Regulations Relating to Information Reporting by Foreign Financial Institutions and Withholding on Certain Payments to Foreign Financial Institutions and Other Foreign Entities

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 301

[TD 9610]

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:

Final Regulations.

SUMMARY:

This document contains final 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.

DATES:

Effective date.

These regulations are effective January 28, 2013.

Applicability dates.

For dates of applicability, see §§ 1.1471-1(c); 1.1471-2(a)(1); 1.1471-2(a)(2)(i), (ii), (iii)(A); 1.1471-2(a)(4)(ii); 1.1471-3(d)(1); 1.1471-3(d)(4)(i), (ii); (iv); 1.1471-3(d)(6)(v); 1.1471-3(d)(11)(viii)(A); 1471-3(d)(12)(iii)(B); 1471-3(e)(3)(ii); 1471-3(e)(4)(vii)(B); 1.1471-4(b)(1), (4); 1.1471-4(d)(7); 1.1471-4(e)(2)(v); 1.1471-4(e)(3)(iv); 1.1471-5(f)(2)(iv); 1.1471-6(i); 1.1472-1(b); 1.1473-1(a)(1)(ii) and 1.1473-1(a)(4)(vi); 1.1474-1(d)(4)(iii)(C) and 1.1474-1(i); 1.1474-2(c); 1.1471-3(c); 1.1474-4(b); 1.1474-5(c); 1.1474-6(f); 1.1474-7(c); 301.1474-1(e).

FOR FURTHER INFORMATION CONTACT:

John Sweeney, (202) 622-3840 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

I. In General

This document contains final amendments to the Income Tax Regulations (CFR parts 1 and 301) under sections 1471 through 1474 of the Code (commonly known as the Foreign Account Tax Compliance Act, or FATCA). 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. Chapter 4 generally requires U.S. withholding agents to withhold tax on certain payments to foreign financial institutions (FFIs) that do not agree to report certain information to the Internal Revenue Service (IRS) regarding their United States accounts (U.S. accounts), and on certain payments to certain nonfinancial foreign entities (NFFEs) that do not provide information on their substantial United States owners (substantial U.S. owners) to withholding agents. 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). The FATCA Notices are available at

IRS.gov.

On February 15, 2012 (77 FR 9022), the Treasury Department and the IRS published a notice of proposed rulemaking (the proposed regulations) addressing chapter 4's due diligence, withholding, reporting, and associated requirements. On October 24, 2012, the Treasury Department and the IRS released Announcement 2012-42, which announced the intention to amend certain provisions of the proposed regulations in adopting the final regulations.

The Treasury Department and the IRS received numerous comments in response to the proposed regulations, and a public hearing on the proposed regulations was held on May 15, 2012. The comments received in writing and at the public hearing were carefully considered in developing these final regulations.

II. Chapter 4 Policy in the Context of the U.S. Federal Income Tax Laws

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 U.S. voluntary tax 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 U.S. voluntary tax 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.

III. Statutory Provisions

The following discussion briefly explains the statutory provisions of FATCA, which are implemented by these regulations. 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.

IV. Balanced and Integrated Approach to Implementing Chapter 4

Chapter 4 grants the Secretary of the Treasury broad regulatory authority to prescribe rules and procedures relating to the diligence, reporting, and withholding obligations of the statute. These final regulations exercise this authority by providing specific operational guidelines for implementing FATCA in a manner consistent with its principal policy objectives. Recognizing that there are costs associated with the implementation of any new withholding and reporting regime, the Treasury Department and the IRS solicited comments and 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. This engagement resulted in hundreds of constructive comments from and numerous productive meetings with stakeholders. While the comments covered a broad range of issues relating to the implementation of FATCA, the vast majority of commenters expressed concerns regarding the costs and burdens associated with implementing FATCA and the legal impediments to compliance in a number of jurisdictions. Comments also expressed concerns regarding the procedural and systems aspects of registering and reporting.

The Treasury Department and the IRS carefully considered these comments and established three avenues for addressing the principal concerns regarding burdens, legal impediments, and technical implementation. The first avenue was to adopt a risk-based approach to implementing the statute that effectively addresses policy considerations, eliminates unnecessary burdens, and, to the extent possible, builds on existing practices and obligations. The second avenue was to collaborate with foreign governments to develop an alternative intergovernmental approach to implementing chapter 4 that removes legal impediments, allows for alignment and coordination with local law reporting practices, and achieves further burden reductions. The third avenue was to develop administrative approaches to simplify the process for registering and entering into an agreement with the IRS in order to minimize operational costs associated with collecting and reporting FATCA information.

A. Targeted Regulations

These final regulations address potential administrative burdens associated with FATCA compliance by adopting a risk-based and targeted approach to implement the statute with respect to scope, diligence, and timing. In particular, with respect to scope, consistent with the objectives of the statute, the regulations limit the institutions, obligations, and accounts subject to FATCA to more specifically target concerns and address practical considerations. For example, the final regulations refine the scope of FATCA in the following ways:

•

Expansion of Grandfather Rule for Certain Obligations.

To promote the orderly implementation of FATCA, the final regulations exempt from chapter 4 withholding all obligations outstanding on January 1, 2014, and any associated collateral. In addition, because evolving areas of the law may create chapter 4 withholding obligations in the future and create uncertainty and risk in the meantime, the final regulations address obligations (and associated collateral) that may give rise to withholdable payments through future regulations under section 871(m) (relating to dividend equivalent payments) or to foreign passthru payments under the chapter 4 foreign passthru payment rules. Such obligations are grandfathered if the obligations are outstanding at any point prior to six months after the implementing regulations are published.

•

Scope of Covered Financial Institutions.

In response to comments, the final regulations treat passive entities that are not professionally managed as NFFEs rather than as FFIs. The final regulations also provide appropriate exemptions for financial institutions and certain passive NFFEs that are part of a nonfinancial group of companies and that support the operations of the group.

•

Expansion of Deemed Compliant and Other Exempt Categories.

The final regulations expand the categories of FFIs that are deemed to comply with FATCA without the need to enter into an agreement with the IRS in order to focus the application of FATCA on higher-risk financial institutions that provide services to the global investment community. In addition, the final regulations expand the scope of retirement funds that are considered exempt beneficial owners the income of which is not subject to chapter 4 withholding.

With respect to diligence, the final regulations reduce the administrative burdens associated with identifying U.S. accounts by calibrating due diligence requirements based on the value and risk profile of the account, and by permitting FFIs in many cases to rely on information they already collect. For example, the final regulations reduce the burdens associated with identifying U.S. accounts in the following ways:

•

Accounts exempt from review.

The final regulations exempt from review entirely all preexisting accounts held by individuals with a balance or value of $50,000 or less. This threshold is raised to $250,000 for preexisting accounts held by entities and for preexisting accounts that are cash value insurance and annuity contracts. In addition, the final regulations exempt insurance contracts with a balance or value of $50,000 or less from treatment as financial accounts.

•

Reduced diligence and documentation rules for lower value preexisting accounts.

In the case of preexisting accounts with a balance or value of $1,000,000 or less, the final regulations permit a participating FFI to determine whether any of its accounts held by individuals are U.S. accounts based solely on a search of electronically searchable account information for certain U.S. indicia. In addition, for such accounts held by passive NFFEs, the final regulations allow a withholding agent to rely on its review conducted for anti-money laundering due diligence purposes to identify any substantial U.S. owners of the payee in lieu of obtaining a certification.

•

Reliance on self-certification.

In the case of accounts held by entities, the final regulations expand the ability of FFIs to rely on a self-certification from

an account holder as to its chapter 4 status.

Finally, with respect to timing, the final regulations allow reasonable timeframes to review existing accounts and implement FATCA's obligations in stages to minimize burdens and costs consistent with achieving the statute's compliance objectives. For example:

•

Time allowed for review of pre-existing accounts.

The final regulations treat all accounts maintained by an FFI prior to January 1, 2014, as preexisting accounts. In addition, the final regulations allow participating FFIs and withholding agents until December 31, 2015, to document account holders and payees that are not prima facie FFIs.

•

Phased implementation of reporting.

The final regulations modify the due date for the first information report by requiring participating FFIs to file the first information reports with respect to the 2013 and 2014 calendar years not later than March 31, 2015.

•

Phased implementation of withholding on passthru payments and gross proceeds.

The final regulations exempt from withholding foreign passthru payments and gross proceeds from sales or dispositions of property occurring before January 1, 2017.

B. Intergovernmental Agreements

1. In General

In many cases, foreign law would prevent an FFI from reporting directly to the IRS the information required by the FATCA statutory provisions and these regulations, thus potentially exposing the FFI to withholding. Such an outcome would be inconsistent with FATCA's objective to address offshore tax evasion through increased information reporting. To overcome these legal impediments, the Treasury Department has collaborated with foreign governments to develop two alternative model intergovernmental agreements that facilitate the effective and efficient implementation of FATCA in a manner that removes domestic legal impediments to compliance, fulfills FATCA's policy objectives, and further reduces burdens on FFIs located in partner jurisdictions.

The first model intergovernmental agreement was published on July 26, 2012. A partner jurisdiction signing an agreement with the United States based on the first model (Model 1 IGA) agrees to adopt rules to identify and report information about U.S. accounts that meet the standards set out in the Model 1 IGA. FFIs covered by a Model 1 IGA that are not otherwise excepted or exempt pursuant to the agreement must identify U.S. accounts pursuant to due diligence rules adopted by the partner jurisdiction and report specified information about the U.S. accounts to the partner jurisdiction. The partner jurisdiction then exchanges this information with the IRS on an automatic basis. These standards ensure that the IRS will receive the same quality and quantity of information about U.S. accounts from FFIs covered by a Model 1 IGA as it receives from FFIs applying these final regulations.

A second model intergovernmental agreement was published on November 14, 2012. A partner jurisdiction signing an agreement with the United States based on the second model (Model 2 IGA) agrees to direct and enable all FFIs that are located in the jurisdiction, and that are not otherwise excepted or exempt pursuant to the Model 2 IGA, to register with the IRS and report specified information about U.S. accounts directly to the IRS in a manner consistent with chapter 4 and these final regulations, except as expressly modified by the Model 2 IGA. In the case of certain recalcitrant account holders, the information reported to the IRS by FFIs covered by a Model 2 IGA is supplemented by government-to-government exchange of information.

Both Model 1 IGAs and Model 2 IGAs (together, IGAs) contemplate that the partner jurisdiction will require all financial institutions that are located in the jurisdiction, and that are not otherwise excepted or exempt pursuant to the agreement, to identify and report information about U.S. accounts. In consideration of the full cooperation by the partner jurisdiction, the model agreements contemplate a number of simplifications and burden reductions associated with the application of FATCA in the partner jurisdiction. The Treasury Department and the IRS believe that IGAs represent efficient and effective ways of implementing the requirements of chapter 4 and will continue to conclude bilateral agreements based on the two models with interested jurisdictions. In addition, the Treasury Department and the IRS continue to receive comments strongly supporting the approach to FATCA implementation embodied in the IGAs. 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.

2. Interaction of IGAs With the Final Regulations

FFIs covered by a Model 1 IGA, and that are in compliance with local laws implemented to identify and report U.S. accounts in accordance with the terms of the Model 1 IGA, will be treated as satisfying the due diligence and reporting requirements of chapter 4. Accordingly, consistent with the terms of the Model 1 IGA, these FFIs do not need to apply the final regulations for purposes of complying with and avoiding withholding under FATCA. In certain cases prescribed in the Model 1 IGA, the laws of the partner jurisdiction may allow the resident FFI to elect to apply provisions of these regulations instead of the rules otherwise prescribed in the Model 1 IGA.

FFIs covered by a Model 2 IGA with the United States will be required to implement FATCA in the manner prescribed by these regulations except to the extent expressly modified by the Model 2 IGA. The final regulations accommodate such variations.

C. Streamlined Registration and Technical Implementation

FFIs registering with the IRS will be able to do so through a secure online web portal, the FATCA Registration Portal (Portal), from anywhere in the world. The Portal is designed to accomplish an entirely paperless registration process. Registering FFIs will be able to use the Portal to register their chapter 4 status (such as participating FFI or reporting Model 1 FFI (both as defined in the final regulations)), manage their registration information, and, as appropriate, agree to the terms of or make the representations required for their status. The Portal will also facilitate electronic communication between the IRS and FFIs and other registrants. Registered FFIs designated as leads of an expanded affiliated group will be able to use the Portal to manage the registration status of group members. The Portal will also be used by registering FFIs that are already Qualified Intermediaries (QIs) to renew their QI status. An FFI's submission and maintenance of registration information through the Portal will maximize processing efficiencies, minimize errors, and ensure expedient issuance of a Global Intermediary Identification Number (“GIIN”). An FFI will use its GIIN to establish its chapter 4 status for withholding purposes and to identify the institution for reporting purposes under the final regulations. The IRS currently contemplates that the GIIN may also be used by reporting Model 1 FFIs to satisfy reporting requirements under local law and is discussing this possibility with its Model 1 IGA partners. With regard to reporting, the IRS is also discussing with partner jurisdictions the possibility of adopting

a single format for reporting FATCA information, whether that information is reported directly to the IRS or to the tax administration in a Model 1 IGA jurisdiction.

The IRS also anticipates that the certifications of compliance required to be made by responsible officers pursuant to §§ 1.1471-4(c)(7) and 1.1471-4(f)(3) will be made electronically through the Portal, resulting in similar efficiencies.

