FAQs provides FATCA guidance on applying for qualified derivatives dealer status
FAQs provides FATCA guidance on applying for qualified derivatives dealer status
IRS has recently updated its list of general frequently asked questions (FAQs) under the Foreign Account Tax Compliance Act (FATCA), to provide information on how to apply for qualified derivatives dealer (QDD) status. Four new questions and answers (FAQ Nos. 10-13) have been added under the heading “Qualified Intermediaries/Withholding Foreign Partnerships/Withholding Foreign Trusts” ( QI/WP/WT).
Background on Chapters 3 and 4 of the Code. In general, nonresident aliens and foreign corporations are subject to a U.S. withholding tax on certain items of income that they receive from U.S. sources that are not effectively connected with a U.S. trade or business. Such “fixed, determinable, annual, and periodic income” (FDAP) includes interest, dividends, royalties, compensation, and certain gains. The U.S. withholding tax is generally collected at the source by the withholding agent. Such agent is generally the last person in the U.S. who handles the item before it is remitted to the foreign taxpayer or the taxpayer’s foreign agent.
Under chapter 3 of Subtitle A to the Code, “Withholding of Tax on Nonresident Aliens and Foreign Corporations,” a withholding agent must withhold 30% of any payment that is subject to withholding and made to a foreign payee, unless it can reliably associate the payment with valid tax documentation. (See Code Sec. 1441 to Code Sec. 1446.)
Chapter 4 of the Code (Code Sec. 1471 through Code Sec. 1474 (FATCA)) requires withholding agents to withhold 30% of certain payments to a foreign financial institution (FFI) unless the FFI has entered into a “FFI agreement” with IRS to, among other things, report certain information with respect to U.S. accounts. (The withholding rules are essentially a mechanism to enforce new reporting requirements.) Chapter 4 also imposes withholding, documentation, and reporting requirements on withholding agents with respect to certain payments made to certain non-financial foreign entities (NFFEs). In cases in which foreign law would prevent an FFI from complying with the terms of an FFI agreement, IRS has collaborated with other governments to develop two alternative intergovernmental agreement (IGA) models that facilitate FATCA implementation.
A qualified intermediary (QI) is an eligible person that submits an application and enters into a QI agreement with IRS. Generally, under the QI agreement, the QI agrees to assume certain documentation and withholding responsibilities in exchange for simplified information reporting for its foreign account holders and the ability not to disclose proprietary account holder information to a withholding agent that may be a competitor. (Reg. § 1.1441-1T(e)(5)(ii))
A foreign partnership becomes a withholding foreign partnership (WP) by entering into a withholding agreement with IRS and assuming the withholding and reporting obligations under Chapters 3 and 4, and 61 and Code Sec. 3406 for payments of U.S. source income made to its partners and persons holding interests in the WP through one or more foreign intermediaries or flow-through entities. (Reg. § 1.1441-5(c)(2)(i))
A foreign trust becomes a withholding foreign trust (WT) by entering into a withholding agreement with IRS and assuming the withholding and reporting obligations under Chapters 3 and 4, and 61 and Code Sec. 3406 for payments of U.S. source income made to its beneficiaries, owners and persons holding interests in the WT through one or more foreign intermediaries or flow-through entities. (Reg. § 1.1441-5(e)(5)(v))
In Rev Proc 2017-15, 2017-3 IRB 437, IRS set out the final QI withholding agreement that foreign persons may enter with IRS under Reg. § 1.1441-1(e)(5) to simplify their obligations as a withholding agent under chapters 3 and 4 and as a payor under chapter 61 and Code Sec. 3406 for amounts paid to their account holders. Among other things, a QI agreement can allow certain foreign persons to enter into an agreement with IRS to act as qualified derivatives dealers (QDDs).Rev Proc 2017-15, Sec. 1.01, addresses the treatment of any home office (as defined in Rev Proc 2017-15, Sec. 2.43) or branch (whether or not a disregarded entity) that wants to be a QDD (each home office or branch, a prospective QDD). Each prospective QDD must separately qualify, apply, and be approved for QDD status, including meeting the eligible entity requirements as if it were a separate entity. If a prospective QI has a branch that is a prospective QDD, the branch may apply for QDD status even if the prospective QI (apart from such branch) is not an eligible entity.
New guidance. FATCA FAQ No. 10 notes that a home office can apply for QDD status as part of the standard QI application and provides that in order to apply for QDD status for a branch on the QI system, the following steps must be taken:
- 1. The home office (or prospective QI) must complete and submit its QI application or renewal on the QI system. The QI system was designed to simplify U.S. tax withholding and reporting obligations for payments of income made to an account holder through one or more foreign intermediaries. (The FAQ advises the taxpayer to refer to QI system User Guide for step-by-step instructions). The application or renewal must include all relevant branch information for each branch that intends to act as a QI (including as a QDD).
- 2. Notwithstanding that the home office (or prospective QI) included all relevant branch information with its application or renewal, a separate QI application must be submitted for each branch (including branches that are disregarded entities) that is a prospective QDD. Each home office or branch that is a prospective QDD must submit a separate application, even if located in the same country. Therefore, if multiple branches located in the same country are prospective QDDs, a separate application must be submitted for each branch.
- 3. The process for the branch’s separate QI application will follow the QI system User Guide instruction for applying to become a QI (that is, the same process that the home office or prospective QI used), and the QI system will populate the application using the same answers as provided by the home office (or prospective QI), except for certain specified lines, which the FAQ notes the branch will be required to complete.
FATCA FAQ No. 11 provides that the applicant must provide a detailed description of its business including, but not limited to, the type of business, the approximate value of its total assets, and, in general, the source of income it expects to receive. For businesses that may be involved in sale and leaseback type transactions, it should clearly state the structure of the transaction, including all the parties. If the business is not yet in operation, it should explain how the business intends to obtain financing and the projected startup date. If the applicant is an investment fund, it should also describe the type of anticipated investments and state the term of the fund. In addition, for each QDD applicant, the business operated by the QDD applicant should be indicated, the types of potential Code Sec. 871(m) transactions for which the QDD applicant makes payments should be listed, the types of potential Code Sec. 871(m) transactions and underlying securities for which the QDD applicant receives payments should be listed, and which portion of the business relates to the QDD covered transactions and which portion of the business relates to the equity derivatives dealer business should be indicated. For each QDD applicant, the QDD applicant’s entity classification for U.S. federal income tax purposes (such as a corporation, partnership, or disregarded entity) should be indicated. If the QDD applicant is a branch, the entity classification of its home office should also be indicated.
FATCA FAQ No. 12. provides that for QI applicants (including QDD and qualified securities lender (QSL) applicants), the applicant must provide a detailed description of the account opening procedures. Each type of document that is required for a new account opening should be listed and how each document is reviewed and validated should be explained. For entities that facilitate opening new accounts online, the entire account opening process, including any uploading of documentation, should be described. WP/WT applicants must describe the procedures for admitting a new partner, beneficiary, or owner. If the applicant is an investment fund, the pages of the fund’s subscription agreement or offering documents relating to investor documentation must be attached.
FATCA FAQ No. 13 indicates that an incomplete status due to compliance issues on the application for renewal of QI/WP/WT status will be caused by prior noncompliance as a QI/WP/WT, such as a failure to file a return or a failure to pay tax.
References: For reporting under FATCA, see FTC 2d/FIN ¶ O-13,230 et seq.; United States Tax Reporter ¶ 14,714 et seq.
Updates to FATCA FAQs.