of FFIs that are subject to comparable legal prohibitions on compliance. 3. Additional Categories of Deemed-Compliant FFIs. Section 1471(b)(2) provides that an FFI may be deemed to comply with the requirements of section 1471(b) if it meets certain requirements. Notice 2011-34 provides initial guidance regarding certain categories of FFIs that will be deemed to comply with the requirements of section 1471(b). The proposed regulations expand the guidance in Notice 2011-34 and provide additional categories of deemed-compliant institutions. The expansion of categories of deemed-compliant institutions is intended to focus the application of chapter 4's obligations on financial institutions that provide services to the global investment community and reduce or eliminate burdens on truly local entities and other entities for which entering into an FFI agreement is not necessary to carry out the purposes of chapter 4. 4. Modification of Due Diligence Procedures for the Identification of Accounts. Section 1471(b) requires participating FFIs to identify their U.S. accounts. Notices 2010-60 and 2011-34 provide guidance regarding the due diligence procedures that participating FFIs will be required to undertake to identify their U.S. accounts. A number of comments suggested modifications to that guidance, in particular with respect to preexisting accounts, to reduce the administrative burden on FFIs. To address these concerns in a manner that is consistent with the policy objectives of chapter 4, the proposed regulations rely primarily on electronic reviews of preexisting accounts. For preexisting individual accounts that are offshore obligations, manual review of paper records is limited to accounts with a balance or value that exceeds $1,000,000 (unless the electronic searches meet certain requirements, in which case manual review is not required). In addition, the proposed regulations provide detailed guidance on the precise scope of paper records required to be searched. Additionally, with respect to preexisting accounts, individual accounts with a balance or value of $50,000 or less, and certain cash value insurance contracts with a value of $250,000 or less, are excluded from the due diligence procedure. With respect to preexisting entity accounts, a number of burden-reducing measures are proposed, including exclusions of accounts of $250,000 or less and extended reliance on information gathered in the context of the due diligence required to comply with anti-money laundering/“know your customer” (AML/KYC) rules, and simplified procedures to identify the chapter 4 status of preexisting entity accounts. With respect to new accounts, the proposed due diligence rules rely extensively on an FFI's existing customer intake procedures. Accordingly, the proposed regulations generally do not require an FFI to make significant modifications to the information collected on customer intake, other than with respect to account holders identified as FFIs, as passive investment entities, or as having U.S. indicia. 5. Guidance on Procedures Required to Verify Compliance. Section 1471(b)(1)(B) requires a participating FFI to comply with such verification procedures as the Secretary may require with respect to the identification of U.S. accounts. Notice 2010-60 states that the Treasury Department and the IRS were exploring the possibility of relying on written certifications by high-level management employees regarding the steps taken to comply with chapter 4, and Notice 2011-34 provides further guidance on the certifications to be provided by officers of a participating FFI. The proposed regulations modify and supplement the guidance in Notices 2010-60 and 2011-34 by providing that responsible FFI officers will be expected to certify that the FFI has complied with the terms of the FFI agreement. Verification of such compliance through third-party audits is not mandated. If an FFI complies with the obligations set forth in an FFI agreement, it will not be held strictly liable for failure to identify a U.S. account. 6. Refinement of the Definition of Financial Account. Section 1471(d)(2) defines a financial account to mean, except as otherwise provided by the Secretary, any depository account, any custodial account, and any equity or debt interest in an FFI, other than interests that are regularly traded on an established securities market. The proposed regulations 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. 7. Extension of the Transition Period for the Scope of Information Reporting. Notice 2011-53 provides for phased implementation of the reporting required under chapter 4 with respect to U.S. accounts. Pursuant to Notice 2011-53, only identifying information (name, address, TIN, and account number) and account balance or value of U.S. accounts would be required to be reported in 2014 (with respect to 2013). Numerous commentators indicated that they would need additional time to make the systems adjustments necessary to be able to report income and gross proceeds. To facilitate the implementation of chapter 4 by FFIs, the proposed regulations provide that reporting on income will be phased in beginning in 2016 (with respect to the 2015 calendar year), and reporting on gross proceeds will begin in 2017 (with respect to the 2016 calendar year). In addition, the proposed regulations provide that FFIs may elect to report information either in the currency in which the account is maintained or in U.S. dollars. 8. Passthru Payments. Section 1471(b)(1)(D) requires participating FFIs to withhold on passthru payments made to nonparticipating FFIs and recalcitrant account holders. Notice 2011-53 states that participating FFIs will not be obligated to withhold on passthru payments that are not withholdable payments (foreign passthru payments) made before January 1, 2015. The Treasury Department and the IRS have received numerous comments expressing concern about the costs, administrative complexity, and legal impediments associated with identifying and withholding on passthru payments. The comments indicated that, without additional time to work through these issues, it would be impossible for many FFIs to commit to fulfill their obligations under chapter 4. In recognition of these concerns, and to facilitate implementation of the chapter 4 rules by FFIs, the proposed regulations provide that withholding will not be required with respect to foreign passthru payments before January 1, 2017. Instead, until withholding applies, to reduce incentives for nonparticipating FFIs to use participating FFIs to block the application of the chapter 4 rules, the proposed regulations require participating FFIs to report annually to the IRS the aggregate amount of certain payments made to each nonparticipating FFI. With respect to the scope and ultimate implementation of withholding on foreign passthru payments, the Treasury Department and the IRS request comments on approaches to reduce burden, for example, by providing a de minimis exception from foreign passthru payment withholding and a simplified computational approach or safe harbor rules to determine an FFI's passthru payment percentage. In the case of jurisdictions that enter into agreements to facilitate FATCA implementation, the Treasury Department and the IRS will work with the governments of such jurisdictions to develop practical alternative approaches to achieving the policy objectives of passthru payment withholding. In addition, where such an agreement provides for the foreign government to report to the IRS information regarding U.S. accounts and recalcitrant account holders, FFIs in such jurisdictions may not be required to withhold on any foreign passthru payments to recalcitrant account holders. B. Summary of Obligations of FFIs The proposed regulations provide a detailed explanation of how an FFI can satisfy the obligations imposed by the statutory provisions of chapter 4 and thus avoid withholding. A summary of the proposed rules follows. 1. Due Diligence Required To Identify U.S. Accounts Chapter 4 requires FFIs to identify U.S. accounts, which include both accounts held by U.S. individuals and certain U.S. entities, and accounts held by foreign entities with substantial U.S. owners (generally, owners with a greater than ten percent interest). To provide certainty, and minimize costs and burdens in a manner that is consistent with policy objectives, the proposed regulations outline the due diligence required to be undertaken by FFIs to identify U.S. accounts. For this purpose, the proposed regulations distinguish between the diligence expected with respect to individual accounts and entity accounts and between preexisting accounts and new accounts. It is intended that FFIs that adhere to the diligence guidelines outlined in the proposed regulations will be treated as compliant with the requirement to identify U.S. accounts and will not be held to a strict liability standard. a. Preexisting Individual Accounts • Accounts with a balance or value that does not exceed $50,000 are exempt from review, unless the FFI elects otherwise. • Certain cash value insurance and annuity contracts held by individual account holders that are preexisting accounts with a value or balance of $250,000 or less are exempt from review, unless the FFI elects otherwise. • Accounts that are offshore obligations with a balance or value that exceeds $50,000 ($250,000 for a cash value insurance or annuity contract) but does not exceed $1,000,000 are subject only to review of electronically searchable data for indicia of U.S. status. For this purpose, U.S. indicia include: (1) Identification of an account holder as a U.S. person; (2) a U.S. place of birth; (3) a U.S. address; (4) a U.S. telephone number; (5) standing instructions to transfer funds to an account maintained in the United States; (6) a power of attorney or signatory authority granted to a person with a U.S. address; or (7) a U.S. “in-care-of” or “hold mail” address that is the sole address the FFI has identified for the account holder. No further search of records or contact with the account holder is required unless U.S. indicia are found through the electronic search. The $1,000,000 threshold replaces the $500,000 threshold and the private banking test proposed in the FATCA Notices. Accordingly, FFIs will not be required to distinguish between private banking accounts and other accounts. • Accounts with a balance that exceeds $1,000,000 are subject to review of electronic and non-electronic files for U.S. indicia, including an inquiry of the actual knowledge of any relationship manager associated with the account. To minimize burden, review of non-electronic files is limited to the current customer files and certain other documents, and is required only to the extent that the electronically searchable files do not contain sufficient information about the account holder. b. New Individual Accounts For individual accounts opened after the effective date of an FFI's agreement, the FFI will be required to review the information provided at the opening of the account, including identification and any documentation collected under AML/KYC rules. If U.S. indicia are identified as part of that review, the FFI must obtain additional documentation or treat the account as held by a recalcitrant account holder. Accordingly, FFIs will generally not need to make significant changes to the information collected during the account opening process in order to identify U.S, accounts, except to the extent that U.S. indicia are identified. c. Preexisting Entity Accounts • Preexisting entity accounts with account balances of $250,000 or less are exempt from review until the account balance exceeds $1,000,000. • For remaining preexisting entity accounts, FFIs can generally rely on AML/KYC records and other existing account information to determine whether the entity is an FFI, is a U.S. person, is excepted from the requirement to document its substantial U.S. owners (for example, because it is engaged in a nonfinancial trade or business), or is a passive investment entity (referred to in the regulations as a “passive NFFE”). ○ In the case of preexisting accounts of passive investment entities with account balances that do not exceed $1,000,000, FFIs may generally rely on information collected for AML/KYC due diligence purposes to identify substantial U.S. owners. ○ In the case of preexisting entity accounts of passive investment entities with account balances that exceed $1,000,000, FFIs must obtain information regarding all substantial U.S. owners or a certification that the entity does not have substantial U.S. owners. d. New Entity Accounts • The following new entity accounts are exempt from documentation of substantial U.S. owners: ○ Accounts of another FFI (other than an owner-documented FFI for which the participating FFI has agreed to perform reporting); and ○ Accounts of an entity engaged in an active nonfinancial trade or business or otherwise excepted from documentation requirements. • With respect to the remaining entities (essentially, passive investment entities), FFIs will be required to determine whether the entity has any substantial U.S. owners upon opening a new account, generally by obtaining a certification from the account holder. 