Summary of Comments and Explanation of Revisions

I. In General

The Treasury Department and the IRS received a number of general comments requesting improvements to the readability of the proposed regulations. In response, the Treasury Department and the IRS made substantial changes in the final regulations to simplify and clarify the chapter 4 rules. In addition, the Treasury Department and the IRS received numerous specific comments regarding the proposed regulations and made numerous changes to the final regulations in response to those comments.

The following discussion addresses the significant changes in the final regulations from the proposed regulations. To facilitate this discussion, the defined terms from § 1.1471-1(b) are used throughout.

II. Comments and Changes to § 1.1471-1—Scope of Chapter 4 and Definitions

The chapter 4 definitions have been revised to reflect the IGAs and other changes adopted in the final regulations. Revisions of the definitions are discussed as relevant in the succeeding sections of this preamble.

III. Comments and Changes to § 1.1471-2—Requirement To Deduct and Withhold Tax on Withholdable Payments to Certain FFIs

A. Grandfathered Obligations

Comments requested modifications to the scope of grandfathered obligations to facilitate market transition and allow time for adapting master agreements and collateral arrangements in light of the IGAs, the future issuance of guidance under section 871(m), and other systems developments. In response, the final regulations provide that grandfathered obligations consist of: (1) Any obligation outstanding on January 1, 2014; (2) any obligation that produces withholdable payments solely because the obligation is treated as giving rise to a dividend equivalent pursuant to section 871(m) and the regulations thereunder and that is executed on or before the date that is six months after the date on which obligations of its type are first treated as giving rise to dividend equivalents; and (3) any agreement requiring a secured party to make payments with respect to collateral securing one or more grandfathered obligations (even if the collateral is not itself a grandfathered obligation). If collateral (or a pool of collateral) secures both grandfathered obligations and obligations that are not grandfathered, the collateral posted to secure the grandfathered obligations must be determined by allocating (pro rata by value) the collateral (or, in the case of a pool of collateral, each item comprising the pool of collateral) to all outstanding obligations secured by the collateral (or pool of collateral).

In addition, the final regulations provide that an obligation will not give rise to a foreign passthru payment if it is executed on or before the date that is six months after the date on which final regulations defining the term foreign passthru payment are filed with the

Federal Register

. Comments also requested clarification of the outstanding date of a debt instrument that is reopened in a qualified reopening under § 1.1275-2(k). For debt obligations, the final regulations determine the date the obligation is outstanding based on the issue date of the debt. Thus, whether debt issued in a qualified reopening will be treated as a grandfathered obligation depends on the issue date of the original debt, which is the issue date of the debt issued in the qualified reopening.

The final regulations also provide that the date a non-debt obligation is outstanding is the date a legally binding agreement is executed. Thus, a line of credit or a revolving credit facility for a fixed term may qualify as an obligation provided that the agreement as of its issue date fixes the material terms (including a stated maturity date) under which the credit will be provided.

In response to comments regarding insurance contracts, the final regulations provide that: (1) a life insurance contract payable no later than upon the death of the insured individual(s) is an obligation that may qualify as a grandfathered obligation; and (2) premiums paid for an insurance contract or annuity contract that is treated as a grandfathered obligation are treated as payments made under a grandfathered obligation.

Finally, comments requested provisions to simplify a withholding agent's determination of whether an obligation is grandfathered. Accordingly, the final regulations provide that: (1) A withholding agent, other than the issuer of the obligation (or an agent of the issuer) may, absent actual knowledge, rely on a written statement by the issuer of the obligation to determine whether such obligation meets the requirements for grandfathered treatment; (2) a withholding agent is required to treat a modification as material only if the withholding agent knows or has reason to know that such modification was material; and (3) a withholding agent, other than the issuer of the obligation (or an agent of the issuer), absent actual knowledge, will have reason to know of a material modification if it receives a disclosure thereof from the issuer of the obligation (or from such issuer's agent).

B. Other Changes to the Withholding Provisions

Comments requested that the withholding provisions under chapter 4 conform with certain withholding provisions of chapter 3. In addition, comments requested that the election to be withheld upon under section 1471(b)(3) and provided in the proposed regulations be available on an account-by-account basis. In response to these comments, the final regulations: (1) Clarify the exception to withholding when a withholding agent lacks control, custody, or knowledge of a payment; (2) treat a payment as a withholdable payment in the absence of knowledge of its source or character, or allow for up to a one-year escrow of 30 percent of the payment pending a determination of the relevant facts; and (3) permit the election to be withheld upon pursuant to § 1.1471-2(a)(2)(iii) to be made on an account-by-account basis, provided other applicable requirements are satisfied.

IV. Comments and Changes to § 1.1471-3—Identification of Payee

A. Documentation Alternatives

1. In General

Comments requested that the final regulations generally permit a withholding agent to rely upon a withholding certificate to establish the chapter 4 status of a payee without obtaining additional documentary evidence, unless such documentary evidence is required under chapter 3. This comment was adopted. The final regulations further expand the types of documentary evidence upon which a withholding agent may rely with respect to offshore obligations, including government Web sites and reports from government agencies. For preexisting obligations, the final regulations permit a withholding agent to rely on information previously recorded in the withholding agent's files, in addition to

standardized industry codes, in determining the chapter 4 status of the payee. For these purposes, a standardized industry code may be any coding system employed by the withholding agent.

2. Written Statements

Comments requested that the final regulations permit reliance on written statements without additional documentation for offshore obligations that do not generate payments of U.S. source FDAP income (such as a depository account maintained outside of the United States by an FFI) and enumerate the elements they must contain. This comment was adopted. A written statement may also be relied upon with respect to an offshore obligation that generates payments of U.S. source FDAP income if it is accompanied by documentary evidence establishing the foreign status of the person named on the written statement.

Comments noted that signed documentation outside of the United States generally does not require signature under penalties of perjury, and that such a requirement would depart from current AML due diligence procedures. The final regulations remove the penalties of perjury requirement for written statements used as documentation for payments made outside of the United States on offshore obligations, other than for payments of U.S. source FDAP income.

3. Substitute and Non-IRS Forms

Comments requested the ability to use substitute forms, including forms prepared or filled out in a foreign language. In response, the final regulations provide that substitute forms may be both prepared in and filled out in a foreign language, provided the withholding agent furnishes the IRS with a translated version upon request. Such substitute forms must contain the same certifications as the official IRS form to the extent relevant. For this purpose, a substitute form for individuals is acceptable, provided that the form contains the required information, including the individual's permanent residence address, all relevant tax identification numbers, and, if not signed under penalties of perjury, the withholding agent has obtained applicable documentary evidence that supports the person's claim of foreign status. Qualifying non-IRS forms may be used within the United States as well as for offshore obligations, and also may be used for purposes of chapter 3 to the extent provided in § 1.1441-1(e)(4)(vi).

4. Reliance on Pre-FATCA Form W-8

In response to comments that FFIs would have difficulty obtaining new documentation on all preexisting account holders in a compressed time frame, the final regulations provide that a withholding agent may rely upon a pre-FATCA Form W-8 in lieu of obtaining an updated version of the withholding certificate in certain circumstances.

5. Curing Inconsequential Errors

Comments requested that a minor error in a withholding certificate not invalidate the certificate if the error can be cured with supplemental information already on file for the payee. In response, the final regulations provide that a withholding agent may treat a withholding certificate as valid, notwithstanding an inconsequential error, if it otherwise has sufficient documentation to cure the error that does not contradict the information on the withholding certificate. A failure to make a required certification, or to provide a country of residence (or country under which treaty benefits are sought), is not an inconsequential error.

B. Continuing Validity of Documentation

Comments requested relief from the general requirement to refresh documentation every three years. In response, the final regulations permit documentation to remain valid indefinitely, subject to a change in circumstances, if the chapter 4 status claimed is a specified low-risk category. The Treasury Department and the IRS are considering extending the final regulations' validity rule to chapter 3 in appropriate circumstances (for example, when the payee does not make a claim that withholding under chapter 3 is reduced pursuant to a treaty).

C. Owner-Documented FFIs

In response to comments requesting reduced documentation requirements for the owner-documented FFI provisions, the final regulations make several modifications that also take into account the policy considerations presented by owner-documented FFIs. These modifications include: (1) permitting transitional reliance, subject to certain requirements, on documentation collected for AML due diligence purposes for payments made prior to January 1, 2017, on preexisting obligations; (2) allowing such entities to issue debt interests to an expanded group of holders, provided such debt holders are reported in the same manner as equity holders; (3) simplifying the withholding statement provided for an owner-documented FFI; and (4) providing for indefinite validity for withholding certificates and withholding statements submitted with respect to obligations having an aggregate value equal to or less than $1,000,000.

D. “Eyeball Test” and Effectively Connected Income Presumption

Comments requested that chapter 4 incorporate the so-called “eyeball test” under chapters 3 and 61 that treats payments inside the United States to certain entities that have “incorporated,” “corporation,” or an indication of status as a financial institution in their names as made to U.S. exempt recipients. Moreover, comments noted that withholding agents often already obtain documentary evidence for these entities to satisfy AML due diligence requirements. In response to these comments, the final regulations permit a withholding agent to rely upon documentary evidence obtained with respect to the payee, in lieu of a Form W-9, in order to establish the entity's status as a U.S. person and rely on the “eyeball test” to determine (to the extent applicable) the payee's status as other than a specified U.S. person under chapter 4.

Comments also requested that the final regulations incorporate the chapter 3 rules under which withholding agents are permitted to presume that payments made to U.S. branches of certain banks and insurance companies are payments of income that is effectively connected with the conduct of a trade or business within the United States. In response, the regulations permit a withholding agent to presume that a payment made to a U.S. branch of certain banks and insurance companies is a payment of income that is effectively connected with a trade or business within the United States (and thus not a withholdable payment) if the withholding agent obtains a GIIN that enables the withholding agent to confirm that the FFI is a participating FFI or registered deemed-compliant FFI, as well as an EIN for the U.S. branch that enables the withholding agent to properly report the payment. Conforming changes are anticipated to be made to the presumption rule in chapter 3 to provide consistency with the rule set forth in these regulations.

E. Rules for Offshore Obligations of Funds and New Accounts of Preexisting Customers

Comments requested additional clarity regarding when an interest in an investment fund should be treated as an offshore obligation. Comments also

stated that, in general, an investment fund's office is not separate from that of its manager or administrator, and shares issued by investment funds are not “maintained and executed” at a particular office. In response to these comments, the definition of an offshore obligation has been amended to clarify that an offshore obligation also includes an equity interest in a foreign entity if the owner of the interest purchased the interest outside the United States either directly from the foreign entity or from another entity located outside the United States.

Comments also requested that a new account of a preexisting customer be treated as a preexisting obligation. Comments stated that in such cases, withholding agents and FFIs generally do not get additional documentation from the customer because they are not required to do so for AML due diligence purposes. In response to these comments, the final regulations permit a new account of a customer that has a preexisting obligation to be treated as a preexisting obligation, provided that the withholding agent or FFI maintaining the account also treats the new obligation and the prior obligation as one obligation for purposes of applying AML due diligence, aggregating balances, and applying the standards of knowledge for purposes of chapter 4. The final regulations also permit this treatment to apply on a group basis for expanded affiliated groups and sponsored FFI groups.

F. Standards of Knowledge

Under the final regulations, the standards of knowledge provisions have been modified to allow withholding agents to rely on a claim of status as a participating or registered-deemed compliant FFI based on checking the payee's GIIN against the published IRS FFI list. Prior to January 1, 2015, a withholding agent is not required to confirm GIINs regarding an FFI's claim of status as a reporting Model 1 FFI. However, an FFI will have reason to know that such claim is unreliable if the withholding agent does not have a permanent residence address for the FFI (or address of the relevant branch) in the relevant country that has in effect a Model 1 IGA.

The final regulations further provide: (1) Limits, generally conformed with the chapter 3 limits, on a withholding agent's reason to know regarding a payee's claim of status as a foreign person; (2) limits on the review that must be conducted with respect to particular types of documentation, and in particular on the scope of review with respect to preexisting obligations; and (3) further guidance regarding when a payee has made a reasonable explanation regarding the presence of U.S. indicia. The Treasury Department and the IRS intend to issue guidance under chapter 3 that is consistent with the rules in these regulations regarding such reasonable explanations.

G. Reliance on Presumptions in Lieu of Documentation

Under the final regulations, a withholding agent may choose to rely on presumption rules in lieu of accepting and reviewing documentation of payees. This accommodates withholding agents that are unsure whether the documentation they have obtained is reliable or that do not wish to accept the responsibility associated with the acceptance of the documentation.

H. Consolidation and Sharing of Documentation, and Third-Party Reliance

Comments requested reduction of duplicative documentation requirements, facilitation of documentation sharing, and more detailed rules regarding reliance on agents or third-party service providers. In response, the final regulations adopt the following provisions.

1. Multiple Accounts of the Same Payee

The final regulations provide rules (consistent with chapter 3 in § 1.1441-1(e)(4)(ix)(A)) for a withholding agent to rely on documentation for multiple accounts of the same payee if the withholding agent aggregates the balance or value of those accounts (when relevant) and shares information across those accounts for purposes of determining when the withholding agent has actual knowledge or reason to know that the chapter 4 status claimed is inaccurate.