2. Deemed-Compliant FFIs The statute grants the Treasury Department and the IRS regulatory authority to identify certain FFIs as “deemed-compliant” FFIs that may avoid withholding under chapter 4 without entering into an FFI agreement. The FATCA Notices identified certain types of FFIs that would be deemed to be compliant with chapter 4. The proposed regulations implement the exclusions provided in the FATCA Notices, and expand the categories of deemed-compliant FFIs to include certain banks and investment funds conducting business only with local clients, low-risk entities, or participating FFIs, subject to restrictions designed to prevent the FFIs from being used for U.S. tax evasion. In addition, the proposed regulations expand the category of retirement plans that are treated as posing a low risk of tax evasion and thus are excepted from the chapter 4 requirements. 3. Transitional Rule for Affiliated Groups The proposed regulations provide that, until January 1, 2016, a nonparticipating FFI or branch that is subject to foreign laws that prohibit that FFI or branch from complying with the requirements of section 1471(b) will not disqualify an otherwise participating FFI group with which it is affiliated, as long as the FFI or branch complies with the due diligence procedures required of participating FFIs for identifying U.S. accounts and maintains records of the account holder documentation it collects. These “limited FFI affiliates” and “limited branches” will be subject to withholding upon receipt of withholdable payments. 4. Phase-In of Reporting Obligations The proposed regulations phase in the reporting obligations of FFIs as follows: • For reporting in 2014 and 2015 (with respect to calendar years 2013 and 2014), participating FFIs are required to report only name, address, TIN, account number, and account balance with respect to U.S. accounts. • Beginning with reporting in 2016 (with respect to calendar year 2015), in addition to the aforementioned information, income associated with U.S. accounts must be reported. • Beginning with reporting in 2017 (with respect to calendar year 2016), full reporting, including information on the gross proceeds from broker transactions, will be required. 5. Phase-In of Scope of Passthru Payments The proposed regulations phase in the passthru payment regime in two steps. • Beginning on January 1, 2014, FFIs, like U.S. withholding agents, will be required to withhold on passthru payments that are withholdable payments. FFIs will also be required to report annually on the aggregate amount of certain payments to each nonparticipating FFI for the 2015 and 2016 calendar years. • Beginning no earlier than January 1, 2017, the scope of passthru payments will be expanded beyond withholdable payments and FFIs will be required to withhold on such payments pursuant to and in accordance with future guidance. In the case of jurisdictions that enter into agreements to facilitate FATCA implementation, Treasury and IRS will work with the governments of such jurisdictions to develop practical alternative approaches to achieving the policy objectives of passthru payment withholding. 6. Refunds The statute provides that, to the extent withholding on a payment under chapter 4 exceeds the beneficial owner's underlying U.S. tax liability, the beneficial owner may claim a refund for the overwithheld amount. No refund is available, however, for payments beneficially owned by nonparticipating FFIs, except to the extent required under an income tax treaty. In addition, the proposed regulations provide that an NFFE claiming a refund (other than a refund attributable to a reduced rate of tax under a tax treaty obligation of the United States) must provide information regarding the NFFE's substantial U.S. owners, or certification that the NFFE does not have substantial U.S. owners. The Treasury Department and the IRS intend to issue future guidance regarding the substantiation requirements necessary for claiming a refund. II. Detailed Description of the Provisions of the Proposed Regulations A. Section 1.1471-1—Scope of Chapter 4 Provisions and Definitions Proposed § 1.1471-1(a) describes the purpose and scope of the proposed regulations under sections 1471 through 1474. Paragraph (b) provides definitions of terms relevant to the provisions of chapter 4 and the regulations thereunder. In order to maintain consistency with the structure of the statutory provisions of chapter 4, certain terms are defined in other sections of the regulations. For example, § 1.1471-5 contains certain definitions that apply only for purposes of section 1471 and the regulations thereunder, and § 1.1473-1 contains definitions of certain terms contained in section 1473. In order to facilitate review of the regulations, § 1.1471-1(b) contains specific cross-references to the sections in which each such term is defined. Many of the relevant terms are also used in chapters 3 and 61, and the proposed regulations in most cases adopt the terms and definitions provided in the regulations under those chapters. In the instances in which a different definition is used for purposes of the proposed regulations, the Treasury Department and the IRS generally intend to revise the definitions provided in the regulations under chapter 3 or 61 to conform to the chapter 4 definitions. It is expected that these conforming changes, and the other changes to chapter 3 or 61 guidance needed to conform to chapter 4, as noted in this preamble, will become effective on January 1, 2014, when the withholding and reporting obligations under chapter 4 begin to be phased in. B. Rules Applicable to Withholding Agents 1. Overview Under the proposed regulations, the rules relating to the requirement to withhold U.S. tax on certain payments apply principally to U.S. financial institutions or withholding agents. FFIs, other than FFIs serving as intermediaries with respect to withholdable payments, will generally not be required to withhold tax on payments made to account holders or nonparticipating FFIs before January 1, 2017. In the case of jurisdictions that enter into agreements to facilitate FATCA implementation, Treasury and IRS will work with the governments of such jurisdictions to develop practical alternative approaches to achieving the policy objectives of passthru payment withholding. In addition, where such an agreement provides for the foreign government to report to the IRS information regarding U.S. accounts and recalcitrant account holders, FFIs in such jurisdictions may not be required to withhold on any foreign passthru payments to recalcitrant account holders. The proposed regulations generally coordinate withholding under chapters 3 and 4 by requiring a withholding agent to withhold on payments of U.S. source FDAP income under chapter 4 when the withholding agent would be responsible for withholding under chapter 3. 2. Section 1.1471-2—Requirement To Deduct and Withhold Tax on Withholdable Payments to Certain FFIs Paragraph (a)(1) of § 1.1471-2 provides the general rule that, absent an exception, a withholding agent must withhold under section 1471(a) on a withholdable payment made after December 31, 2013, to an FFI regardless of whether the FFI receives the withholdable payment as a beneficial owner or intermediary. Paragraph (a)(2) provides special withholding rules, including a requirement for withholding agents to withhold with respect to payments of U.S. source FDAP to a participating FFI that is not a QI and is acting as an intermediary or that is a nonwithholding flow-through entity for chapter 3 purposes, unless the participating FFI provides the documentation necessary to determine the portion of the payment for which no withholding is required under chapter 4. A participating FFI that acts as an intermediary or that is a nonwithholding flow-through entity and that provides a valid withholding certificate and all required documentation is not required to withhold or report such payment under chapter 4 unless it knows or has reason to know that the withholding agent failed to withhold the correct amount or failed to report the payment correctly. These rules are intended to reduce instances in which overwithholding occurs because a withholding agent applies withholding under chapter 3 to a withholdable payment that is also subject to withholding by the participating FFI with respect to its own account holders under chapter 4. Paragraph (a)(2)(iii) describes the circumstance in which a participating FFI will be permitted to make an election under section 1471(b)(3) to be withheld upon rather than to withhold on a passthru payment. Generally, a participating FFI that is a QI may make an election under section 1471(b)(3) to be withheld upon rather than to withhold only with respect to a payment that is U.S. source FDAP income and only if the participating FFI has not assumed primary withholding responsibility under chapter 3. A participating FFI that is a QI and that does not make the election under section 1473(b)(3) with respect to U.S. source FDAP income must assume primary withholding responsibility under chapter 3. The election under section 1471(b)(3) is not extended to withholding foreign partnerships (WPs) or withholding foreign trusts (WTs) because these entities are generally required to assume chapter 3 withholding responsibilities under their respective agreements with respect to their partners, beneficiaries, or owners, and the Treasury Department and the IRS intend to expand their responsibilities to assume chapter 4 withholding to coordinate their withholding requirements. Similarly, a foreign branch of a U.S. financial institution that is a QI not assuming primary withholding responsibility under chapter 3 must provide a withholding agent with the documentation necessary to perform withholding under chapter 4 with respect to payments of U.S. source FDAP income. Paragraph (a)(2)(iv) describes the obligation of a financial institution organized under the laws of one of the U.S. territories (territory financial institution) to withhold on withholdable payments. Similar to the rules provided in chapter 3, a territory financial institution that acts as an intermediary with respect to a withholdable payment may agree to be treated similarly to a U.S. financial institution with respect to withholding and reporting under chapter 