2. Mergers or Bulk Acquisitions

The final regulations provide a temporary six month period during which withholding agents that acquire accounts in a merger or bulk acquisition for value may rely, in the absence of contrary knowledge or a change in circumstances, upon the chapter 4 statuses assigned by a predecessor that is a U.S. withholding agent, a participating FFI, or a reporting Model 1 FFI that has completed all due diligence required under its agreement or pursuant to the applicable Model 1 IGA, provided that the predecessor is not a member of the withholding agent's expanded affiliated group prior to a merger or bulk acquisition, or after a bulk acquisition. At the end of the temporary period, the acquirer may continue to so rely only if the documentation it has, including the acquired documentation, supports the chapter 4 statuses claimed.

3. Common Agents

The final regulations provide rules (consistent with § 1.1441-1(e)(4)(ix)(A)(4) and (B)) with respect to sharing and relying upon documentation that has been provided by a common agent for multiple parties, including a fund advisor or principal underwriter that collects documentation for a family of mutual funds. This reliance is made contingent upon the agent also sharing any knowledge regarding inaccuracy or unreliability of the chapter 4 status claims across all the withholding agents with which the agent shares the documentation.

4. Third-Party Data Providers

The final regulations provide rules permitting a withholding agent to rely upon documentation collected with respect to an entity by a third-party data provider, subject to conditions including: (1) The third-party data provider is in the business of collecting information regarding entities and providing business reports or credit reports to unrelated customers and must have reviewed all information it has for the entity and verified that such additional information does not conflict with the chapter 4 status claimed by the entity; (2) the third-party data provider collects documentation sufficient to meet the applicable documentation requirements; and (3) the third-party data provider provides notice of changes in circumstances. This provision permits withholding agents to rely upon documentation collected by a third-party data provider, but does not relieve the withholding agent of the obligation to determine whether that documentation is reliable based on the information contained in the documentation and other information in the withholding agent's files.

5. Introducing Brokers

Comments requested that for purposes of chapter 4 a withholding agent be permitted to rely upon certifications regarding a payee's chapter 4 status provided by an introducing broker that is a QI or participating FFI (in addition to introducing brokers who are U.S. persons, as provided under the proposed regulations). In response to these comments, the final regulations permit reliance upon a certification provided by a participating FFI (which includes a QI that is a financial institution) if the participating FFI is

acting as an agent of the payee with respect to an obligation and receiving all payments made by the withholding agent with respect to that obligation on behalf of the payee, provided that certain requirements are met and the withholding agent does not know or have reason to know that the broker has not obtained valid documentation as represented or the information contained in the certification is otherwise inaccurate.

6. Transfer Agents

Comments requested that a transfer agent's obligations as a withholding agent be limited to the obligations of the principal on behalf of which the transfer agent acts in order to avoid duplicative efforts or conflicts between the standards applicable to the transfer agent and the principal. In response, the final regulations provide that merely acting as an agent with respect to a financial account belonging to the principal will not cause the agent to also have a financial account for that customer unless the agent would be treated as having the financial account independent of its actions as an agent. An agent that makes a payment on behalf of a principal is a withholding agent with respect to the payment and, accordingly (as under chapter 3) has a responsibility to determine the chapter 4 status of the payee and withhold, if required. However, because the obligation belongs to the principal, the level of due diligence that must be completed with respect to the obligation is determined by the obligation's status with respect to the principal. In order to minimize any duplicative responsibilities, the final regulations permit the agent to rely (absent contrary knowledge or reason to know) upon documentation collected by the principal or a certification by the principal that appropriate documentation has been collected.

I. Electronic Transmission of Documentation

Comments requested that a withholding agent be permitted to rely upon withholding certificates that are signed with a handwritten signature, scanned into an electronic device, and then emailed to the withholding agent. The final regulations adopt the rule of the proposed regulations, which permits the electronic transmission of a withholding certificate that has been signed with a handwritten signature and then scanned and emailed to the withholding agent if the requirements of § 1.1441-1(e)(4)(iv) are met. Further, the Treasury Department and the IRS continue to consider whether to retain the confirmation requirements in chapters 3 and 4. In addition, in response to comments, the final regulations do not require that documentary evidence that has been transmitted electronically be a certified or notarized copy.

J. Other Changes Made to Payee Identification Rules

Consistent with a risk-based approach to compliance under chapter 4, the final regulations adopt in whole or part several modifications requested by comments, including modifications to:

(1) Permit documentary evidence that does not contain an address, provided that the documentary evidence contains the person's country of residence or citizenship, and the withholding agent has obtained a permanent residence address for the person.

(2) Include a director, any foreign equivalent of an officer in the United States, and any other person granted written authority as a person authorized to sign a withholding certificate or written statement.

(3) Permit, in lieu of retention of copies of documentation, the retention of notations regarding documentation reviewed and (for obligations that are not preexisting obligations) any U.S. indicia identified, in the course of AML due diligence.

(4) Treat registered deemed-compliant FFIs as payees under the same circumstances in which participating FFIs are treated as payees.

(5) Treat all excepted NFFEs in the same manner, and provide that any excepted NFFE is the payee, unless it is acting as an agent or intermediary (other than a QI accepting primary withholding responsibility).

(6) Permit the submission of a withholding certificate within 30 days of payment (rather than the 15 days permitted in the proposed regulations) without an affidavit of accuracy as of the time of payment.

(7) Provide a definition for the term standing instructions to pay amounts to include current payment instructions that will repeat without further instructions being provided by the account holder.

(8) Clarify that a withholding statement submitted by a participating FFI or registered deemed-compliant FFI can include pooled information with respect to each class of payees unless payee-specific information is provided for purposes of chapter 3, in which case a chapter 4 status must be provided for each payee that is identified on the withholding statement.

V. Comments and Changes to § 1.1471-4—FFI Agreement

A. In General

1. FFI Agreement

The Treasury Department and the IRS received comments requesting additional guidance on the requirements of the FFI agreement. In response to these comments, the final regulations set forth all of the substantive requirements applicable to an FFI under the FFI agreement. The final regulations provide the requirements for verifying compliance with the FFI agreement, define an event of default and procedures for remediating of an event of default, allow participating FFIs to file collective refund claims on behalf of certain account holders and payees for amounts overwithheld, and provide procedural requirements if a participating FFI is legally prohibited from reporting or withholding as required under the FFI agreement. In addition, the final regulations do not restrict a participating FFI's ability to terminate an FFI agreement. This responds to comments concerning future withholding requirements for foreign passthru payments, and allows an FFI the flexibility to reconsider its status as further guidance is promulgated.

The Treasury Department and the IRS expect to publish a revenue procedure setting out the terms of an FFI agreement, consistent with these final regulations, coordinating an FFI's obligations under the FFI agreement with chapter 3 obligations and with the provisions of any applicable IGA, and including administrative provisions such as those relating to termination, renewal, and modification of the agreement.

2. Effective Date of the FFI Agreement

Many comments were received regarding the effective date provided in the proposed regulations for implementing the chapter 4 rules. Comments requested a delay of the effective date of the FFI agreement to allow FFIs sufficient time to modify systems and to implement the required account opening procedures. In response to comments, the final regulations delay the effective date of the FFI agreement until December 31, 2013, for all participating FFIs that receive a GIIN prior to January 1, 2014. This change aligns the effective date of, and due diligence periods under, the FFI agreement with the timelines provided under the IGAs.

3. U.S. Branches of Participating FFIs

Comments requested further clarifications on the application of the chapter 4 rules to U.S. branches of participating FFIs. In response to these comments, the final regulations provide comprehensive rules for U.S. branches of participating FFIs. A U.S. branch of a participating FFI that is treated as a U.S. person, as provided in § 1.1441-1(b)(2)(iv), is subject to special requirements to fulfill the withholding, due diligence, and reporting requirements of a U.S. financial institution to the extent provided under chapters 4 and 61 and section 3406(a). Additionally, such a U.S. branch is required to file a separate Form 1042 to report amounts subject to reporting under chapter 4 and any taxes withheld.

A U.S. branch of a participating FFI that is not treated as a U.S. person is required to fulfill the general requirements set forth in § 1.1471-4 for withholding, due diligence, and reporting.

B. Withholding by FFIs

The final regulations provide that an FFI is not required to withhold on foreign passthru payments until the later of January 1, 2017, or six months after the date of publication in the

Federal Register

of final regulations defining the term foreign passthru payments.

Comments requested more comprehensive rules concerning the withholding requirements of a participating FFI under the FFI agreement. In response to these comments, the final regulations provide that a participating FFI may apply the exceptions from withholding provided in § 1.1471-2, including the exception for grandfathered obligations and the transitional withholding requirements for payments made to prima facie FFIs. In addition, the proposed regulations did not provide detail on the coordination of withholding under sections 1471(a) and 1472 with withholding under section 1471(b). The final regulations provide that a participating FFI that satisfies its obligations under § 1.1471-4(b) to withhold on withholdable payments made to payees that are nonparticipating FFIs and recalcitrant account holders will be deemed to satisfy its obligations under sections 1471(a) and 1472 with respect to such payees and account holders.

C. Due Diligence

The final regulations adopt numerous comments intended to assist participating FFIs in complying with their obligations to perform due diligence to identify and document account holders.

1. General Requirements for Due Diligence

In response to comments, the final regulations modify the general requirements for identifying and documenting account holders in a number of ways. For example, the final regulations modify the record retention requirements for offshore obligations to allow an FFI to retain a notation in its files regarding the documentary evidence examined, rather than retaining a copy of the documentary evidence itself, unless the FFI is required pursuant to its AML due diligence to retain copies of documentation reviewed. In such cases, the final regulations no longer require a notation of the name of the person who reviewed the documentary evidence.

The final regulations also provide special procedures to identify and document accounts acquired in mergers or bulk acquisitions for value from another financial institution. For accounts acquired from nonparticipating FFIs or deemed-compliant FFIs that do not apply the final regulations' due diligence procedures, the final regulations allow a participating FFI to apply preexisting account identification and documentation procedures. For accounts acquired from another participating FFI, certain deemed-compliant FFIs, or U.S. financial institutions, the final regulations allow a participating FFI to rely on the chapter 4 determinations made by such transferor financial institution, subject to certain conditions. Additionally, the final regulations in § 1.1471-4 incorporate by reference the revised rules for documentation standards, validity periods of documentation, and reliance on valid documentation collected by other withholding agents provided in § 1.1471-3(c).

2. Account of a Preexisting Customer and Sharing of Account Documentation

Comments requested that a new account opened at an FFI by a customer that has a preexisting account with the FFI be treated as a preexisting account rather than a new account. Comments stated that in such cases, FFIs generally do not obtain documentation from the customer for AML due diligence purposes. Recognizing the substantial burden for the FFI to separately document an existing customer, the final regulations revise the definition of a preexisting obligation to permit a new account of a customer that has a preexisting account to be treated as a preexisting account provided that the FFI maintaining the account also treats the new account and the preexisting account as one account for purposes of applying AML due diligence, aggregating balances, and applying the standards of knowledge for purposes of chapter 4 to all such accounts. The final regulations allow this treatment on a group basis for expanded affiliated groups and sponsored FFI groups that share documentation within the group. In addition, to address comments concerning the burden of documenting multiple accounts of a customer generally (regardless of whether any such accounts are preexisting accounts), the final regulations allow a participating FFI, participating FFI group, or a sponsored FFI group to apply the provisions for documentation sharing systems described in § 1.1471-3(c)(8).

3. Change in Circumstances

In response to comments that the obligations of a participating FFI following a change in circumstances were unclear in the proposed regulations, the final regulations provide that an FFI must retain a record of documentation to establish the account holder's chapter 4 status within the earlier of 90 days from the date of a change in circumstances or the date a withholdable payment or foreign passthru payment is made to the account or, if unable to do so, must treat such account as held by a recalcitrant account holder or nonparticipating FFI (as applicable).

4. Entity Accounts

Comments indicated that for certain investment entities, direct investment may be held in bearer form so that the investment entity is unable to document such account holders until the time of payment. The final regulations allow a participating FFI that is an investment entity to document an account holder of a preexisting account that is in bearer form at the time of payment.

The final regulations clarify that in addition to documenting the entity account holder, a participating FFI is also required to document the payee (if other than the account holder) to the extent necessary to determine whether withholding applies. For example, if an account is held by an NFFE that is a flow-through entity (other than a WP, WT, or excepted NFFE), the participating FFI is also required to identify and document the partners, owners, or beneficiaries of such entity to determine if withholding is required

with respect to payments of U.S. source FDAP income made to such account.

5. Individual Accounts

a. New Accounts

Comments requested alternative documentation options to address difficulties in obtaining U.S. tax forms from account holders. In response to these comments, the final regulations modify the identification and documentation procedures of participating FFIs with respect to individual accounts that are new accounts to permit certain alternative forms of documentation. For example, the final regulations permit a participating FFI to rely on information provided by a third-party credit agency to establish an account holder's foreign status when certain conditions are met.

The final regulations adopt the requirement in the proposed regulations for a participating FFI to review all information collected in connection with the opening or maintenance of each account, including documentation collected as part of the participating FFI's account opening procedures and documentation collected for other regulatory purposes, to determine if an account holder's claim of foreign status is unreliable or incorrect. The final regulations clarify that a participating FFI is required in such reviews to apply the standards of knowledge provided in § 1.1471-3(e) for offshore obligations held by individuals. If the participating FFI is not able to establish an account holder's status as a foreign person, the final regulations require the participating FFI to retain a record of a U.S. TIN and, if necessary, a valid and effective waiver described in section 1471(b)(1)(F)(i) to establish an account holder's status as a U.S. person. The final regulations allow a participating FFI to retain a record of a U.S. TIN by any means (that is, not exclusively by retaining a record of a Form W-9).