4. If a territory financial institution is a flow-through entity or acts as an intermediary with respect to a withholdable payment, the territory financial institution does not have an obligation to withhold under chapter 4, if it has provided its withholding agent with certain information to allow the withholding agent to withhold. Paragraph (a)(2)(v) provides that when multiple withholding agents that are brokers are involved in effecting a sale, each broker must determine whether it is required to withhold on its payment of gross proceeds by reference to the status of its payee for chapter 4 purposes. This paragraph also provides that for a “delivery versus payment” transaction, “cash on delivery” transaction, or other similar account or transaction, each broker that pays the gross proceeds is a withholding agent with respect to the payment. Paragraph (a)(3) coordinates the withholding requirements of sections 1471(a) and 1471(b) with respect to participating FFIs that make withholdable payments to account holders, and generally provides that a participating FFI that complies with the withholding requirements of section 1471(b), as described in § 1.1471-4(b) and its FFI agreement, will be deemed to satisfy its withholding obligations with respect to withholdable payments under section 1471(a). Paragraph (a)(4) describes payments for which no withholding is required, including payments for which the withholding agent lacks control, custody, or knowledge, and certain payments to participating FFIs and territory financial institutions. Paragraph (a)(4) also sets forth a transitional rule that exempts from withholding under section 1471(a) certain payments made prior to January 1, 2015, with respect to a preexisting account for which the withholding agent does not have documentation indicating the payee's status as a nonparticipating FFI, unless the payee is a prima facie FFI. The rules for determining if a payee is a prima facie FFI require the withholding agent to search its electronic data for certain indications that the payee is an FFI. In addition, paragraph (a)(4) provides for certain exceptions to withholding for payments made to certain classes of payees. Paragraph (b) of § 1.1471-2 describes certain obligations the payments on which will be exempt from withholding under chapter 4. Section 501(d)(2) of the HIRE Act provides that no amount shall be deducted or withheld from any payment under any obligation outstanding on March 18, 2012, (two years after the date of enactment of the HIRE Act) or from the gross proceeds from any disposition of such an obligation. Paragraph (b)(1) provides that withholding is not required with respect to any payment under a grandfathered obligation or from the gross proceeds from any disposition of such an obligation. Paragraph (b)(2)(ii) defines the term grandfathered obligation as any obligation outstanding on January 1, 2013, and the term obligation as a legal agreement that produces or could produce a withholdable payment or passthru payment, other than an instrument that is treated as equity for U.S. tax purposes or that lacks a stated expiration or term. Paragraphs (b)(2)(iii) and (iv) provide that the determination of whether an obligation is outstanding on January 1, 2013, depends upon the type of obligation. A debt instrument is outstanding on January 1, 2013, if it has an issue date, as determined under U.S. tax law, before January 1, 2013. A significant modification under § 1.1001-3 will result in the obligation being treated as newly issued as of the date of the significant modification. An obligation that is not a debt instrument is outstanding on January 1, 2013, if a legally binding agreement establishing the obligation was executed before January 1, 2013. A material modification of the obligation will result in the obligation being treated as newly issued or executed as of the effective date of such modification, and whether (and when) a material modification has occurred will be determined based upon all relevant facts and circumstances. Paragraph (b)(3) describes special rules to determine when a payment is made under a grandfathered obligation in the case of a flow-through entity with respect to a partner, beneficiary, or owner in such entity. See section XIX.G of this preamble for a request for comments regarding a potential grandfather status for certain investment vehicles. IV. Section 1.1471-3—Establishing a Payee's Chapter 4 Status Paragraph (a) of § 1.1471-3 sets forth the rules for determining the payee for chapter 4 purposes and the documentation requirements to establish a payee's chapter 4 status. These rules generally follow the rules under § 1.1441-1(b)(2) for determining the payee of a payment subject to withholding or reporting for chapter 3 purposes, but are modified in several ways, including to account for the requirement of withholding agents to determine an FFI's status for chapter 4 purposes and to determine whether an NFFE that is a flow-through entity is an active NFFE under § 1.1472-1(c)(1)(v). The Treasury Department and the IRS intend to revise Forms W-8 and W-9 as necessary to permit a payee to establish its status for both chapters 3 and 4 on one form. Paragraph (c) of § 1.1471-3 provides rules for when a withholding agent may reliably associate a withholdable payment with valid documentation. Paragraph (c)(2) sets forth the documentation requirements for payments made through an intermediary or flow-through entity that is not the payee. Paragraph (c)(3) provides the standards for withholding certificates, written statements (in lieu of withholding certificates), withholding statements, and documentary evidence; describes a withholding agent's responsibilities with respect to changes in circumstances and documenting payees after payments are made; allows for the electronic transmission of withholding certificates (including by facsimile); and allows a withholding agent to continue to accept a prior version of the withholding certificate for six months after an IRS revision of the withholding certificate (based on the revision date shown on the updated withholding certificate). Paragraph (d) of § 1.1471-3 provides the general documentation requirements to establish a payee's chapter 4 status for determining whether withholding applies under section 1471 or 1472. Paragraph (d) also sets forth the specific documentation requirements that must be met in order to treat a payee as having a particular chapter 4 status, and provides certain exceptions and special rules for payees that hold offshore and preexisting accounts. Consistent with the rules for documentation of offshore accounts contained in § 1.6049-5(c)(4), paragraph (d) allows a withholding agent that makes a payment to an account that is an offshore obligation to rely on documentary evidence, in certain cases supplemented by a written statement, to establish the payee's chapter 4 status in lieu of obtaining a withholding certificate. To minimize the burden on withholding agents to collect new documentation for preexisting accounts, paragraph (d) provides that for withholdable payments made prior to January 1, 2017, with respect to a preexisting account, a withholding agent may treat a payee as a participating FFI or a registered deemed-compliant FFI if it has a valid withholding certificate establishing the payee's foreign status and the withholding agent has verified the payee's FFI-EIN (provided by the payee either orally or in writing) on the IRS's published FFI list. With respect to preexisting accounts held by passive NFFEs with a balance or value of $1,000,000 or less, paragraph (d)(11)(vi)(D)( 2 ) permits a withholding agent to rely upon its review conducted for AML due diligence purposes to identify any substantial U.S. owners of the payee. Paragraph (e) sets forth the standards of knowledge for when a withholding agent knows or has reason to know that a withholding certificate is unreliable or incorrect, and modifies the standards set forth in chapter 3 for a withholding agent to determine the foreign status of a payee by adding a telephone number in the United States and a U.S. place of birth as reasons to know that a withholding certificate establishing foreign status is unreliable or incorrect, unless additional documentation of foreign status is obtained. The Treasury Department and the IRS intend to modify the chapter 3 rules regarding standards of knowledge to conform to these requirements. Paragraph (e) also requires a withholding agent to review the IRS's published FFI list and to check annually to confirm a payee's claim to be a participating FFI or registered deemed-compliant FFI. Paragraph (f) of § 1.1471-3 sets forth presumption rules for determining the payee's chapter 4 status in the absence of documentation or when documentation is unreliable or incorrect. The presumption rules set forth in paragraph (f) for purposes of chapter 4 differ from the presumption rules of chapters 3 and 61 because the rules in paragraph (f) require a withholding agent to presume that certain entities that are treated as exempt recipients under § 1.6049-4(c)(1)(ii) and for which reliable documentation is not obtained are foreign persons. The Treasury Department and the IRS intend to make a conforming change to the presumption rules set forth in chapters 3 and 61. V. Section 1.1471-4—Foreign Financial Institution Agreement (FFI Agreement) A. In General The Treasury Department and the IRS intend to publish a draft model FFI agreement in early 2012, and intend to publish a final model FFI agreement, incorporating comments received, in the fall of 2012. Section 1.1471-4 sets forth the general requirements that will apply to an FFI under an FFI agreement. Paragraph (a) of § 1.1471-4 includes a general description of the withholding, due diligence, reporting, verification, and certain other requirements under the FFI agreement. Paragraphs (b), (c), and (d) set forth in more detail the withholding, due diligence, and account reporting requirements that will apply to an FFI under an FFI agreement. The FFI agreement will also provide the IRS's verification process for determining a participating FFI's compliance with its FFI agreement. As described in paragraph (a), this will require, among other things, that a participating FFI: (i) Adopt written policies and procedures governing the participating FFI's compliance with its responsibilities under the FFI agreement; (ii) conduct periodic internal reviews of its compliance (rather than periodic external audits, as is presently required for many QIs); and (iii) periodically provide the IRS with a certification and certain other information that will allow the IRS to determine whether the participating FFI has met its obligations under the FFI agreement. The Treasury Department and the IRS intend to include the requirements to conduct these periodic reviews and to provide their certifications in the FFI agreement or in other guidance. The Treasury Department and the IRS request comments regarding the scope and content of such reviews and the factual information and representations FFIs should be required to include as part of such certifications. The proposed FFI agreement also will provide that repetitive or systematic failures of the participating FFI's processes relating to its compliance with the FFI agreement may result in enhanced compliance verification requirements such as an external audit of one or more issues identified by the IRS. The proposed FFI agreement also will provide the egregious circumstances that will cause a participating FFI to be in default with respect to its FFI agreement. B. Withholding Requirements Under the FFI Agreement Paragraph (b) of § 1.1471-4 describes the withholding requirements of participating FFIs and provides that a participating FFI is required to withhold on any passthru payment that is a withholdable payment made to a recalcitrant account holder or a nonparticipating FFI (or a participating FFI that has made an election to be withheld upon under section 1471(b)(3)) after December 31, 2013. The requirements for withholding on foreign passthru payments are reserved. Paragraph (b) of § 1.1471-4 also provides that a participating FFI is a withholding agent for purposes of chapter 4 and thus is subject to the requirements of sections 1471(a) and 1472(a) with respect to withholdable payments. Paragraph (b)(2) provides, however, that a participating FFI that complies with the withholding requirements of paragraph (b) and its FFI agreement will be deemed to satisfy its withholding obligations with respect to withholdable payments under sections 1471(a) and 1472(a). Paragraph (b)(4) provides a special rule for dormant accounts, under which a participating FFI that withholds on passthru payments (including withholdable payments) made to a recalcitrant account holder of a dormant account may, in lieu of depositing the tax withheld, set aside the amount withheld in escrow until the date that the account ceases to be a dormant account. Paragraph (b)(4) provides that within 90 days of the account ceasing to be dormant, the participating FFI must obtain the appropriate documentation for the account holder, in which case the tax withheld is refunded to the account holder. If the participating FFI fails to obtain the required documentation within 90 days, the participating FFI must deposit the tax withheld. Paragraph (b)(5) provides a special withholding rule for U.S. branches of participating FFIs, which treats a U.S. branch similar to a U.S. financial institution with respect to the withholding requirements under chapter 4. This paragraph provides that a U.S. branch that satisfies its backup withholding obligations under section 3406(a) with respect to accounts treated as held by U.S. non-exempt recipients will be treated as satisfying its withholding obligations under section 1471(b) with respect to such accounts. Paragraph (b)(5) thereby eliminates duplicate withholding that would otherwise occur with respect to account holders of a U.S. branch that are (or are presumed to be) U.S. non-exempt recipients to which backup withholding under section 3406 would apply. A U.S. branch of a participating FFI is also subject to special reporting requirements described in paragraph (d) of § 1.1471-4, which are coordinated with its withholding requirements under this paragraph. C. Identification of Account Holders Under the FFI Agreement Paragraph (c) of § 1.1471-4 describes the procedures for participating FFIs to identify and document U.S. accounts and accounts other than U.S. accounts. Paragraph (c)(2) describes the general requirements with respect to identification of account holders and incorporates the principles of § 1.1471-3 that determine the chapter 4 status of an account holder, associate an account with valid documentation (without regard to payments), and establish the standards of knowledge for reliance on documentation. Paragraph (c)(2) also requires a participating FFI to retain records of documentation collected, including electronic searches and responses to relationship manager inquiries with respect to certain high-value accounts, for a minimum of six years. The account identification and documentation for participating FFIs described in paragraph (c) generally follow the procedures described in Notice 2011-34 with some modifications made in response to comments. For identification of entity accounts, paragraph (c)(3) incorporates the identification and documentation rules of § 1.1471-3 and provides an exception from these procedures for preexisting accounts held by entities that are offshore obligations with an account balance or value of $250,000 or less, subject to further diligence if the account balance or value subsequently exceeds $1,000,000. An account that meets this exception is not treated as a U.S. account, and the account holder is not treated as a nonparticipating FFI for withholding and reporting purposes with respect to the account. For new accounts established for individual account holders, a participating FFI is required to review all information collected under its existing account opening procedures to determine whether the account holder has U.S. indicia (defined in paragraph (c)(4)(i)(A)). Where an account has U.S. indicia, paragraph (c)(4)(i)(B) describes the documentation a participating FFI is required to obtain in order to establish whether the account is a U.S. account. For accounts that are required to be treated as U.S. accounts, the participating FFI is generally required to collect a Form W-9 from each individual account holder. Except for such cases, these rules are intended to minimize the extent to which participating FFIs would need to modify their account opening and documentation collection procedures to comply with these requirements. Paragraph (c)(4)(ii) of § 1.1471-4 incorporates the rule provided in § 1.1471-5(a)(4), which provides that a participating FFI may treat as other than a U.S. account a preexisting account with a balance or value of $50,000 or less that is held by one or more individuals. Paragraph (c)(4)(iii) provides a documentation exception for preexisting accounts of individual account holders that are offshore obligations, other than cash value insurance or annuity contracts, with an account balance or value of $50,000 or less. Paragraphs (c)(4)(iii)(A), (B), and (C) provide the requirements for accounts to meet this documentation exception, including aggregation rules. Paragraph (c)(4)(iv) provides a documentation exception for preexisting cash value insurance or annuity contracts of individual account holders if such account has an account balance or value of $250,000 or less on the last day of the calendar year preceding the effective date of the FFI's FFI agreement. Accounts that meet these two exceptions will be subject to further due diligence procedures if the account balance or value subsequently exceeds $1,000,000. Further, an account that meets a documentation exception is not treated as a U.S. account and the account holder of such account is not treated as a recalcitrant account holder for withholding and reporting purposes. Paragraph (c)(5) provides the currency translation rules for determining the account balance or value. Paragraph (c)(6) provides several examples illustrating the application of the aggregation rules described in paragraphs (c)(4)(iii) and (iv). Paragraph (c)(7) provides an alternative to the general identification and documentation procedure of paragraph (c)(4)(i) for preexisting offshore accounts of individual account holders. Paragraph (c)(7)(ii) requires, as part of this alternative procedure, that the participating FFI conduct an electronic search for U.S. indicia and obtain the appropriate documentation to establish the account holder's status if U.S. indicia are found. A participating FFI that follows this alternative procedure with respect to an account will not be attributed knowledge with respect to information contained in any account files that the participating FFI did not review and that it was not required to review under this alternative procedure. Additionally, under this alternative procedure, a participating FFI will be treated as having obtained the required documentary evidence if the participating FFI's file contains a notation stating that documentary evidence has been examined and listing the type of document examined and the name of the employee that reviewed the document. The rule described in the preceding sentence is intended to limit those cases in which a participating FFI would need to contact its preexisting account holders to obtain additional documentation of their chapter 4 status. In response to comments, the proposed regulations do not incorporate the requirement to identify and perform an enhanced review of private banking accounts, as described in Notice 2011-34. Instead, paragraph (c)(8) requires that a participating FFI perform an additional enhanced review of high-value accounts. A high-value account is any account with a balance or value that exceeds $1,000,000 at the end of the calendar year preceding the effective date of the participating FFI's FFI agreement, or at the end of any subsequent calendar year. As part of the enhanced review, the participating FFI must identify all high-value accounts for which a relationship manager has actual knowledge that the account holder is a U.S. person. For these accounts, the participating FFI is required to obtain from the account holder a Form W-9, and a valid and effective waiver, if necessary. For other high-value accounts, paragraph (c)(8)(iii) also requires an enhanced review of paper and electronic files. In response to comments, paragraph (c)(8)(iii)(B) provides that the paper review is limited to the current customer master file and certain documents, described in paragraphs (c)(8)(iii)(A)( 1 ) through ( 5 ), obtained by the participating FFI in the five years prior to the effective date of its FFI agreement, and the review is required only to the extent sufficient information about the account holder is not available in the participating FFI's electronically searchable information. Paragraph (c)(8)(iv) provides an exception from the enhanced review requirement for any high-value account for which the participating FFI has obtained a Form W-8BEN and documentary evidence to establish the foreign status of the account holder, but the participating FFI is still required to perform the relationship manager inquiry. Paragraph (c)(9) provides an exception from the electronic search and, if the account is a high-value account, the enhanced review requirement (excluding the relationship manager inquiry) if the account was previously documented by the participating FFI to establish the account holder's status as a foreign individual in order to meet its obligations under a QI, WP, or WT agreement or to fulfill its reporting obligations as a U.S. payor under sections 6041, 6042, 6045, and 6049. Paragraph (c)(10) requires a responsible officer of a participating FFI to make certain certifications. The first certification is required to confirm, with respect to its preexisting accounts that are high-value accounts, that within one year of the effective date of the FFI agreement the participating FFI has completed the required review and to the best of the responsible officer's knowledge, after conducting a reasonable inquiry, the participating FFI did not have any formal or informal practices or procedures in place at any time from August 6, 2011 (120 days from the release of Notice 2011-34 to the public) through the date of such certification to assist account holders in the avoidance of chapter 4. The Treasury Department and the IRS request comments regarding alternative due diligence or other procedures that should be required of FFIs that are unable to certify that no such practices or procedures were in place after such date in order to maintain participating FFI status. The second certification by a responsible officer is required to confirm, with respect to all of its preexisting accounts, that within two years of the effective date of its FFI agreement the participating FFI has completed the account identification procedures and documentation requirements or, if it has not obtained the documentation required to be obtained with respect to an account, the participating FFI treats the account holder of such an account as a recalcitrant account holder or nonparticipating FFI. D. Reporting Requirements of Participating FFIs Paragraph (d) of § 1.1471-4 describes the reporting responsibilities of participating FFIs with