The final regulations also provide alternative identification and documentation procedures for certain cash value insurance or annuity contracts. Comments noted that when a group life insurance contract or group annuity contract is issued to an employer and individual employees are the insured/beneficiaries, the insurance company does not have a direct relationship with the employee/certificate holders at inception of the contract. In response, the final regulations do not require the insurance company to document each employee until the date on which an amount is payable to an employee/certificate holder or beneficiary if the participating FFI obtains a certification from an employer that no employee/certificate holder (account holder) is a U.S. person and certain other conditions are satisfied (for example, that the number of employees covered under the contract exceeds 25). Comments also requested relief from the requirement to identify and document beneficiaries of cash value insurance contracts. In response, the final regulations provide that a participating FFI may presume that an individual beneficiary (other than the owner) receiving a death benefit with respect to a life insurance contract that is a cash value insurance contract is a foreign person, and is therefore not required to retain a record of documentation from such person, unless the participating FFI has actual knowledge or reason to know that the beneficiary is a U.S. person. A participating FFI has reason to know that a beneficiary of a cash value insurance contract is a U.S. person if the information collected by the participating FFI and associated with the beneficiary contains U.S. indicia.

b. Preexisting Accounts

Comments requested clarification with regard to procedures for identifying and documenting preexisting accounts. In response to these comments, the final regulations provide a more detailed explanation of the application of these rules. For example, the final regulations expressly provide that a participating FFI is not required to retain a record of documentation from the account holder until there is a change in circumstances if the identification and documentation procedure specified for preexisting accounts is applied and no U.S. indicia are identified. In addition, the final regulations expressly provide that for preexisting accounts, a participating FFI may apply the identification and documentation procedure for either new accounts or preexisting accounts.

The proposed regulations did not coordinate the rules in § 1.1471-3(e) (covering standards of knowledge) with the documentation requirements under § 1.1471-4(c) to establish an account holder's foreign status when U.S. indicia are associated with the account. To provide such coordination, § 1.1471-4(c) incorporates by reference the standards of knowledge in § 1.1471-3(e).

c. Presumption of Status for Individual Accounts

Comments noted that the proposed regulations were unclear concerning the application of the presumption rules to individual account holders of participating FFIs. In response to these comments, the final regulations clarify that the presumption rules of § 1.1471-3(f) do not apply to individual account holders of a participating FFI. A participating FFI must complete the requisite identification and documentation procedures with respect to each account within the time period provided by § 1.1471-5(g)(3) (start of recalcitrant account holder status), or, if unable to do so, must treat such account as held by a recalcitrant account holder.

d. Preexisting Individual Accounts Previously Documented

With respect to the exception to the preexisting account identification procedure (other than the relationship manager inquiry) for an account documented as held by foreign individuals for purposes of chapter 61 or the QI, WP, or WT agreement, the final regulations clarify that an individual account holder's foreign status has been documented under chapter 61 if the participating FFI has retained a record of the documentation required under chapter 61 to establish the individual's foreign status and the account received a reportable payment (as defined under section 3406(b)) in any prior year. With respect to QIs, WPs, and WTs, an account holder's foreign status has been documented if the QI, WP, or WT has met the relevant documentation requirements of its agreement with respect to an account holder that received a reportable amount in any year in which the agreement was in effect.

e. Certifications of Responsible Officer

The final regulations retain the requirement in the proposed regulations for a responsible officer to certify, to the best of his/her knowledge after conducting a reasonable inquiry, that the participating FFI does not have any formal or informal practices or procedures in place to assist account holders in avoiding chapter 4, such as advising account holders to split up their accounts to avoid reporting as high-value accounts. Comments requested additional examples of policies that violate the certification. The final regulations provide such additional examples, including: advising that account holders of U.S. accounts close, transfer, or withdraw from their account to avoid reporting; intentional failures to disclose a known U.S. account; or advising that an account holder remove U.S. indicia from its account information. In response to comments, the final regulations also provide that an email requiring responses from relevant

customer on-boarding and management personnel as to whether they engaged in any such practices is considered a reasonable inquiry for purposes of the certification.

Comments requested specific timing for making the certifications regarding completion of required due diligence. The final regulations respond to these comments and also simplify and consolidate the certifications. The final regulations provide that these certifications may be made concurrently and no later than 60 days following the date that is two years after the effective date of the FFI agreement. See section V.F.3 of this preamble for a discussion of a responsible officer's periodic certification requirements.

Comments also requested clarification on a responsible officer's responsibilities if he/she could not make the required certification. The final regulations provide that a responsible officer may make a qualified certification stating why the general certification cannot be made and that corrective actions will be taken by the responsible officer.

D. Account Reporting

1. In General

As in the proposed regulations, the final regulations indicate that the FFI that maintains an account is generally responsible for reporting the account in accordance with the reporting rules under § 1.1471-4(d). The final regulations add in § 1.1471-5 a rule to determine if an FFI is treated as maintaining an account.

The final regulations describe the reporting responsibilities of a sponsoring entity that has agreed to fulfill the reporting requirements of a sponsored FFI and generally require the sponsoring entity to report accounts of the sponsored FFI in the manner the sponsored entity would otherwise be required to report if it were a participating FFI.

2. Account Balance or Value

In response to comments generally requesting that the final regulations accommodate current business practices of FFIs, the final regulations provide that a participating FFI must report the average balance or value of the account to the extent that the FFI reports average balances or values to the account holder for a calendar year and otherwise to report the balance or value of the account as of the end of the calendar year.

3. Payments

The final regulations clarify that any distribution (including a distribution that would be considered a redemption) made to an account holder with respect to a cash value insurance contract or annuity contract must be reported under § 1.1471-4(d)(4)(iv)(C) without regard to the U.S. tax treatment.

4. Section 953(d) Insurance Companies and Reporting in a Manner Similar to Section 6047(d)

Comments requested that a foreign insurance company that has made an election under section 953(d) be excluded from the definition of an FFI. The final regulations do not adopt this comment when the foreign insurance company is not licensed to do business in the United States. How a foreign insurance company and its United States shareholders are taxed is immaterial to the need for reporting with regard to insurance or annuity contracts issued by the insurance company to its customers. Therefore, the final regulations provide that the term U.S. person does not include an insurance company that has made an election under section 953(d) if the company is not licensed to do business in any State. However, a foreign insurance company that has made an election under section 953(d) and is licensed to do business in the United States would be considered, for purposes of chapter 4, a U.S. person and, therefore, would remain subject to reporting with respect to its life insurance and annuity contracts under section 6047(d), not chapter 4.

Comments also requested that a foreign insurance company be permitted to satisfy its chapter 4 reporting obligations by reporting under section 6047(d). Permitting a foreign insurance company that is not licensed to do business in the United States to report only the information required under section 6047(d) would provide insufficient reporting for FATCA purposes because section 6047(d) reporting applies only to distributions made under a contract issued by an insurance company licensed to do business under the laws of a State.

In response to the comments, however, the final regulations permit an insurance company participating FFI that is not licensed to do business in the United States to elect to report its chapter 4 account information with respect to its life insurance and annuity contracts in a manner similar to section 6047(d) reporting. Under this election, an insurance company participating FFI reports the sum of: (1) a cash value or annuity contract's account balance or value; and (2) any amount paid under the contract as a “gross distribution” in Box 1 of Form 1099-R. The participating FFI could then check box 2b to indicate the taxable amount is not determined.

5. Special Reporting for Calendar Year 2013

The final regulations incorporate the reporting requirements in Announcement 2012-42, 2012-47 I.R.B. 561 with respect to calendar year 2013. The final regulations provide that if an FFI agreement has an effective date that is on or before December 31, 2014, the participating FFI is required to report U.S. accounts that it maintained during 2013 that are outstanding on December 31, 2013. The final regulations adopt the streamlined reporting rules provided in the proposed regulations. The final regulations also eliminate the proposed regulations' requirement for reporting by September 30, 2014, and instead permit participating FFIs to report for both calendar years 2013 and 2014 on or before March 31, 2015.

E. Expanded Affiliated Group Requirements

The final regulations do not incorporate comments suggesting the sunset date for limited branches and limited FFIs be extended beyond December 31, 2015. The final regulations also do not adopt suggestions to relax the requirement that all members of an expanded affiliated group be participating FFIs, deemed-compliant FFIs, or limited FFIs. The Treasury Department and the IRS believe that IGAs are the appropriate vehicle to address these concerns.

F. Verification

1. In General

The final regulations include the verification and certification requirements for participating FFIs. These verification procedures rely on a responsible officer (or designee) to establish a compliance program that includes policies, procedures, and processes sufficient for the participating FFI to satisfy the requirements of the FFI agreement. The participating FFI must subject its compliance program to periodic review. The responsible officer may be any officer of any participating FFI or reporting Model 1 FFI in the participating FFI's expanded affiliated group with sufficient authority to fulfill the duties of a responsible officer described in the final regulations. The responsible officer may designate others to implement and oversee the compliance with the verification requirements, but must make any required certifications to the IRS (as described below).

2. Consolidated Compliance Program

In response to comments supporting the approach set forth in Notice 2011-34 for an optional consolidated compliance program, the final regulations provide for such a program. Under the final regulations, a participating FFI, reporting Model 1 FFI, or U.S. financial institution (compliance FI) may agree to establish and maintain a consolidated compliance program and perform a consolidated periodic review on behalf of one or more FFIs in the same expanded affiliated group that elect this option (the consolidated compliance group). The consolidated compliance group is not required to include every FFI in the expanded affiliated group, and an expanded affiliated group may have multiple consolidated compliance groups organized under different or the same compliance FI. The final regulations also require a sponsoring entity to act as the compliance FI for all of the FFIs that it sponsors (including any certified deemed-compliant FFIs that it sponsors).

It is anticipated that additional guidance will be provided in either the instructions to the registration system or the FFI agreement for an electing FFI to identify itself as part of a consolidated compliance group and procedures for the responsible officer of the compliance FI to make the required certifications on behalf of the consolidated compliance group.

3. Certification of Compliance

The final regulations require the responsible officer, on behalf of the participating FFI, to periodically certify to the IRS that the FFI is in compliance with the requirements of the FFI agreement. Such certification is required once every three years. In advance of such certification, a participating FFI is required to review its compliance program and its compliance with the requirements of the FFI agreement. In consideration of the results of this review, the responsible officer is required to certify to the IRS that it maintains effective internal controls and that there were no material failures during the certification period, or any material failures that did occur were corrected. A material failure is a failure of the participating FFI to fulfill the requirements of the FFI agreement if the failure was the result of a deliberate action by the participating FFI to avoid the requirements of the FFI agreement or was an error attributable to a failure to implement sufficient internal controls. The final regulations provide that a material failure that occurs in limited circumstances will not result in an event of default. If a material failure occurring during the certification period has not been corrected, or if an event of default has occurred, the final regulations provide that a responsible officer may instead make a qualified certification.

4. IRS Review of Compliance

Comments requested guidance on the standards the IRS would apply when requesting additional information from a participating FFI to determine its compliance with its FFI agreement. The final regulations provide for general inquiries under which the IRS contacts the participating FFI to request additional information regarding the information reported on the returns filed by the participating FFI, and for inquiries when the IRS determines in its discretion that there may have been substantial non-compliance with an FFI agreement. The IRS expects that inquiries regarding substantial non-compliance will not be made on a routine basis. If a determination that there may have been substantial non-compliance is made, the IRS may inquire as to the FFI's compliance with certain requirements of the FFI agreement and may request information necessary to verify the participating FFI's compliance with the FFI agreement, such as a description of the participating FFI's procedures for conducting its periodic review. The IRS may also request the performance of specified review procedures (including an external audit). If the IRS determines, based upon its review, that the FFI has not substantially complied with the requirements of an FFI agreement, it will deliver a notice of event of default.

G. Event of Default

The final regulations define an event of default of the FFI agreement and describe procedures for a participating FFI to remediate an event of default. Comments expressed concern that any failure to comply with an FFI agreement would result in termination of that agreement. In response to these comments, the final regulations clarify that an event of default does not result in automatic termination of the FFI agreement. The final regulations provide that if the IRS becomes aware of an event of default, it will deliver a notice of default to the participating FFI and allow the participating FFI to develop a plan to remediate the event of default. If the participating FFI fails to respond to the notice of default or comply with an agreed-upon remediation plan, the IRS may terminate the FFI's participating FFI status within a reasonable period of time, subject to an FFI's request for reconsideration of termination by written request to the LB&I Director for Foreign Payments Practice.

H. Collective Refunds

The final regulations provide that a participating FFI (or a reporting Model 1 FFI) may file a collective refund claim on behalf of its account holders and payees that were overwithheld upon under chapter 4, subject to certain conditions and procedural requirements.

I. Legal Prohibitions on Reporting U.S. Accounts and Withholding

In response to comments requesting clarification on whether an FFI can enter into an FFI agreement if foreign law imposes prohibitions on the FFI's ability to report or withhold, the final regulations clarify that an FFI may enter into an FFI agreement if it can meet the requirements of § 1.1471-4(i). The final regulations require, however, that if foreign law prohibits a participating FFI from fulfilling its withholding obligations with respect to an account, the participating FFI must close the account within a reasonable time or, if local law prohibits closing the account, the participating FFI must block or transfer the account. Similarly, if a participating FFI is prohibited by foreign law, absent a waiver, from reporting information on an account that it must treat as a U.S. account, the final regulations provide that the participating FFI must request a waiver of foreign law from such account holder and if such waiver is not obtained within a reasonable period of time, the participating FFI must close or transfer such account.