respect to U.S. accounts and accounts held by recalcitrant account holders, and includes rules to phase in the reporting requirements. Paragraph (d)(2)(i) provides that a participating FFI is required to report any account that it is required to treat as a U.S. account or as held by a recalcitrant account holder that it maintained at any time during the preceding calendar year or as of the end of the year, respectively. Paragraph (d)(2)(ii) provides that the participating FFI that maintains the account is responsible for reporting the account for each calendar year subject to an exception that requires a participating FFI to report with respect to account holders of a territory financial institution that acts as an intermediary with respect a withholdable payment and that does not agree to be treated as a U.S. person with respect to the payment. Paragraph (d)(2)(ii)(C) also provides an exception for a participating FFI that elects for one or more of its branches to separately report the accounts maintained by each such branch. This election is intended to address legal restrictions on sharing account holder information across branches located in different jurisdictions and the limitations of many FFIs' information technology systems. Paragraph (d)(2)(iii)(A) provides a special reporting rule for participating FFIs (other than U.S. branches) that are U.S. payors to coordinate their chapter 61 reporting requirements with respect to U.S. non-exempt recipients with their chapter 4 reporting with respect to U.S. accounts. This rule provides that a participating FFI that is a U.S. payor may add the information required under paragraph (d)(5)(ii) to its reporting for chapter 61 purposes to satisfy the participating FFI's reporting requirements for U.S. accounts under chapter 4. Paragraph (d)(2)(iii)(B) describes a special reporting rule for a U.S. branch of a participating FFI to satisfy its reporting requirements under chapter 4 and to coordinate this reporting with its withholding requirements under § 1.1471-4(b). This reporting rule requires a U.S. branch to report for chapter 4 purposes in the same manner as a U.S. financial institution. Paragraph (d)(2)(iv) requires a participating FFI that maintains an account held by a financial institution that it has identified as an owner-documented FFI to report information with respect to each owner of the owner-documented FFI that is a specified U.S. person. Paragraph (d)(3) provides rules for reporting accounts held by specified U.S. persons and accounts held by U.S. owned foreign entities under section 1471(c)(1). These rules prescribe the information to be reported with respect to accounts required to be treated as U.S. accounts, the time and manner of filing the required form, and procedures for requesting an extension to file such forms. If a separate reporting election is not made with respect to a branch (as described in this preamble), a participating FFI is also required to report the jurisdiction of the branch that maintains the U.S. account being reported. Paragraph (d)(4) provides guidance on the information required to be included on the U.S. account information reporting form, including the methods for determining the account balance or value and the currency to be used for reporting account balances and payments made with respect to the account. These rules generally follow the proposed guidance described in Notice 2011-34, but allow a participating FFI to report its U.S. accounts in the currency in which the account is maintained. Paragraph (d)(4)(vi) provides record retention requirements for account statements. The IRS is developing a form for U.S. account reporting and the procedures for processing the form. Paragraph (d)(5) prescribes the reporting requirements for those participating FFIs that elect to report U.S. accounts under section 1471(c)(2). This paragraph provides that a participating FFI that makes such election must report under sections 6041, 6042, 6045, and 6049 with respect to reportable payments to the same extent as is required of a U.S. payor and requires that the participating FFI treat each holder of a U.S. account that is a specified U.S. person or U.S. owned foreign entity as a payee who is an individual and citizen of the United States. Paragraph (d)(5) also provides that the election under section 1471(c)(2) does not apply to cash value insurance or annuity contracts that are financial accounts and that would otherwise be subject to the reporting requirements of section 6047. For accounts held by recalcitrant account holders, paragraph (d)(6) provides for aggregate reporting of recalcitrant account holders in separate categories. The separate categories of accounts held by recalcitrant account holders are accounts with U.S. indicia, accounts of other recalcitrant account holders, and dormant accounts. Paragraph (d)(6)(ii) defines dormant accounts and prescribes when an account ceases to be treated as a dormant account. Paragraph (d)(7) sets forth special reporting rules for accounts maintained for the 2013 through 2015 calendar years. Paragraph (d)(7)(v)(B) provides that, with respect to the 2013 year, participating FFIs must report by September 30, 2014, those accounts identified as U.S. accounts or as held by recalcitrant account holders as of June 30, 2014. However, this paragraph further provides that a U.S. payor (including a U.S. branch) is not required to follow this special June 30, 2014, determination date and may instead report with respect to the 2013 calendar year in accordance with the reporting dates provided under chapter 61 with respect to all accounts identified as U.S. accounts or as held by recalcitrant account holders as of December 31, 2013. These rules also phase in the extent of information required to be reported by participating FFIs with respect to the 2013 through 2015 calendar years. Paragraphs (d)(8) through (10) reserve on the reporting requirements for participating FFIs that are QIs, and for WPs and WTs with respect to their partners, owners, and beneficiaries. The Treasury Department and the IRS seek comments on coordinating the chapter 3 reporting requirements and existing withholding requirements of these entities under their respective agreements with the reporting and withholding requirements under chapter 4 (including QIs that are foreign branches of U.S. financial institutions). With respect to QIs, the Treasury Department and the IRS do not intend to limit reporting under chapter 4 to QI designated accounts as currently defined in the QI model agreement. E. Expanded Affiliated Group Requirements Paragraph (e)(1) of § 1.1471-4 provides the general rule that, for any member of an expanded affiliated group to be a participating FFI or registered deemed-compliant FFI, each FFI that is a member of the group must be either a participating FFI or registered deemed-compliant FFI. Paragraphs (e)(2), (3), and (4) provide exceptions to this general rule for certain branches, FFI affiliates, and QIs. Paragraph (e)(1) also provides that each FFI that is a member of an expanded affiliated group must complete a registration form with the IRS and agree to all the requirements for the status for which it applies with respect to all of the accounts it maintains. Paragraph (e)(2) permits an FFI to be a participating FFI notwithstanding that one or more of its branches cannot satisfy all of the requirements of the FFI agreement. Paragraph (e)(2)(ii) defines a branch as a unit, business or office of the FFI that is treated as a branch under the regulatory regime of the country in which it is located or is otherwise regulated under the laws of such country as separate from other offices, units, or branches of the FFI, and maintains books and records separate from the books and records of the participating FFI (and any other of its branches). Further, all units, businesses, or offices of a participating FFI in a single country (including the country of organization or incorporation) are treated as a single branch. Paragraph (e)(2)(iii) defines a limited branch as a branch that cannot report the information required to be reported with respect to its U.S. accounts to the IRS and cannot close or transfer such accounts, or that cannot withhold on its recalcitrant account holders or accounts held by nonparticipating FFIs and cannot close or transfer such accounts. To qualify for limited branch status, the FFI, as part of its registration process, must: (i) Identify the relevant jurisdiction of each branch for which it seeks limited branch status; (ii) agree that each such branch will identify its account holders under the due diligence requirements applicable to participating FFIs; (iii) retain account holder documentation pertaining to those identification requirements for six years from the effective date of its FFI agreement; (iv) report to the IRS with respect to its accounts that it is required to treat as U.S. accounts to the extent permitted under the relevant laws pertaining to the branch; (v) treat each such branch as a separate entity for purposes of withholding; (vi) agree that each such branch will not open new accounts that it is required to treat as U.S. accounts or accounts held by nonparticipating FFIs; and (vii) agree that each such branch will identify itself to withholding agents (including affiliates of the FFI) as a nonparticipating FFI. Paragraph (e)(2)(v) requires a participating FFI to withhold on certain withholdable payments that it is considered to receive on behalf of a limited branch. Paragraph (e)(2)(vi) provides that a branch will cease to be a limited branch after the earlier of December 31, 2015, or the beginning of the third calendar quarter following the date on which the branch is no longer prohibited from complying with the requirements of the FFI agreement. In order to retain its status, a participating FFI must notify the IRS by such date that the branch will comply with the FFI agreement. Paragraph (e)(3) permits an FFI that is a member of an expanded affiliated group to obtain status as a participating FFI notwithstanding that one or more members of the group cannot satisfy the requirements of the FFI agreement. Similar to the requirements under paragraph (e)(2) for a limited branch, paragraph (e)(3)(ii) defines a limited FFI as an FFI that, under the laws of each jurisdiction that apply with respect to the accounts maintained by the affiliate, cannot report or withhold as required under the FFI agreement. Paragraph (e)(3)(iii) also provides registration requirements for limited FFI status that are similar to those for limited branches. Paragraph (e)(3)(iv) requires participating and deemed-compliant FFIs to treat limited FFIs as nonparticipating FFIs with respect to withholdable payments made to these affiliates. No withholding will be required, however, with respect to foreign passthru payments made to a limited FFI. Paragraph (e)(3)(v) provides that an FFI will cease to qualify as a limited FFI either after December 31, 2015, or the beginning of the third calendar quarter following the date on which the FFI is no longer prohibited from complying with the requirements of the FFI agreement. Participating and deemed-compliant FFIs that are members of the same expanded affiliated group will retain their status if, by such date, the FFI that ceased to be limited notifies the IRS that it will comply with the FFI agreement. Paragraph (e)(4) provides a special rule for QIs. The Treasury Department and the IRS intend to require all QIs that are FFIs to become participating FFIs. Therefore, in order for an FFI to renew its QI agreement for chapter 3 purposes, an FFI will be required to be a participating FFI. However, paragraph (e)(4) permits QIs to retain their status as a QI for a limited period of time (until December 31, 2015) even though the QI cannot comply with the provisions of an FFI agreement. In such case, the QI is treated as a limited FFI and must identify itself to its withholding agents as a nonparticipating FFI. VI. Section 1.1471-5—Section 1471 Definitions Section 1.1471-5 sets forth additional definitions that are applicable to the regulations under section 1471 and to the FFI agreement. A. U.S. Account Paragraph (a)(2) of § 1.1471-5 defines the term U.S. account as any financial account maintained by a financial institution that is held by one or more specified U.S. persons or U.S. owned foreign entities. Paragraph (a)(3) generally provides that an account is held by the person listed or identified as the holder of such account with the financial institution that maintains the account, even if that person is a flow-through entity. Paragraphs (a)(3)(ii) through (v) set forth exceptions and other rules that supplement the general rule for determining the holder of an account. For accounts held by a grantor trust, the grantor is treated as the owner of the account or assets in the account to the extent required under the principles of sections 671 through 679. For accounts held by agents, investment advisors, and similar persons, the person on whose behalf such person is acting is treated as the account holder. For accounts held jointly, each joint holder will be treated as owning the account. Finally, for accounts that are insurance and annuity contracts, the account holder is the person who can access the cash value of the contract or change the beneficiary, or, if there is no such person, the account holder is the beneficiary. Paragraph (a)(4) sets forth the exception from U.S. account status provided in section 1471(d)(1)(B) for any depository account held by one or more individuals with an aggregate balance or value that does not exceed $50,000. Paragraph (a)(4)(ii) provides aggregation rules for determining the aggregate balance or value of the account for purposes of this exception to U.S. account status. The same rules apply to both preexisting and new accounts. Generally, the rules provide that depository accounts are aggregated with other depository accounts only for purposes of applying the exception from U.S. account status provided in section 1471(d)(1)(B). B. Financial Account Section 1471(d)(2) provides that except as provided by the Secretary, the term financial account means, with respect to any financial institution, any depository account maintained by such financial institution; any custodial account maintained by such financial institution; and any equity or debt interest in such financial institution (other than interests which are regularly traded on an established securities market). In addition, the technical explanation of the HIRE Act prepared by the Joint Committee on Taxation states that the Secretary may “prescribe special rules addressing circumstances in which certain categories of companies, such as insurance companies, are financial institutions or the circumstances in which certain contracts or policies, for example annuity contracts or cash value life insurance contracts, are financial accounts or United States accounts * * *.” 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), February 23, 2010, at 44 (Technical Explanation). Paragraph (b)(1) of § 1.1471-5 defines the term financial account. First, the proposed regulations define a depository account to include a commercial, checking, savings, time, or thrift account, an account evidenced by a certificate of deposit or similar instruments, and any amount held with an insurance company under an agreement to pay interest. A custodial account is defined to include an account that holds any financial instrument or contract held for investment for the benefit of another person. The proposed regulations exclude from the definition of a financial account certain savings accounts (including both retirement and pension accounts and nonretirement savings accounts) that meet certain requirements with respect to tax treatment and the type and amount of contributions. They also exclude any account that otherwise constitutes a financial account if it is held solely by one or more exempt beneficial owners described in § 1.1471-6 or by nonparticipating FFIs that hold the account as intermediaries solely on behalf of one or more such owners. Thus, a participating FFI need not determine whether such an account is a U.S. account or held by a recalcitrant account holder. The proposed regulations also provide guidance on the treatment of debt or equity as a financial account. First, as provided in section 1471(d)(2)(C), debt or equity that is regularly traded on an established securities market is not a financial account. For this purpose, debt or equity interests are considered regularly traded on an established securities market if trades in such interests are effected, other than in de minimis quantities, on such market or markets on at least 60 days during the prior year, and the aggregate number of such interests that are traded on such market or markets during the prior year is at least ten percent of the average number of such interests outstanding during the prior year. Second, the proposed regulations provide that an equity interest includes a capital or profits interest in a partnership and, in the case of a trust that is a financial institution, the interest of an owner under sections 671 through 679 and a beneficial interest in a trust described in § 1.1473-1(b)(3). Third, the proposed regulations provide that an equity or debt interest in a financial institution is a financial account if it is an equity or debt interest in a financial institution that is engaged primarily in the business of investing, reinvesting, or trading securities. In the case of a financial institution that is engaged in a banking or similar business, holds financial assets for the account of others, or is an insurance company, equity or debt instruments in such financial institution will constitute financial accounts only if the value of those interests is determined, directly or indirectly, primarily by reference to assets that give rise to withholdable payments. Finally, to address the circumstances in which certain insurance or annuity contracts are financial accounts, paragraph (b)(1)(iv) includes in the definition of a financial account insurance contracts that include an investment component—namely cash value insurance contracts and annuity contracts. The proposed regulations exclude from the definition of financial account insurance contracts that provide pure insurance protection (such as term life, disability, health, and property and casualty insurance contracts). C. U.S. Owned Foreign Entity Paragraph (c) of § 1.1471-5 defines the term U.S. owned foreign entity as any foreign entity that has one or more substantial U.S. owners. Additionally, paragraph (c) provides that an owner-documented FFI will be treated as a U.S. owned foreign entity if it has one or more direct or indirect owners that are specified U.S. persons, whether or not it has a substantial U.S. owner. D. Financial Institution and FFI Section 1471(d)(4) and § 1.1471-5(d) provide that an FFI means any financial institution that is a foreign entity. A territory financial institution is not an FFI. Section 1471(d)(5) provides that except as otherwise provided by the Secretary, the term financial institution means any entity that: (i) Accepts deposits in the ordinary course of a banking or similar business; (ii) holds as a substantial portion of its business financial assets for the account of others; or (iii) is engaged (or holding itself out as being engaged) primarily in the business of investing, reinvesting, or trading in securities (as defined in section 475(c)(2) without regard to the last sentence thereof), partnership interests, commodities (as defined in section 475(e)(2)), or any interest (including a futures or forward contract or option) in such securities, partnership interests, or commodities. In addition, the Technical Explanation states that the Secretary has authority to “prescribe special rules addressing circumstances in which certain categories of companies, such as insurance companies, are financial institutions.” Technical Explanation, at 44. Paragraph (e) of § 1.1471-5 provides guidance on the types of entities that constitute “financial institutions.” Paragraph (e)(2) lists the activities that constitute a “banking or similar business” for a deposit-taking institution, and clarifies that entities engaged in a banking or similar business include, but are not limited to, entities that would qualify as a “bank” 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). Instead, the proposed regulations provide that the determination of whether an entity conducts a banking or similar business is based on the character of the business conducted, and the fact that the entity is subject to local regulation is relevant, but not necessarily determinative. Paragraph (e)(3) defines what constitutes holding financial assets as a “substantial portion” of an entity's business by reference to a bright line test based on gross income. As in the case of deposit-taking institutions, the fact that an entity is subject to the banking or credit laws of one or more jurisdictions is relevant to, but not necessarily determinative of, financial institution status. The proposed regulations also provide guidance regarding whether an entity is engaged primarily in the business of investing, reinvesting, or trading securities and other relevant assets. Paragraph (e)(1)(iii) includes within the types of securities that cause a financial institution to be engaged primarily in the business of investing, reinvesting, or trading notional principal contracts and insurance and annuity contracts that are traded, held for investment, or securitized. Paragraph (e)(4) provides that an entity is engaged primarily in the business of investing, reinvesting, or trading if the entity's gross income from those activities is at least 50 percent of the entity's total gross income over the testing period. Paragraph (e)(1)(iv) of the proposed regulations provides that an entity that is an insurance company and issues (or is obligated to make payments with respect to) a cash value insurance policy or an annuity contract is a financial institution. Finally, the proposed regulations describe entities that are excluded from the definition of a financial institution and are treated as excepted NFFEs. These entities are certain nonfinancial holding companies, certain start-up companies, nonfinancial entities that are liquidating or emerging from reorganization or bankruptcy, hedging/financing centers of a nonfinancial group, and entities described in section 501(c). E. Deemed-Compliant FFIs Paragraph (f) of § 1.1471-5 describes the FFIs that will be deemed compliant with the requirements of section 1471(b), and therefore exempt from withholding under section 1471(a) and (b). The categories of deemed-compliant FFIs described in these proposed regulations are broader than the categories of deemed-compliant FFIs described in Notice 2011-34. Paragraph (f) provides for two general types of deemed-compliant FFI: registered and certified deemed-compliant FFIs. A registered deemed-compliant FFI generally is required to register with the IRS to declare its status as deemed-compliant and to attest to the IRS that it satisfies certain procedural requirements. The categories of registered deemed-compliant FFIs are local FFIs, nonreporting members of participating FFI groups, qualified investment vehicles, restricted funds, and FFIs that comply with the requirements of section 1471(b) under an agreement between the United States and a foreign government. To qualify as a local FFI, generally, each