VI. Comments and Changes to § 1.1471-5—Definitions Applicable to Section 1471

A. U.S. Account

Comments requested additional exceptions from the definition of U.S. account for low-value accounts other than preexisting accounts and the depository account exception provided by section 1471(d)(1)(B). In response to these comments, the Treasury Department and the IRS have provided a $50,000 exception for cash value insurance contracts by amending the definition of financial account, discussed below.

B. Account Holder

Comments requested clarification of whether an entity that is disregarded as an entity separate from its owner under § 301.7701-2(c)(2)(i) (disregarded entity)

is treated as an account holder. In response to these comments, because the definition of person excludes a disregarded entity, the final regulations clarify that an account held by a disregarded entity shall be treated as held by the person owning such entity.

Comments expressed concern regarding the identification of the account holder of insurance and annuity contracts. The final regulations provide that an insurance or annuity contract that is a financial account is treated as held by each person that can access the contract value (for example, through a loan, withdrawal, or surrender) or change a beneficiary under the contract. If no person can access the contract value or change a beneficiary under the contract, then the contract is treated as held by both the person(s) named in the contract as the owner(s) of the contract and each beneficiary under the contract. When the obligation to pay any benefit under the contract becomes fixed, the person entitled to such benefit is treated as a holder of the contract.

C. Financial Accounts

1. Depository Accounts

In response to comments, the final regulations limit the scope of the term depository account in a number of ways. For example, the final regulations exclude certain escrow accounts established for commercial transactions from treatment as financial accounts. The final regulations also exclude negotiable debt instruments that are traded on a regulated market or over-the-counter market and distributed through financial institutions. In response to comments, the final regulations also clarify the meaning of “any other similar instrument” in the definition of a depository account. The final regulations limit the scope of a depository account to an account for the placing of money (as opposed to the holding of property) in the custody of an entity engaged in a banking or similar business. The final regulations also clarify that a credit balance with respect to a credit card account issued by a credit card company is a depository account.

Comments requested guidance regarding the specific circumstances in which an amount held by an insurance company would be treated as a depository account. The final regulations provide that a depository account includes an amount that an insurance company holds under a guaranteed investment contract or under a similar agreement to pay or credit interest thereon. The final regulations also provide that a depository account does not include an advance premium or premium deposit received by an insurance company, provided the prepayment or deposit relates to an insurance contract for which the premium is payable annually and the amount of the prepayment or deposit does not exceed the annual premium for the contract. Such amounts are also excluded from cash value for purposes of determining whether a contract is a cash value insurance contract.

2. Equity and Debt Interests

With regard to equity or debt interests in investment entities, the final regulations revise the financial account definition to correspond to the changes discussed below to the definition of FFI for investment entities. Accordingly, the final regulations generally remove from the financial account definition debt or equity interests in investment entities that are described solely in § 1.1471-5(e)(4)(i)(A), which are generally investment advisors or asset managers. This treatment parallels the treatment of equity and debt interests in entities that act solely as depository institutions or custodial institutions.

Comments requested that bank holding companies should be treated like depository institutions for purposes of the financial account exclusion for non-regularly traded debt and equity interests to cover cases in which the holding company raises funds for its subsidiaries. Comments noted that these interests are often held through custodial institutions that are in a better position to document the holders and report and withhold on such instruments. The final regulations respond to these comments by generally removing from the definition of financial account debt or equity interests in holding companies and treasury centers of expanded affiliate groups whose aggregate income is derived primarily from active NFFEs, depository institutions, custodial institutions, and insurance companies.

Nevertheless, the final regulations limit the exception from financial account for a debt or equity interest in a holding company or a treasury center so that the exception does not apply in cases in which the debt or equity interest tracks the performance of one or more investment entities described in paragraph § 1.1471-5(e)(4)(i)(B) or (C) (generally traders and investment vehicles) or one or more passive NFFEs that are members of entity's expanded affiliated group rather than of the group as a whole. The final regulations also provide anti-abuse rules if the value of the interest is determined, directly or indirectly, primarily by reference to assets that give rise (or could give rise) to withholdable payments, or the interest is issued with a principal purpose of avoiding the reporting or withholding requirements of chapter 4.

The proposed regulations provided that an equity or debt interest in certain types of financial institutions would be treated as a financial account only if the value of the interest is determined, directly or indirectly, primarily by reference to assets that give rise (or could give rise) to withholdable payments. Comments requested additional guidance regarding when an equity or debt interest would be considered to be determined, directly or indirectly, primarily by reference to assets that give rise (or could give rise) to withholdable payments. The final regulations provide that the value of an interest is determined, directly or indirectly, primarily by reference to assets that give rise (or could give rise) to withholdable payments if the amount payable upon redemption of the interest is either secured or determined primarily by reference to assets that give rise to withholdable payments. The value of a debt interest is determined, directly or indirectly, primarily by reference to assets that give rise (or could give rise) to withholdable payments if the debt is convertible into stock of a U.S. person, amounts payable as interest or upon redemption of the debt are determined primarily by reference to profits or assets of a U.S person, or the debt is secured by assets of a U.S. person.

A number of comments were received regarding the exception from financial account status for debt and equity that is regularly traded on an established securities market. The final regulations respond to comments by adopting the definitions provided in the final regulations under section 1472, including the revisions made to those regulations that provide a special rule for the initial year of public offering. The final regulations also clarify that an interest is not regularly traded if the holder of the interest (other than a financial institution acting as an intermediary) is registered on the books of the investment entity. This rule does not apply to the extent a holder's interest is registered prior to January 1, 2014, on the books of the investment entity. The proposed regulations excluded debt or equity interests in an investment entity that are regularly traded because such interests are typically held through other financial institutions, so that reporting by the issuing entity is not necessary to fulfill the purposes of chapter 4. Where that is not the case, the final regulations clarify

that such interests are treated as financial accounts. See § 1.1471-3(c)(9)(iii), however, for when the entity may rely upon a certification from broker acting as an agent of a payee (including receiving of payments on behalf of the payee from the entity).

3. Accounts Held by Estates

With regard to accounts held by estates, in response to comments, the final regulations conformed the chapter 4 rules with the reporting rules under section 6038D by excepting accounts held by estates from the definition of financial account.

4. Insurance Definitions and Contracts

Comments requested that the definitions of “annuity contract,” “life insurance contract,” and “insurance company” in the proposed regulation be modified to eliminate the need for foreign companies to become proficient in the specialized definitions of these terms under U.S. tax rules defining these products and to accommodate local law definitions and practices. In response to comments, the final regulations replace the references to U.S. tax law rules when defining these terms with plain language definitions and incorporate, where appropriate, references to local law definitions and practices.

Comments also requested that the final regulations clarify when an insurance company is a financial institution or a NFFE, because an insurance company's reserve activities could cause an insurance company that is not a specified insurance company to qualify as a depository institution, custodial institution, or investment entity. In response to these comments, the final regulations clarify that: (1) an insurance company that is not a specified insurance company must independently determine whether it is a depository institution, custodial institution, or investment entity; (2) an insurance company's reserve activities with respect to its insurance contracts and annuity contracts are not taken into consideration in determining whether the company is a depository institution, custodial institution, or investment entity; and (3) an insurance company that is not a financial institution is a NFFE.

The final regulations also respond to comments by expanding the exclusion from financial account status for certain term life insurance contracts. Because mortality risk under an insurance contract increases as the insured ages, the final regulations permit increasing periodic premium payments. To prevent front loading premiums, however, the final regulations require that the premiums be payable at least annually during the period the contract is in existence or until the insured attains age 90, and that the premiums do not decrease over time.

In addition, the Treasury Department and the IRS did not accept comments requesting that return of premium be permitted to the extent that it did not exceed the aggregate premiums paid for the contract, without regard to mortality, morbidity, and expense charges. The Treasury Department and the IRS believe such instruments implicate the policy objectives of chapter 4. Accordingly, under the final regulations, if a policyholder at the beginning of January purchases a term life insurance contract with a $100,000 annual premium, terminates the contract on April 1st, and upon termination receives $75,000 as a return of the premium paid ($100,000 less $25,000 mortality, morbidity, and expense charges for the period the contract was in force), then the contract qualifies for the term contract exclusion from a cash value insurance contract. If, however, upon termination, the policyholder would receive an amount exceeding $75,000, the contract would not qualify for exclusion from financial account status as a term life insurance contract.

Comments requested an exemption from financial account status for immediate pension or disability annuities that relate to exempt retirement or pension accounts. The final regulations respond to this comment by providing that a financial account does not include a non-investment linked, non-transferable, immediate annuity purchased by the accountholder in connection with an exempt retirement or pension account.

In response to comments requesting an expansion of the contracts that are exempt from financial account status, the final regulations made a number of revisions to the rules associated with cash value insurance contracts. The final regulations provide that an insurance contract is excluded from the definition of a financial account unless it has a cash value that exceeds $50,000 at any time during the calendar year, unless the participating FFI elects to report all contracts with a cash value. In addition, the final regulations exclude indemnity reinsurance contracts between two insurance companies from the definition of a cash value insurance contract and expand the exclusions from cash value to include a refund of premium upon the termination of a contract.

5. Exception for Certain Savings Accounts

Numerous comments were received requesting that the proposed regulation's exceptions from financial account status for certain savings accounts be expanded to accommodate savings vehicles commonly used in a number of jurisdictions. In response to these comments, substantial revisions were made to the exceptions in order to accommodate more savings vehicles without significantly increasing the ability for U.S. persons to use such vehicles to avoid chapter 4 reporting. For retirement and pension accounts, the excepted category is revised to eliminate the requirements that all contributions to the account be government, employer, or employee contributions and that the contributions be limited to earned income. In addition, the limitation on contributions is liberalized to allow plans that either have an annual contribution limit of $50,000 or less or a maximum lifetime contribution limit of $1,000,000 or less. The final regulations also add the condition that the relevant tax authorities require information reporting with respect to the account. For non-retirement savings accounts, the final regulations eliminate the requirement that contributions be limited by reference to earned income and instead require that the account be tax favored. The final regulations expand the definition of “tax favored” provided in the proposed regulations for purposes of these rules.

6. Account Balance or Value

The proposed regulations did not provide express guidance on the manner in which debt interests should be valued. The final regulations revise the definition of account balance or value with respect to a debt interest to mean the principal amount of such debt.

Comments noted that certain insurance companies value insurance and annuity contracts on the contract's anniversary date under normal business practices. In response to these comments, the final regulations allow the annual reporting of account balance or value of an insurance or annuity contract to be based upon either the account value at calendar year end or the account value at each contract anniversary date. Also, the final regulations provide that in the case of an annuity contract for which no value is reported to the account holder, the annuity is valued using the discount interest rate and mortality tables that are either (1) prescribed under section 7520 and the regulations thereunder, or (2)

used by the FFI to determine the amounts payable under the contract.

7. Maintaining a Financial Account

The Treasury Department and the IRS received comments that the proposed regulations could be read to provide that a single account could be maintained by multiple entities (such as both a collective investment vehicle and its transfer agent), thereby creating multiple documentation, reporting, or withholding obligations for each entity. In response to these comments, the final regulations identify the entity that will be treated as maintaining a financial account in order to avoid requiring multiple entities to document, withhold, and report with respect to a financial account.

D. Foreign Financial Institution

In response to comments requesting conformity between IGA definitions and the chapter 4 definitions, the final regulations amend the definition of FFI to provide that IGAs determine whether a resident entity described in the applicable IGA is an FFI. A corresponding change was made to the definition of NFFE. The statutory and regulatory definitions apply for entities that are not resident in IGA jurisdictions.

E. Financial Institution

1. Depository Institution

With regard to the definition of a depository institution, the Treasury Department and the IRS received a number of comments regarding whether merely accepting deposits was or should be sufficient to create depository institution status. In response to these comments, the final regulations clarify that accepting deposits is necessary but not sufficient to create depository entity status. Therefore, an entity that accepts deposits must also engage in one or more of the enumerated banking or financing activities (adapted from section 864's and section 954(f)'s active banking, financing, and similar business rules). The final regulations also provide that, to be treated as a depository institution, an entity needs to engage on a regular basis in one or more such activities. In addition, the final regulations clarify that an entity that completes money transfers by instructing agents to transmit funds is not in a banking or similar business because it does not accept deposits or other similar temporary investments of funds. The final regulations also clarify that an entity that solely accepts deposits from persons as collateral or security pursuant to a lease, loan, or similar financing arrangement is not a depository institution. This exception is intended to exclude from FFI status entities such as finance companies that do not fund their operations through deposits and entities acting as networks for credit card banks that hold cash collateral from such banks.

2. Custodial Institution

With regard to the definition of a custodial institution, the proposed regulations define custodial institutions by reference to whether over 20 percent of an entity's income is “attributable to the holding of financial assets.” In response to comments, the final regulations clarify the specific types of income that will be treated as attributable to holding financial assets.

In addition, in response to comments that new institutions (starts-ups) cannot qualify as custodial institutions, the final regulations provide a special rule for start-up entities that bases custodial institution status on the expectations and purposes of the entity.

3. Investment Entity

Comments requested that the definition of “financial institution” be clarified and more narrowly defined to exclude passive, non-commercial investment vehicles, including trusts. The IGAs adopt this approach by requiring an investment entity to undertake activity on behalf of customers. The IGAs also expand the definition of an investment entity to include an entity that provides certain financial services to customers, such as individual or collective portfolio management or otherwise investing, administering, or managing funds or money on behalf of other persons, regardless of whether the entity holds financial assets.

Taking into consideration comments that the provisions of the final regulations should conform as closely as possible to the provisions of the IGAs, the final regulations generally incorporate the definition of investment entity contained in the IGAs by providing that an investment entity includes any entity that primarily conducts as a business on behalf of customers: (1) trading in an enumerated list of financial instruments; (2) individual or collective portfolio management; or (3) otherwise investing, administering, or managing funds, money, or certain financial assets on behalf of other persons. In addition, the final regulations limit the scope of the proposed regulations' definition of investment entity by treating an entity (other than an entity that primarily conducts as a business on behalf of customers one of the activities enumerated in the preceding sentence) the gross income of which is primarily attributable to investing, reinvesting, or trading as an investment entity only if the entity is managed by a depository institution, a custodial institution, another investment entity, or an insurance company that qualifies as a financial institution. Accordingly, passive entities that are not professionally managed are generally treated as passive NFFEs rather than as FFIs. However, entities that function or hold themselves out as mutual funds, hedge funds, or any similar investment vehicle established with an investment strategy of investing, reinvesting, or trading in financial assets are investment entities.

Consistent with the approach of the proposed regulations, the final regulations provide that an entity primarily conducts an activity as a business if gross income attributable to such activity equals or exceeds 50 percent of the entity's gross income.

4. Insurance Companies and Holding Companies

With regard to insurance companies and holding companies of insurance companies, the final regulations provide that a holding company that is a member of an expanded affiliated group that includes an insurance company will be treated as an FFI if it issues or is obligated to make payments with respect to a cash value insurance contract or annuity contract, regardless of whether it would otherwise be treated as an FFI.

5. Certain Holding Companies and Treasury Centers

Comments noted that under many circumstances a company within an affiliated group of companies that serves as a holding company or provides treasury services for or on behalf of group members should not be considered a financial institution under chapter 4. In response to these comments, the final regulations limit the circumstances under which a holding company or treasury center is treated as a financial institution. Under the final regulations, such entities are FFIs in two situations. First, subject to limited exceptions for nonfinancial groups, discussed below, such entities are FFIs if they are part of an expanded affiliated group that includes a depository institution, custodial institution, insurance company, or investment entity described in paragraph (e)(4)(i)(B) and (C) (not exclusively a financial service provider). Second, they are FFIs regardless of

whether they are a member of a nonfinancial group if they are formed in connection with or availed of by a collective investment vehicle, mutual fund, exchange traded fund, private equity fund, hedge fund, venture capital fund, leveraged buyout fund, or any similar investment vehicle established with an investment strategy of investing, reinvesting, or trading in financial assets. These rules help to ensure that holding companies and treasury centers cannot be used by financial groups with nonparticipating FFIs or limited FFIs to shelter payments from chapter 4 withholding.

6. Exceptions to FFI Status

The Treasury Department and the IRS received a number of comments requesting more comprehensive exceptions to FFI status for holding companies and similar entities. Comments noted instances in which holding companies and other financial entities were part of a nonfinancial group, the activities of these entities were in furtherance of the nonfinancial business of the group, and the entities provided no meaningful investment opportunities to third-parties. In response to these comments, the final regulations provide more comprehensive exceptions to FFI status for certain nonfinancial group entities as described below. These entities are also excepted NFFEs for purposes of section 1472.

In particular, the final regulations provide an exception to FFI status (and passive NFFE status for section 1472 purposes) for holding companies, treasury centers, and captive finance companies that are part of a nonfinancial group. In response to comments, excepted holding companies may be part of nonfinancial group structures that include tiers of holding companies. Nonfinancial groups are permitted to include FFI members to a limited extent when all such members are participating FFIs or deemed-compliant FFIs. In response to comments, the final regulations also provide that an excepted entity can provide a mixture of holding company, treasury center, and captive finance company functions so long as substantially all of its activities are such activities. The final regulations also provide that this excepted status does not apply to entities formed in connection with or availed of by private equity funds and similar arrangements.

The final regulations also create a new exception to FFI status for excepted inter-affiliate FFIs. Comments noted that financial groups may include dormant entities, entities that were formed for a specific deal and were not subsequently liquidated, or entities formed for regulatory purposes whose activities are entirely within the financial group. In response to these comments, the final regulations provide that an entity that is a member of a PFFI group is not an FFI if it: (1) does not maintain financial accounts (other than accounts maintained for members of its expanded affiliated group); (2) does not hold an account with or receive payments from any withholding agent other than a member of its expanded affiliated group; (3) does not make withholdable payments to any person other than to members of its expanded affiliated group that are not limited FFIs or limited branches; and (4) has not agreed to report under § 1.1471-4(d)(1)(ii) or otherwise act as an agent for chapter 4 purposes on behalf of any financial institution, including a member of its expanded affiliated group.

In response to comments, the final regulations also provide an exception for an entity that is changing its line or business, provided that the entity previously qualified as an active NFFE.

With regard to entities described in section 501(c), the final regulations exclude insurance companies described in section 501(c)(15) from the section 501(c) exception from FFI status. Section 501(c)(15) insurance companies are for-profit insurance companies that qualify for the exemption from U.S. tax because they are small companies, but are not in any way restricted from maintaining financial accounts for specified U.S. persons. Therefore, these entities are not low-risk, so as to warrant an exemption from FFI status.

F. Deemed-Compliant FFIs

1. In General

The final regulations generally retain the same deemed-compliant categories that were included in the proposed regulations but have made several modifications and clarifications in response to comments received. In addition, the final regulations introduce new categories of deemed-compliant FFIs for certain credit card issuers, as described in § 1.1471-5(f)(1)(i)(E), sponsored FFIs, as described in § 1.1471-5(f)(2)(iii), and limited-life debt investment entities, as described in § 1.1471-5(f)(2)(iv). In response to comments, the deemed compliant category for retirement funds has been combined with the exempt beneficial owner category for a retirement fund in § 1.1471-6(f). Because a non-profit organization may be either an FFI or an NFFE, the category for non-profit organizations that are exempt from withholding under chapter 4 has been moved from the deemed-compliant FFI section to § 1.1471-5(e)(5), which describes entities that are excepted from treatment as financial institutions and are treated instead as excepted NFFEs. The proposed regulations indicated that the Treasury Department and the IRS were considering whether an additional deemed-compliant category should be created for insurance companies. In response to comments, the final regulations instead permit insurance companies to qualify as local FFIs and FFIs with only low-value accounts.

The Treasury Department and the IRS decline to adopt other recommendations to add to the categories of deemed-compliant FFIs to address jurisdiction-specific entities and arrangements and, instead, retain the proposed regulations' approach of using generally applicable attributes to define different categories of deemed compliant FFIs. Nevertheless, in the context of IGAs relating to the implementation of chapter 4, the Treasury Department will continue to identify entities that qualify as deemed-compliant FFIs on a jurisdiction-specific basis, and the final regulations treat those entities as deemed-compliant FFIs. In addition, the Treasury Department and the IRS have undertaken in other parts of these regulations to limit the number of entities that are subject to the chapter 4 rules. For example, as discussed herein, the category of exempt beneficial owners has been refined and expanded in response to comments and certain entities have been removed from the definition of FFI, either because they have neither customers nor assets relevant to the application of chapter 4 or because chapter 4's purposes are adequately served by treating such entities as NFFEs.

2. Registered Deemed-Compliant FFIs

a. Local FFIs

Comments requested that the final regulations expand the types of entities that qualify as local FFIs to include insurance companies, credit unions, and investment entities. The final regulations adopt these comments. The final regulations do not adopt comments that requested specific standards for an FFI to apply when determining whether it is regulated as a financial institution under the laws of its country of organization or incorporation. This requirement is intended merely to ensure that the government of incorporation or organization exercises some form of financial regulation over the FFI and, accordingly, is intended to be applied broadly.

The final regulations have amended the requirement that a local FFI not have a fixed place of business outside its country of incorporation or organization to permit an FFI to have a location in another jurisdiction, provided that location is not publicly advertised and performs solely administrative support functions (that is, back office functions). The Treasury Department and the IRS otherwise intend for the local FFI category to be available only to FFIs whose activities are limited to a single country. Accordingly, the Treasury Department and the IRS declined to adopt other comments suggesting that the presence and activities of the local FFI and its expanded affiliated group should not be limited to one country.

Comments pointed out that an FFI that services only the local population may advertise U.S. dollar denominated accounts for legitimate business reasons. In response to such comments, the final regulations eliminate the proposed regulations' prohibition against advertising U.S. dollar denominated deposit accounts or investments, provided that the FFI does not solicit customers or account holders outside its country of incorporation or organization. For this purpose, an FFI will not be considered to have solicited customers or account holders outside its country of incorporation or organization merely because it operates a Web site, provided that the Web site does not specifically indicate that the FFI maintains accounts for, or provides services to, nonresidents and does not otherwise target or solicit U.S. customers or account holders. Comments requested clarification as to whether an FFI would be considered to have solicited customers outside its country of incorporation or organization (the FFI's country) if it advertises through print, radio, or television that is distributed in multiple countries in addition to the FFI's country. The Treasury Department and the IRS have modified the regulations to indicate that an FFI whose print, radio, or television advertising is distributed outside the FFI's country is not considered to have solicited customers or account holder outside the FFI's country, provided the FFI's advertising is distributed or aired primarily within the FFI's country and the FFI does not advertise services or accounts for nonresidents and does not otherwise target or solicit U.S. customers or account holders.

In response to comments stating that many countries do not impose information reporting requirements on their financial institutions, the final regulations provide that an FFI may still qualify as a local FFI notwithstanding that its accounts are not subject to information reporting or withholding requirements if the AML due diligence requirements of the FFI's country require the FFI to identify whether its account holders are residents of the FFI's country.

Comments noted that many FFIs would fail to meet the 98 percent resident account holder threshold provided in § 1.1471-5(f)(1)(i)(A)(

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), and requested that the Treasury Department and the IRS reduce the threshold. The local FFI exception is not intended to apply to FFIs that serve significant numbers of nonresident account holders. The 98 percent threshold is intended to provide limited flexibility in cases in which a financial institution otherwise qualifies as a local FFI but has a few nonresident account holders, for example because a prior resident has moved or taken a job in another country. Accordingly, the Treasury Department and the IRS have declined to reduce the 98 percent threshold necessary to qualify for the local FFI exception.

The final regulations have amended the resident test in § 1.1471-5(f)(1)(i)(A)(

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) to require the resident threshold be applied based on account value instead of the number of accounts. In addition, to accommodate territories and administrative regions that primarily service their mainland populations, the resident threshold has been modified to permit the FFI to apply the test based on residents or citizens rather than solely based on residents, as provided in the proposed regulations.

Comments have also addressed the provision in the proposed regulations that required each member of the FFI's expanded affiliated group to qualify as a local FFI in order for any member of the group to qualify as a local FFI, and have noted that this requirement did not permit the group to have members that were NFFEs or other types of FFIs. The final regulations continue to provide that in order for an FFI to qualify as a local FFI, any FFI member of the expanded affiliated group should also be a local FFI in the same country, but provide an exception for members of the expanded affiliated group that are NFFEs or retirements funds described under § 1.1471-6(f).

The final regulations also add as a condition of local FFI status a requirement that the FFI not have policies or practices that discriminate against opening or maintaining accounts for U.S. individuals that are resident in the local FFI's country.

The Treasury Department and the IRS declined to adopt a number of other comments requesting changes to the local FFI registered deemed compliant criteria. The Treasury Department and the IRS believe that the final regulations strike the appropriate balance between ensuring that only entities that are low-risk or otherwise not necessary to carry out the purposes of chapter 4 are given deemed-compliant status and providing rules that have application across a number of jurisdictions and legal and regulatory systems.

b. Nonreporting Members of PFFI Groups

The final regulations retain the same requirements for a nonreporting member of a PFFI group that were provided in the proposed regulations except that the final regulations, in response to comments, conform this deemed-compliant category with other categories by allowing a nonreporting member of a PFFI group to close a U.S. account or an account of a nonparticipating FFI.

c. Qualified Collective Investment Vehicles

The final regulations retain the deemed-compliant category for qualified collective investment vehicles. The primary purpose of this deemed-compliant category is to provide relief for investment entities that are owned solely through participating FFIs or directly by large institutional investors, payments to which would not be subject to withholding or reporting under chapter 4. For this reason, the Treasury Department and the IRS have generally declined to adopt comments that request an expansion of the types of investors permitted in a qualified collective investment vehicle except that the final regulations permit investors that are retirement plans and nonprofit organizations. An investment entity that has other types of investors may be able to qualify as a deemed-compliant FFI if it meets the requirements under § 1.1471-5(f)(1)(i)(D) to be a restricted fund.

Comments suggested that an investment entity that is not regulated as an investment fund by its country of incorporation or organization should be considered regulated as an investment fund if it is regulated by the country in which it operates or if its fund manager is regulated with respect to the investment entity. The final regulations adopt this suggestion and expand the cases in which an investment entity will be considered to be regulated to include cases in which the investment entity is regulated in all of the countries in which it is registered and all countries

in which it operates, or the investment entity's manager is regulated with respect to the investment entity in all countries in which the investment entity is registered and all countries in which the investment entity operates.