FFI in the group (or in the case of a standalone FFI, the FFI) must meet certain licensing and regulation requirements. In addition, it must have no fixed place of business outside its country of organization and must not solicit account holders outside its country of organization. In addition, 98 percent of the accounts maintained by the FFI must be held by residents of the FFI's country of organization, and the FFI must be subject to reporting or withholding requirements in its country of organization with respect to resident accounts. For this purpose, an FFI that is organized in a European Union (EU) Member State may treat account holders that are residents of other EU Member States as residents of the country in which the FFI is organized. The Treasury Department and the IRS included this rule for FFIs established in EU Member States because financial institutions in EU Member States have common tax reporting or withholding obligations with respect to EU residents. A local FFI must also establish policies and procedures to ensure that it does not open or maintain accounts for specified U.S. persons that are not residents in the country in which the FFI is organized, for nonparticipating FFIs, or for entities controlled or beneficially owned by specified U.S. persons, and must perform due diligence with respect to its entity accounts and certain individual accounts. The registered deemed-compliant category for nonreporting members of participating FFI groups permits an FFI that is a member of an expanded affiliated group that includes at least one participating FFI to become a deemed-compliant FFI if it transfers any preexisting accounts that are identified under specified procedures as U.S. accounts or accounts held by nonparticipating FFIs to an affiliate that is a participating FFI or U.S. financial institution. Paragraph (f)(1)(i)(B) also requires the nonreporting member to implement policies and procedures to ensure that if it opens or maintains any U.S. accounts or accounts held by nonparticipating FFIs, it either transfers any such accounts to an affiliate that is a participating FFI or U.S. financial institution or becomes a participating FFI itself, in either case within 90 days of having opened the account or of having knowledge or reason to know of a change in circumstances resulting in an account becoming a U.S. account or an account held by a nonparticipating FFI. In response to comments, this type of deemed-compliant FFI is not limited to those FFIs that operate within a single country and that solicit account holders in such country, as was required under Notice 2011-34. Paragraph (f)(1)(i)(C) sets forth a deemed-compliant category for qualified investment vehicles. In general, an FFI regulated as a collective investment vehicle (CIV) is a qualified investment vehicle if all holders of record of a direct interest in the FFI are participating FFIs, deemed-compliant FFIs, or exempt beneficial owners. In response to comments, paragraph (f)(1)(i)(D) provides a separate deemed-compliant category for an FFI that is regulated as an investment fund under the law of its country of organization and for which each distributor of the investment fund's interests is a participating FFI, a registered deemed-compliant FFI, a nonregistering local bank, or a restricted distributor (defined in paragraph (f)(4)). Paragraph (f)(1)(i)(D) requires that each agreement that governs the distribution of the investment fund's debt or equity interests (other than interests which are both distributed by and held through a participating FFI) prohibit sales of debt or equity interests in the fund to U.S. persons, nonparticipating FFIs, or passive NFFEs with one or more substantial U.S. owners, and its prospectus must indicate that sales to U.S. persons, passive NFFEs, and nonparticipating FFIs (other than interests which are both distributed by and held through a participating FFI) are prohibited. The FFI must also establish procedures to review preexisting direct accounts and ensure proper treatment of new direct accounts. Paragraph (f)(1)(ii) sets forth the procedural requirements for registered deemed-compliant FFIs and provides that a registered deemed-compliant FFI must certify to the IRS that it meets the requirements of its applicable deemed-compliant category, agrees to the conditions for deemed-compliant status, and will renew its certification every three years (or earlier if there is a change in circumstance). The certified categories of deemed-compliant FFIs are nonregistering local banks, retirement plans, non-profit organizations, certain owner-documented FFIs, and FFIs with only low-value accounts. Institutions that satisfy the requirements of these categories are not required to register with the IRS, but each will certify to the withholding agent that it meets the requirements of its certified deemed-compliant category on a Form W-8. To qualify as a nonregistering local bank, generally, a bank must offer basic banking services, operate solely in its country of incorporation (or if it is a member of an expanded affiliated group, all members must operate in the same country), and the assets on each member FFI's balance sheet must be no more than $175 million (and the entire expanded affiliated group must have no more than $500 million on their combined balance sheets). Paragraph (f)(2)(ii) describes the requirements for retirement plans to qualify for certified deemed-compliant status. Generally, the FFI must be organized for the provision of retirement or pension benefits under the law of each country in which it is established or in which it operates. Contributions to the FFI must consist only of employer, government, or employee contributions and must be limited by reference to earned income. In addition, no single beneficiary may have a right to more than five percent of the FFI's assets. Finally, contributions to the FFI must be excluded from the income of the beneficiary and/or taxation of the income attributable to the beneficiary must be deferred under the laws of the country in which the FFI is organized or operates, or the FFI must receive 50 percent or more of its total contributions from the government or employers. Alternative criteria are provided for FFIs that provide retirement or pension benefits and that have fewer than 20 participants and meet certain other requirements. Paragraph (f)(2)(iii) describes the requirements for non-profit organizations to qualify for certified deemed-compliant status. A non-profit organization will qualify for certified deemed-compliant status if it: (i) Is established and maintained in its country of residence exclusively for religious, charitable, scientific, artistic, cultural, or educational purposes; (ii) is exempt from income tax in its country of residence; (iii) has no shareholders or members that have a proprietary interest in its income or assets; and (iv) is subject to restrictions preventing the private inurement of its income and assets. Paragraph (f)(2)(iv) describes the requirements for FFIs with only low-value accounts to qualify for certified deemed-compliant status. An FFI with only low-value accounts will qualify for certified deemed-compliant status if: (i) The FFI is an FFI solely because it accepts deposits in the ordinary course of a banking or similar business as described in § 1.1471-5(e)(1)(i) or, as a substantial portion of its business, holds financial assets for the account of others as described in § 1.1471-5(e)(ii); (ii) no financial account maintained by the FFI (or, in the case of an FFI that is a member of an expanded affiliated group, by any member of the expanded affiliated group) has a balance or value in excess of $50,000; and (iii) the FFI has no more than $50 million in assets on its balance sheet (and, in the case of an FFI that is a member of an expanded affiliated group, the entire expanded affiliated group has no more than $50 million in assets on its consolidated or combined balance sheet). Paragraph (f)(3) provides, generally, that an owner-documented FFI is eligible for certified deemed-compliant status if it is not described in § 1.1471-5(e)(1)(i), (ii), or (iv) and is not affiliated with another FFI described in those sections, it maintains no financial accounts for nonparticipating FFIs, it does not issue debt that constitutes a financial account in excess of $50,000 to any person, it provides a withholding agent with all required documentation regarding its owners, and the withholding agent agrees to report to the IRS the information required with respect to any of the owners of the owner-documented FFI that are specified U.S. persons. Because an owner-documented FFI is required to provide each withholding agent with documentation and the withholding agent must agree to report on behalf of the owner-documented FFI, an owner-documented FFI may have certified deemed-compliant status only with respect to a specific withholding agent. The Treasury Department and the IRS are considering how to address specific organizations or classes of organizations that may not be deemed to comply with the requirements of section 1471(b) due to their use to circumvent the purposes of chapter 4. In addition, the Treasury Department and the IRS are considering how the conditions for deemed-compliant status should apply where an FFI is described in more than one subparagraph of section 1471(d)(5), because, for example, it accepts deposits in the ordinary course of a banking business and, as a substantial portion of its business, holds financial assets for the account of others. F. Recalcitrant Account Holder Paragraph (g) defines the term recalcitrant account holder and provides guidance on when an account holder will be treated as recalcitrant. Generally, a recalcitrant account holder is any holder of an account maintained by a participating FFI if the account holder is not an FFI and the account holder either (i) Fails to comply with the participating FFI's request for documentation or information to establish whether the account is a U.S. account, (ii) fails to provide a valid Form W-9 upon the request of the participating FFI, (iii) fails to provide a correct name and TIN upon request of the FFI after the participating FFI receives notice from the IRS indicating a name/TIN mismatch, or (iv) fails to provide a valid and effective waiver of foreign law if foreign law prevents reporting with respect to the account holder by the participating FFI. The IRS intends to extend the “B” notice process currently used for name/TIN mismatches in Form 1099 reporting to the reporting of U.S. accounts and will notify a participating FFI if a name and TIN combination provided on a form is incorrect. The Treasury Department and the IRS are considering whether participating FFIs should be required to use the IRS on-line TIN matching program to ensure that its U.S. account holders have provided the correct name and TIN combination prior to filing the form for reporting U.S. accounts with the IRS, but if this requirement were adopted, it would begin no earlier than January 1, 2015. Paragraph (g) also sets forth the rules for when a participating FFI will start and cease treating an account holder as recalcitrant. G. Passthru Payments Paragraph (h) of § 1.1471-5 defines a passthru payment as any withholdable payment and any foreign passthru payment. The proposed regulations reserve on the definition of a foreign passthru payment, but see the discussions regarding the proposed implementation of reporting on certain foreign payments in section X of this preamble and withholding in section XIX of this preamble. H. Expanded Affiliated Groups Section 1471(e)(2) provides the definition of an expanded affiliated group for purposes of section 1471(e) and chapter 4, and § 1.1471-5(i) incorporates