Comments requested that a collective investment vehicle be eligible for deemed-compliant status notwithstanding that the vehicle previously issued bearer shares which remain outstanding if the vehicle discontinues issuing such shares. In response to these comments, the final regulations permit a qualified collective investment vehicle to have outstanding bearer obligations that were issued prior to January 1, 2013, if the qualified collective investment vehicle identifies the status of the holder prior to payment, no shares are issued in bearer form, including reissuances of surrendered shares, after December 31, 2012, and certain other conditions are met.

d. Restricted Funds

As with qualified collective investment funds, comments suggested that a fund may not always be regulated by its country of incorporation or organization but should be considered regulated if it is regulated by the country in which it operates or if its fund manager is regulated with respect to the fund. The final regulations adopt this suggestion and expand the methods under which a fund will be considered to be regulated to include cases in which the fund is regulated in all of the countries in which it is registered and all countries in which it operates, or the fund's manager is regulated with respect to the investment entity in all countries in which the investment entity is registered and all countries in which the investment entity operates.

Several comments indicated confusion regarding the requirement that all interests in the fund must be sold through identified distributors or redeemed directly by the fund. The final regulations clarify that interests in the fund may be issued by the fund directly if the investor can only dispose of those interests by having them redeemed or transferred by the fund, and not by selling them on a secondary market. Further, the regulations clarify that interests in the restricted fund can only be issued directly by the fund or by designated distributors described in § 1.1471-5(f)(1)(i)(D)(

3

). Finally, the regulations clarify that interests in an investment fund that are issued through a transfer agent or a distributor that does not hold the interests as a nominee of the account holder are considered issued directly by the fund.

Because the restricted fund category was created to provide relief for foreign funds that only target foreign investors, the Treasury Department and the IRS declined to adopt comments requesting that the restricted fund category be expanded to permit U.S. distributors. However, in response to requests that the restricted fund distributor provisions include foreign branches of U.S. financial institutions in the list of acceptable distributors described in § 1.1471-5(f)(1)(i)(D)(

3

), the final regulations modify the definition of a participating FFI to include a qualified intermediary (“QI”) branch of a U.S. financial institution. In addition, since a foreign branch of a U.S. financial institution that is a reporting Model 1 FFI is a registered deemed-compliant FFI, such foreign branch will also satisfy the distributor requirements of § 1.1471-5(f)(1)(i)(D)(

3

).

In response to comments that the renegotiation of distribution agreements will take a substantial amount of time and requests that a restricted fund be provided an additional year in order to renegotiate its distribution agreements to include the prohibitions required under § 1.1471-5(f)(1)(i)(D), the Treasury Department and the IRS are providing investment funds until the later of June 30, 2014, or six months after the date the investment fund registers with the IRS as a registered deemed-compliant FFI to renegotiate its debt and equity interest distribution agreements to comply with § 1.1471-5(f)(1)(i)(D)(

4

) and (

5

). The Treasury Department and the IRS are also modifying the sales restrictions of § 1.1471-5(f)(1)(i)(D)(

4

) to restrict sales only to specified U.S. persons, rather than all U.S. persons as was provided in the proposed regulations.

The Treasury Department and the IRS did not adopt comments requesting that the prohibition on sales to U.S. persons be limited only to sales to U.S. residents because such change would be inconsistent with the policy objectives of chapter 4. The Treasury Department and the IRS also declined to remove the requirement that a restricted fund acquire or redeem all debt and equity interests that were issued through a distributor that ceases to be a qualifying distributor within six months of the distributor's change in status, but have modified the requirement to permit such interests to be transferred to another distributor described in § 1.1471-5(f)(1)(i)(D)(

3

).

Comments also requested that a restricted fund be permitted to have preexisting direct accounts that were issued in bearer form before January 1, 2013, if the fund performs the required account identification procedures when the bearer certificate is presented for payment. In response, the final regulations permit a restricted fund to have outstanding bearer obligations that were issued prior to January 1, 2013, if the restricted fund identifies the status of the holder prior to payment, no shares are issued in bearer form, including reissuances of surrendered shares, after December 31, 2012, and certain other conditions are met.

e. Qualified Credit Card Issuers

The Treasury Department and the IRS have received comments requesting a deemed-compliant category for credit card issuers that accept deposits associated with the credit card. In response to these comments, the Treasury Department and the IRS are adding a new category of registered deemed-compliant FFIs to the final regulations for credit card issuers that agree to prevent a customer from having a deposit with the credit card issuer in excess of $50,000.

f. Registered Deemed-Compliant Procedural Requirements

Comments requested that the qualified collective investment vehicle rules provide a cure period in the case of noncompliance that occurs following the FFI's registration with the IRS (including a change of status by the FFI's interest holders that results in disqualification as a qualified collective investment vehicle). The final regulations provide a registered deemed-compliant FFI with six months from the time it becomes ineligible for the registered deemed-compliant status to cure the default or notify the IRS of its change in status.

g. Sponsored FFIs

Comments noted that in many cases it may be preferable for a trustee or fund manager to perform the due diligence and reporting for all of the FFIs which it manages on a consolidated basis. Comments also noted that a number of U.S. financial institutions have systems in place to perform all due diligence, withholding, and reporting obligations of its controlled foreign corporation subsidiaries for U.S. tax purposes. In response to these comments, the final regulations create a registered deemed compliant FFI category for sponsored FFIs for which a sponsoring entity agrees to perform all due diligence, withholding, reporting, and other requirements the sponsored FFI would have been required to perform if it were a participating FFI, and complies with certain other requirements.

3. Certified Deemed-Compliant FFIs

a. Nonregistering Local Banks

In response to comments requesting a simplification of the definition of a bank for purposes of the nonregistering local bank category, the final regulations do not include a cross reference to section 581 and have clarified that, in addition to banks, certain credit unions or similar organizations may also qualify as nonregistering local banks. The final regulations amend the requirements applicable to a nonregistering local bank to conform with the changes made to the local FFI registered deemed-compliant category described above.

Because the nonregistering local bank category was intended to apply only to very small FFIs, the Treasury Department and the IRS declined to adopt comments requesting that the threshold for total assets of the FFI be raised above $175 million for the FFI and $500 million for the FFI's expanded affiliated group.

b. Sponsored, Closely Held Investment Vehicles

The final regulations also create a certified deemed-compliant category for sponsored, closely held investment vehicles, which are sponsored by a sponsoring FFI in the same manner as the registered deemed-compliant category.

c. Limited Life Debt Investment Entities

The Treasury Department and the IRS received comments stating that certain investment vehicles will be unable to comply with the registration and due diligence requirements in the regulations, thus necessitating a deemed-compliant category for such entities. In particular, comments have noted that vehicles that have a fixed lifespan and that were created for the purpose in investing in a limited type of debt obligation with the intent to hold such obligations until maturity or until the liquidation of the vehicle will often provide the trustee of the vehicle with limited authority to act in manner not specifically provided for under the agreement. In most cases, the trustee would not be permitted to register the vehicle as a participating FFI or comply with the due diligence requirements of a participating FFI unless the trust indenture requires the trustee to do so, the trustee is required to do so under a provision of law, or all of the investors in the vehicle agree to amend the trust agreement to provide the trustee with the power to act in such a manner. In order to provide time to address these limitations, the final regulations permit these entities to qualify as deemed-compliant FFIs for a limited period of time. After December 31, 2016, the deemed-compliant status of these entities terminates, and each such entity will be required to comply with the terms of any applicable IGA or otherwise register as a participating FFI.

4. Owner-Documented FFIs

Comments stated that the $50,000 debt limit on owner-documented FFIs was too restrictive for common business practices of many small FFIs and requested that such entities be allowed to have unlimited debt interests provided the FFI identify and pass up to the withholding agent the chapter 4 status of all debt holders. In response to these comments, the final regulations no longer prohibit owner-documented FFIs from issuing debt interests that constitute financial accounts in excess of $50,000 to persons other than nonparticipating FFIs, provided that the owner-documented FFI reports all individuals and specified U.S. persons that directly or indirectly hold such interests (other than persons that hold such interests through a participating FFI, registered deemed-compliant FFI, certified deemed-compliant FFI, U.S. person, exempt beneficial owner, or excepted NFFE) to the designated withholding agent.

5. Restricted Distributors

Comments requested that § 1.1471-5(f)(4) be amended to permit a participating FFI to treat a distributor as a restricted distributor. The Treasury Department and the IRS agree that permitting a participating FFI that holds an interest in a restricted fund as a nominee to use a restricted distributor to distribute that interest fulfills the same purpose as permitting the restricted fund to use a restricted distributor. For this reason, the final regulations have been amended to permit a participating FFI to use a restricted distributor to distribute interests in a restricted fund that the participating FFI holds as a nominee.

G. Recalcitrant Account Holders

The final regulations expand the definition of recalcitrant account holder to include an account holder that is documented as an NFFE (other than a WP or WT) but that fails to provide the information required under § 1.1471-3(d) regarding its owners.

The final regulations also revise the start of recalcitrant account holder status to coordinate with a participating FFI's withholding requirements. The final regulations require a participating FFI or deemed-compliant FFI to treat an account other than preexisting account or an account (including preexisting account) that undergoes a change in circumstances as held by a recalcitrant account holder beginning on the earlier of the date a withholdable payment or foreign passthru payment is made to the account or the date that is 90 days after account opening or the change in circumstances.

The proposed regulations did not coordinate recalcitrant account holder status under chapter 4 with the chapter 61 backup withholding procedures for cases in which a participating FFI receives a notice from the IRS regarding a name and TIN mismatch for an account holder. The final regulations clarify that an account for which the participating FFI or deemed-compliant FFI receives a notice from the IRS indicating that the name and TIN combination provided for the account holder is incorrect will be treated as a recalcitrant account holder following the date of such notice if the account holder does not provide a correct name and TIN combination within the time prescribed in § 31.3406(d)-5(a). The IRS intends to provide a process similar to the “B Notice” process of chapter 61 to notify an FFI of a name/TIN mismatch for an account holder of a U.S. account that was reported under § 1.1471-4(d). Under § 31.3406(d)-5(a), a payor that receives a “B Notice” for a payee is required to start backup withholding and reporting reportable payments made to such payee on or before the 30th business day after the receipt of the “B Notice.” Similarly, a participating FFI or deemed-compliant FFI is required to treat an account holder for which it receives a notice indicating a name/TIN mismatch as a recalcitrant account holder (and withhold and report to the extent required) on or before the 30th business day after the FFI receives such notice.

H. Expanded Affiliated Group

Proposed § 1.1471-5(i) defined an expanded affiliated group for purposes of chapter 4. The final regulations make two material changes to the proposed regulations.

First, some comments requested an exclusion from membership in an expanded affiliated group for entities formed through seed capital investments by another group member. These comments described a seed capital investment as an initial capital contribution made to an investment entity by an entity related to the manager of the investment entity for purposes of establishing a performance record before selling interests in the entity to unrelated investors or for purposes otherwise deemed appropriate

by the manager. In support of this exclusion, comments noted the burden of monitoring ownership changes in the investment entity for determining when to exclude the entity as a member of such a group, including the potential updating required for purposes of the group's FFI application with the IRS. In response to these comments, the final regulations modify the definition of expanded affiliated group to exclude from the group an investment entity owned by an FFI group member when the member's ownership exists solely to provide a seed capital investment in an entity. The final regulations describe the circumstances in which an investment qualifies for this treatment (including by defining seed capital) and prescribe a three-year period in which the investment entity is excluded from the group.

Second, the final regulations incorporate an anti-abuse rule that disregards a change in ownership, voting rights, or the form of an entity with respect to an expanded affiliated group if the change is pursuant to a plan a principal purpose of which is to avoid withholding or reporting obligations under chapter 4.

VII. Comments and Changes to Section 1.1471-6—Payments Beneficially Owned by Exempt Beneficial Owners

Proposed § 1.1471-6 defined classes of entities that qualify as exempt beneficial owners for purposes of chapter 4. The final regulations expand the circumstances in which certain classes of entities qualify as exempt beneficial owners and modify when an entity qualifies as an exempt beneficial owner under § 1.1471-6(g) (describing certain entities owned by only exempt beneficial owners). The final regulations also clarify that, except as provided in § 1.1471-6(f) (regarding retirement funds), an entity cannot qualify as an exempt beneficial owner unless it is the beneficial owner of the payment.

To coordinate the final regulations' identification of specific entities as exempt beneficial owners with the IGAs, the definition of an exempt beneficial owner is expanded to include any entity identified as an exempt beneficial owner pursuant to an IGA. This change is incorporated into the definition of an exempt beneficial owner in § 1.1471-1(b)(38).

Comments noted that limiting the definition of international organization to include only international organizations in which the United States participates as a member was unnecessary. In response to these comments, this definition has been expanded to allow an entity to qualify as an international organization if the entity: (1) is a supranational organization or intergovernmental organization recognized as an international organization under certain provisions of foreign law or that has in effect a headquarters agreement with a foreign government; and (2) prevents private inurement under the principles of § 1.1471-6(b)(3)(ii).

In response to comments, the final regulations broaden the classes of pension funds qualifying as exempt beneficial owners under § 1.1471-6(f) by including several new categories of pension funds, each of which applies without regard to whether the pension fund is the beneficial owner of income. Comments requested removal of the beneficial owner requirement because, depending on the jurisdiction, a fund may or may not be treated as the beneficial owner of income it receives under local law. Other comments were received regarding the interaction of the exemption for retirement plans in proposed § 1.1471-6(f) with those retirement plans afforded deemed compliant status in proposed § 1.1471-5(f)(2)(ii) (which did not require the plan to be the beneficial owner and which included certain plans with fewer than twenty participants). In response to these comments, § 1.1471-5(f)(2)(ii) was removed and the types of retirement plans that may qualify as exempt beneficial owners under § 1.1471-6(f) regardless of whether they are beneficial owners was expanded, as described below.