that definition. VII. Section 1.1471-6—Exempt Payments to Certain Beneficial Owners Section 1.1471-6 describes classes of beneficial owners that are exempt from withholding under section 1471(a) pursuant to section 1471(f) (exempt beneficial owners). The classes of persons treated as exempt beneficial owners are: foreign governments, political subdivisions of a foreign government, and wholly owned instrumentalities and agencies of a foreign government; international organizations and wholly owned agencies or instrumentalities of an international organization; foreign central banks of issue; governments of U.S. territories; and certain foreign retirement plans. In general, the principles of section 892 and the regulations thereunder apply in determining whether a beneficial owner qualifies as a foreign government. The definition of a controlled entity of a foreign government has been expanded from the definition set forth in § 1.892-2T to include entities that are owned and controlled by more than one foreign sovereign, and paragraph (b)(5) prescribes that such entities will qualify as exempt beneficial owners except when they are financial institutions described in section 1471(d)(5)(A) or (B) and the regulations thereunder. The principles of section 7701(a)(18) and the regulations thereunder generally apply to determine whether a beneficial owner qualifies as an international organization. The principles of section 895 and the regulations thereunder generally apply to determine whether a beneficial owner qualifies as a foreign central bank. Additionally, a foreign central bank is exempt from withholding under chapter 4 with respect to income earned on collateral held by the foreign central bank in the normal course of its operations. Under paragraph (f), certain foreign retirement funds will qualify as exempt beneficial owners. Specifically, a fund that is eligible for the benefits of an income tax treaty with the United States with respect to income that the fund derives from U.S. sources and that is generally exempt from income tax in that country is an exempt beneficial owner if it operates principally to administer or provide pension or retirement benefits. A fund that is formed for the provision of retirement or pension benefits under the law of the country in which it is established will also qualify as an exempt beneficial owner if: (i) It receives only employer, government, or employee contributions that are limited by reference to earned income, (ii) no single beneficiary has a right to more than five percent of the fund's assets, and (iii) its investment income is exempt from tax under the laws of the country in which it is organized or in which it operates as a result of its status as a retirement or pension plan in that country, or it receives 50 percent or more of its total contributions from the government or employers. An entity that is described in § 1.1471-6(g) and is wholly owned by one or more exempt beneficial owners is also an exempt beneficial owner. VIII. Section 1.1472-1—Withholdable Payments to Non-Financial Foreign Entities (NFFEs) A. General Rules for Withholding Under Section 1472 Section 1.1472-1 provides rules regarding the withholding and reporting requirements of section 1472. Except as otherwise provided in section 1472 and § 1.1472-1, a withholding agent must withhold tax of 30 percent of any withholdable payment made to an NFFE, unless the beneficial owner of such payment is the NFFE or another NFFE, the withholding agent can treat the beneficial owner as an NFFE that does not have any substantial U.S. owners or as an NFFE that has identified its substantial U.S. owners, and the withholding agent reports the required information with respect to any substantial U.S. owners. Paragraph (b)(2) also provides a rule to coordinate the withholding obligations under these proposed regulations with the withholding obligations set forth in an applicable FFI agreement for withholdable payments made by a participating FFI. In general, a participating FFI that complies with its FFI agreement is considered to have satisfied its obligations under section 1472(a) and § 1.1472-1. C. Exceptions From Withholding Under Section 1472 Paragraph (c) contains exceptions to the withholding rules described in § 1.1472-1(b) for withholdable payments made to certain excepted NFFEs. Paragraphs (c)(1)(i) through (vi) of § 1.1472-1 identify categories of entities that are exempt from withholding under section 1472(a) and (c). Paragraph (c)(1)(iv) of § 1.1472-1 expands the statutory exception to include a government of a U.S. territory. Paragraph (c)(1)(v) provides an exception for an NFFE that is an active NFFE. An active NFFE is any NFFE if less than 50 percent of its gross income for the calendar year is passive income and less than 50 percent 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. Paragraph (c)(1)(vi) clarifies that an entity that is the recipient and beneficial owner of a withholdable payment that is described in § 1.1471-5(e)(5) shall not be subject to withholding under section 1472. Paragraph (c)(2) provides that payments to a WP and a WT are not subject to withholding under section 1472(a). This is because a WP or WT must generally assume primary withholding responsibilities with respect to reportable amounts under chapter 3 on behalf of their partners, owners, or beneficiaries, respectively, pursuant to their withholding agreements with the IRS under section 1441. Because WP and WT agreements are expected to be modified to take into account withholding obligations under chapter 4, it is not necessary to withhold under section 1472(a) on payments to such entities. Instead, the WP or WT will be required to assume primary chapter 4 withholding responsibility and to identify the chapter 4 status of its partners, owners, or beneficiaries to determine whether it must withhold under section 1471 or 1472. D. Establishing When a Withholding Agent May Treat a Withholdable Payment as Made to a Payee Paragraphs (d)(1) through (5) of § 1.1472-1 provide rules that clarify the coordination between §§ 1.1472-1 and 1.1471-3. In general, for purposes of § 1.1472-1, a withholding agent may treat the payee of a payment (as determined under § 1.1471-3) as the beneficial owner of the payment, and must determine the chapter 4 status of such payee in accordance with the rules of § 1.1471-3. In addition, paragraph (d)(5) provides that the presumption rules under § 1.1471-3(f) must be applied to determine the chapter 4 status of a payee when the withholding agent does not have valid documentation that it can rely upon to determine the chapter 4 status of the payee. E. Information Reporting Requirement Paragraph (e) of § 1.1472-1 provides information reporting requirements with respect to withholdable payments made to a payee and the income tax filing requirement of a withholding agent that withholds under § 1.1472-1. In addition, it sets forth the information reporting rules with respect to substantial U.S. owners of certain NFFEs. IX. Section 1.1473-1—Section 1473 Definitions A. Withholdable Payment Generally, paragraph (a) of § 1.1473-1 defines withholdable payment as any payment of U.S. source FDAP income and any gross proceeds from the sale or other disposition of any property which may produce interest or dividends from sources within the United States with respect to a sale or disposition occurring after December 31, 2014. For chapter 4 purposes, the term FDAP income means fixed or determinable annual or periodic income as defined for purposes of chapter 3 (without regard to the exemptions from withholding). Paragraph (a)(2)(i)(B) clarifies that an exclusion from withholding under chapter 3 or an exclusion from taxation under section 881 does not exclude such amount from the definition of U.S. source FDAP for the purpose of determining whether a payment is a withholdable payment under chapter 4. In addition, paragraphs (a)(2)(vi) and (a)(3)(iii)(B) provide that interest accrued between payment dates is not treated as FDAP, but is instead treated as gross proceeds solely for purposes of chapter 4. To determine the source of income, paragraph (a)(2)(ii)(A) cross-references the rules provided in sections 861 through 865 and other relevant Code provisions. However, as provided in section 1473(1)(C), paragraph (a)(2)(ii)(B) provides that interest described in section 861(a)(1)(A)(i) or (ii) (bank deposit interest paid with respect to offshore accounts) is treated as income from sources within the United States for purposes of the definition of withholdable payment. Similar to the rule that applies for purposes of withholding under chapter 3, paragraph (a)(2)(ii)(A) provides that if a withholding agent cannot determine the source of a payment at the time the payment is made, the payment is treated as U.S. source. Generally, paragraph (a)(3) defines the term sale or other disposition as any sale, exchange, or other disposition that requires the recognition of gain or loss under section 1001 from property of a type that can produce interest or dividends from sources within the United States. Paragraph (a)(3)(i)(C) provides a special rule that limits gross proceeds paid by a clearing organization to the net amount paid or credited to an account of a member of the clearing organization if the clearing organization settles sales and purchases of securities between member organizations on a net basis. Paragraph (a)(3)(ii) provides rules for determining when property is of a type that can produce interest or dividends from sources within the United States. Paragraph (a)(3)(iii)(A) provides rules for determining when gross proceeds are paid. Paragraph (a)(3)(iii)(B) sets forth the rules for determining the amount of gross proceeds from a sale or other disposition. Paragraph (a)(4) provides a list of payments that are excluded from the definition of withholdable payments. This list includes original issue discount from certain short-term obligations, income that is taken into account as effectively connected with the conduct of a trade or business in the United States, certain payments in the ordinary course of the withholding agent's business, gross proceeds from the sale of property that can produce income that is excluded from the definition of withholdable payment, and certain broker transactions that involve the sale of fractional shares. While the proposed regulations do not explicitly exempt payments with respect to State and local bonds, interest on State and local bonds is excluded from gross income under section 103, and such interest is thus not a withholdable payment. Moreover, interest that is excluded from gross income under section 103 is not treated as gross income from sources within the United States under section 861(a), and thus gross proceeds from the sale of bonds that give rise to interest that is excluded under section 103 are not withholdable payments. Paragraph (a)(5) provides special payment rules for flow-through entities with respect to U.S. source FDAP income allocated to partners, owners, and beneficiaries in these entities that mirror the rules under § 1.1441-5. Paragraph (a)(5) reserves on how payments of gross proceeds are to be allocated to such persons. B. Substantial U.S. Owner Paragraph (b) provides the definition of substantial U.S. owner. Generally, the term substantial U.S. owner means any specified U.S. person (as defined in paragraph (c)) that owns, directly or indirectly, more than ten percent of the stock of a corporation, or with respect to a partnership, more than ten percent of the profits interests or capital interests in such partnership. For trusts, a substantial U.S. owner is any specified U.S. person that holds, direc [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2012-2979. Public record. Not legal advice.