In response to comments, the final regulations treat a fund entitled to benefits under an income tax treaty and operated principally to administer or provide pension or retirement benefits as an exempt beneficial owner regardless of whether the fund is generally exempt from taxation in the country in which it is organized.

Regarding the general requirements for retirement funds included in proposed § 1.1471-6(f), comments noted that many plans would fail to qualify under the rule requiring that all contributions to the plan, except for rollover contributions from other retirement funds, come from employer or employee contributions. Comments suggested alternative requirements to prevent funds from being abused for chapter 4 purposes, including annual information reporting, strict limitations on withdrawals or distributions from the fund, or penalties for early distributions. Additionally, comments noted that certain types of mandatory government plans may also fail the requirement in proposed § 1.1471-6(f) that contributions be solely from employer or employee contributions. Comments also requested that funds that provide for disability or death benefits should not disqualify a retirement fund from being an exempt beneficial owner that would otherwise qualify under § 1.1471-6(f).

In response to these comments, the final regulations: (1) provide rules allowing for alternative sources of contributions apart from those from employers and employees; (2) provide anti-abuse provisions based on alternatives suggested in comments; and (3) allow, in appropriate circumstances, plans to provide disability or death benefits. In response to comments, the final regulations also broaden the treaty-qualified retirement fund category and add a new category for funds formed pursuant to pension plans that would meet the requirements of section 401(a), other than the requirement that the plan be funded by a trust created or organized in the United States.

Comments also questioned whether the proposed regulations intended to exclude certain pension funds established by exempt beneficial owners, noting that the regulations under section 892 specifically include an exemption for certain pension funds established by foreign governments. The Treasury Department and the IRS generally intend for these types of pension funds to qualify as exempt beneficial owners. To eliminate the possibility that such plans might not so qualify in appropriate cases, the final regulations provide that pension funds meeting certain requirements (relating to retirement, disability, or death benefits) will qualify as exempt beneficial owners when established by another exempt beneficial owner for its employees, employees' beneficiaries, or other persons providing services to such funds.

With respect to the allowance in proposed § 1.1471-6(g) providing exempt beneficial owner status to certain entities wholly owned by exempt beneficial owners, comments noted that this provision did not contemplate structures in which entities are owned directly by other entities that would qualify as exempt beneficial owners under § 1.1471-6(g). The final regulations are amended to clarify that exempt beneficial owner status under § 1.1471-6(g) applies in such cases. The final regulations also clarify that receiving loans from depository institutions or issuing debt to other exempt beneficial owners will not prevent an entity from qualifying as an exempt beneficial owner under § 1.1471-6(g).

The final regulations provide in § 1.1471-6(h) an exception to exempt beneficial owner status for foreign governments, international organizations, foreign central banks of issue, and the governments of U.S. territories that engage in certain commercial activities, replacing the prohibition in the proposed regulations on commercial activities that had applied only to foreign governments. Some comments noted that an entity would fail to qualify as an exempt beneficial owner under the commercial activities exception in the proposed regulations even when the entity accepts deposits or maintains financial accounts only for exempt beneficial owners (such as the members in an entity such as a development bank organized by certain foreign governments). The final regulations respond to these comments by providing a limitation on the commercial activities exception for activities for or on behalf of other exempt beneficial owners.

VIII. Section 1.1472-1—Withholding on NFFEs

The regulations under section 1472 provide rules applicable to withholding agents for withholding on certain NFFEs and reporting with respect to the substantial U.S. owners of certain NFFEs.

In response to comments requesting a transition period to accommodate the creation of associated systems, the final regulations provide that withholding agents are required to withhold under section 1472 only with respect to withholdable payments made after December 31, 2013. In addition, § 1.1472-1(b)(2) provides that withholding agents are not required to withhold under section 1472 on payments made before January 1, 2015, with respect to a preexisting obligation to a payee that is not a prima facie FFI and for which a withholding agent does not have documentation indicating the payee's status as a passive NFFE with one or more substantial U.S. owners.

The final regulations also clarify the interaction of section 1472 withholding with a participating FFI's withholding obligations under section 1471(b) and the associated regulations. Under the final regulations, a participating FFI that complies with its withholding obligations under § 1.1471-4(b) will be deemed to satisfy its obligations under section 1472 with respect to withholdable payments made to NFFEs that are account holders. Section 1472 will continue to apply to a participating FFI that acts as a withholding agent on a withholdable payment made to an NFFE that is not an account holder (for example, a payment with respect to a contract that does not constitute a financial account). These withholding obligations will be limited, however, by § 1.1473-1(a)(4)(vi), which provides a temporary exception from the definition of withholdable payment for certain payments of U.S. source FDAP income made prior to January 1, 2017, with respect to offshore obligations.

In response to comments, § 1.1472-1(c)(1)(i)(B) clarifies the application of the publicly traded rules for excepted NFFE status in the year of an initial public offering.

With regard to the exception from withholding for payments to active NFFEs, the Treasury Department and the IRS received comments requesting that passive income be defined by reference to section 954(c). This comment was not adopted. The Treasury Department and the IRS believe that providing a specific list of items constituting passive income will provide more certainty for withholding agents and NFFEs. The final regulations do, however, clarify the scope of passive income, including the rules regarding commodities. In addition, in response to comments, the final regulations expand the exceptions to passive income in a number of respects. First, the final regulations in § 1.1472-1(c)(1)(iv)(B) provide that passive income will not include dividends, interest, rents, and royalties received or accrued from a related person to the extent that they are properly allocable to income of the payor that is not passive income. Second, the final regulations provide an exception from passive income for certain income earned by dealers acting in the ordinary course of their trade or business.

In addition, the final regulations provide expanded categories of excepted NFFEs to address the treatment of holding companies and similar entities that are part of and that support a group conducting an active trade or business. The final regulations also clarify that an entity will not be an active NFFE unless less than 50 percent of its gross income is from passive income and less than 50 percent of its assets are passive assets (that is, assets that produce or are held for the production of passive income), on a weighted average basis.

Also, the requirements for reporting on substantial U.S. owners were moved to § 1.1474-1(i)(2) in the final regulations to include these requirements with the other reporting requirements applicable to withholding agents.

IX. Changes and Comments to § 1.1473-1—Section 1473 Definitions

A. Withholdable Payment

1. In General

Comments noted that U.S. mutual funds that invest in foreign securities will pay dividends that are withholdable payments and, correspondingly, that gross proceeds from the sale of interests in such U.S. funds would be withholdable payments. Those comments requested that the definition of withholdable payment be amended such that U.S. fund dividends would be characterized based on the assets held by the fund and would be subject to withholding only to the extent provided under the foreign passthru payment rules otherwise applicable to participating FFIs to avoid creating a competitive imbalance.

The final regulations provide temporary relief to U.S. stock and debt issuers, including U.S. funds, by delaying withholding on gross proceeds until 2017. Treasury and the IRS do not believe, however, that eliminating chapter 4 withholding on payments of dividends that constitute U.S. source FDAP income under chapter 3 advances the purposes of chapter 4. It is expected, however, that these issues will be alleviated in practice through the conclusion of IGAs.

Comments also requested that the rules defining withholdable payment exclude payments that are reported by the withholding agent on Form 5471 or 5472 in order to alleviate duplicative reporting. The final regulations do not adopt this comment because the chapter 4 withholding rules serve different purposes than the reporting regimes under sections 6038 and 6038A which underlie Forms 5471 and 5472.

2. Gross Proceeds

Comments noted that clearing organizations pay or credit a member's account with the net amount of sales or dispositions that occurred throughout a given period. The final regulations allow clearing organizations to determine gross proceeds based on the net amount paid or credited to a member's account under the settlement procedures of such organization.

In response to comments, the final regulations clarify that any contract that results in the payment of a dividend equivalent (as defined in section 871(m) and regulations thereunder) is treated as property of a type that can produce U.S. source FDAP income, including if such dividend equivalent is part of a termination payment.

The final regulations also modify the definition of gross proceeds to exclude

proceeds from transactions not subject to recognition under section 1058.

3. Exceptions to Withholdable Payment

a. Withholding on Offshore Payments of U.S. Source FDAP Income

To coordinate the final regulations' withholding requirements with those of the Model 1 IGAs, the final regulations delay withholding on certain offshore payments of U.S. source FDAP income until January 1, 2017. Specifically, the final regulations temporarily exclude from the definition of withholdable payment a payment of U.S. source FDAP income made with regard to an offshore obligation prior to January 1, 2017, by a person that is not acting as an intermediary with regard to the payment. For purposes of this exception, the final regulations expressly include a qualified securities lender as an intermediary. The final regulations also limit the application of this rule for certain flow-through entities.

b. Excluded Nonfinancial Payments

Comments requested clarification and expansion of the proposed regulations' ordinary course of business exception to withholdable payments. In particular, comments requested that the definition of ordinary course of business payments be modified by striking the word “nonfinancial” because it creates uncertainty as to whether services provided to a financial institution that are accounts payable type expenses are ordinary course of business payments. Comments also noted that the ordinary course of business exception imposed significant administrative burdens given the volume of cross-border payments that had to be identified and classified. In response to these comments, the final regulations replace the ordinary course of business exception with a more comprehensive exception for excluded nonfinancial payments. The revised exception provides greater certainty by explicitly describing payments that are excluded from withholdable payments and by providing a list of payments that are withholdable payments.

The proposed regulations also provided that the exclusion for ordinary course of business payments included payments for the sale of goods. Commentators pointed out that such an exception implied that the sale of goods could give rise to U.S. source FDAP income. The final regulations remove the reference to “goods” in the nonfinancial payments exclusion and define a payment of U.S. source FDAP income to expressly incorporate the exclusion under § 1.1441-2(b)(2)(i) (stating that certain gains from the sale of property do not constitute FDAP income).

4. Excise Tax under Section 4371

Under the proposed regulations, withholdable payments include insurance and reinsurance premiums that are U.S. source FDAP income. Comments requested that the final regulations exclude insurance and reinsurance premiums from the definition of withholdable payment to the extent the premiums are subject to the excise tax under section 4371. Such premiums are exempt under chapter 3, however, because the excise tax under section 4371 is an adequate substitute for tax on the business income of a foreign issuer. In contrast, withholding under chapter 4 is intended as an incentive to FFIs to become participating FFIs, rather than as a proxy for the tax on the income of the issuer. As a result, the policy reasons for the exclusion of such insurance and reinsurance premiums for purposes of chapter 3 withholding are not relevant for chapter 4 withholding. The final regulations therefore do not adopt this comment.

B. Substantial U.S. Owner

The final regulations include rules for determining whether a specified U.S. person is a substantial U.S. owner that remain substantially unchanged from the proposed regulations subject to the following modifications. The proposed regulations required that the determination of whether a person is a substantial U.S. owner be made by calculating such person's direct and indirect interest in the entity. The attribution rules under the proposed regulations required that a specified U.S person's indirect interest in an entity be determined by looking through interests held by entities that are U.S. persons. The final regulations do not require an entity to look through interests held by a U.S. person that is not a specified U.S. person when determining whether the entity has a substantial U.S. owner. The final regulations add a provision that requires an entity making a determination as to whether a specified U.S. person is a substantial U.S. owner to aggregate the interests owned by persons related to the specified U.S. person, applying certain provisions of the regulations under section 267 to determine whether such persons are related.

In response to comments regarding the difficulty of determining whether a specified U.S. person owns a sufficient interest in an entity to be a substantial U.S. owner, the final regulations provide a safe harbor that permits an entity, or a withholding agent with respect to the entity, to treat a specified U.S. person as a substantial U.S. owner in lieu of making the calculations necessary to determine whether such person holds a sufficient interest to be a substantial U.S. owner.

Comments requested that the 10 percent ownership threshold for determining a substantial U.S. owner be changed to 25 percent to align with AML due diligence requirements. These comments were not adopted. Jurisdictions have varying approaches to enforcing AML due diligence requirements, and thus, reliance on AML due diligence to determine substantial U.S. owners is more appropriate in the context of the IGAs.

C. Specified U.S. Person

The final regulations add section 457(g) plans and exempt trusts under section 403(b) to the classes of U.S. persons that are not specified U.S. persons.

X. Comments and Changes to § 1.1474-1—Liability for Withheld Tax and Withholding Agent Reporting

A. Use of Agents

The proposed regulations described the circumstances under which a withholding agent could appoint agents to fulfill its obligations under chapter 4 and the withholding agent's liability. Comments requested removal of the proposed regulations' restrictions on the use of sub-agents. The final regulations remove these restrictions and clarify that a withholding agent remains liable for the acts of both its agents and its agents' sub-agents. The final regulations also clarify that any agent or sub-agent that acts as a reporting agent for filing Form 1042 or making deposits and payments reportable on the form on behalf of a withholding agent must file a Form 8655, “Reporting Agent Authorization,” with the IRS.

B. Information Reporting

The proposed regulations set forth the information reporting requirements of a withholding agent paying a chapter 4 reportable amount and the transitional reporting requirements of a participating FFI or registered deemed-compliant FFI making a payment of a foreign reportable amount to a nonparticipating FFI. The proposed regulations also required financial institutions to file such returns electronically on magnetic media without regard to th

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