IRS finalizes FATCA regs on requirements for sponsoring entities

TD 9852, 3/22/2019; Reg. § 1.1471-1, Reg. § 1.1471-4, Reg. § 1.1471-5, Reg. § 1.1472-1

TD 9852, Chapter 4 Regulations Relating to Verification and Certification Requirements for Certain Entities and Reporting by Foreign Financial Institutions

IRS has issued final regs under Code Sec. 1471 through Code Sec. 1474—i.e., the Foreign Account Tax Compliance Act, or FATCA—that provide compliance requirements and verification procedures for sponsoring entities of foreign financial institutions (FFIs) and certain nonfinancial foreign entities (NFFEs). The regs also explain the certification requirements and procedures for IRS’s review of certain trustees of trustee — documented trusts, the procedures for IRS’s review of periodic certifications provided by registered deemed-compliant foreign financial institutions, and the requirements for certifications of compliance for participating FFIs that are members of two consolidated compliance groups.

The final regs contain only limited revisions to proposed regs issued in 2017.

Background—FATCA, generally. The Hiring Incentives to Restore Employment Act of 2010 (P.L. 111-147) added Chapter 4 (i.e., FATCA) to the Code. Under Code Sec. 1471(b), a withholding agent is generally required to withhold a 30% tax on certain payments to a foreign financial institution (FFI) unless the FFI:

… has entered into an FFI agreement with the U.S. to, among other things, report certain information with respect to U.S. accounts (a participating FFI);

… is treated as complying with the Code Sec. 1471(b) requirements (a deemed-compliant FFI); or

… satisfies the Code Sec. 1471(b) requirements, but elects to be withheld upon rather than withhold on certain payments.

The FATCA rules are essentially a mechanism to enforce 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 model intergovernmental agreements (Model 1 and Model 2 IGAs) that facilitate FATCA implementation. The main distinction between Model 1 and Model 2 IGAs is essentially whether the financial institution provides specified information about U.S. accounts to its government, followed by an automatic information exchange with the U.S. (for Model 1 jurisdictions), or whether the information is reported directly to IRS (for Model 2 jurisdictions).

Background—FATCA sponsoring entities, etc.  Chapter 4 regs permit certain FFIs and NFFEs to be sponsored by other entities (sponsoring entities) for purposes of satisfying their chapter 4 requirements. Generally, a sponsoring entity is an entity that agrees to perform chapter 4 due diligence, withholding, and reporting requirements on behalf of certain FFIs (sponsored FFIs) or chapter 4 due diligence and reporting obligations on behalf of certain direct reporting NFFEs (sponsored direct reporting NFFEs). An FFI that is a sponsored FFI is a deemed-compliant FFI, and a NFFE that is a sponsored direct reporting NFFE is an excepted NFFE.

The chapter 4 regs permit a participating FFI that is a member of an expanded affiliated group to elect to be part of a consolidated compliance program under the authority of a participating FFI, reporting Model 1 FFI, or U.S. financial institution that is a member of the same expanded affiliated group (“compliance FI”). The compliance FI must establish and maintain the consolidated compliance program and perform a consolidated periodic review on behalf of each member FFI that elects to be part of the consolidated compliance program (electing FFI).

2017 proposed regs provide verification requirements (including certifications of compliance) and events of default for sponsoring entities. The proposed regs also provide certification requirements and procedures for IRS’s review of trustees of certain trustee-documented trusts and procedures for IRS’s review of periodic certifications provided by registered deemed-compliant FFIs. In addition, the proposed regs describe the procedures for future modifications to the requirements for certifications of compliance for participating FFIs. And, the proposed regs clarify the requirements in the chapter 4 regs for periodic certifications of compliance for consolidated compliance programs of participating FFIs and provide requirements for preexisting account certifications for these programs. (Preamble to Prop Reg REG-103477-14; see Proposed FATCA regs would explain requirements for sponsoring entities)

Final regs.  IRS has now issued final regs regarding FATCA sponsoring entities, etc. The final regs adopt the proposed regs with limited revisions including the following:

…Definition of responsible officer.  The proposed regs require a sponsoring entity of a sponsored FFI to appoint a responsible officer to oversee the compliance of the sponsoring entity with respect to each sponsored FFI. Prop Reg §1.1471-1(b)(116) defines the term responsible officer with respect to a sponsoring entity as an officer of the sponsoring entity with sufficient authority to fulfill the duties of a responsible officer described in Reg. § 1.1471-5(j) or Reg. § 1.1472-1(f) (as applicable).

In the Preamble to the final regs,  IRS acknowledged that, in practice, the person in the best position to know and represent if the sponsoring entity is complying with its obligations under these regs may be an individual other than an officer of the sponsoring entity, given industry practices established by managers and administrators of investment funds and similar vehicles for both chapter 4 and operational purposes. Therefore, the final regs define responsible officer with respect to a sponsoring entity to include an officer of an entity that establishes and maintains policies and procedures for, and has general oversight over, the sponsoring entity, provided such individual has sufficient authority to fulfill the duties of a responsible officer described in Reg. § 1.1471-5(j) or Reg. § 1.1472-1(f) (as applicable). (Reg. § 1.1471-1(b)(116))

And, a comment noted that many investment entities do not appoint officers but may appoint directors for corporate governance purposes who would be able to fulfill the requirements of responsible officers. In response, the final regs revise the definition of a responsible officer of a financial institution or sponsoring entity that is an investment entity to include, in addition to an officer of such entity, an individual who is a director, managing member, or general partner of such entity, or, if the general partner or managing member of the investment entity is itself an entity, an individual who is an officer, director, managing member, or general partner of such other entity. (Reg. § 1.1471-1(b)(116))

…Treatment certification by compliance FIs. The final regs clarify that to the extent a compliance FI or sponsoring entity satisfies the certification requirements in Reg. § 1.1471-4(f)(2)(ii), Reg. § 1.1471-5(j)(2) and Reg. § 1.1471-5(j)(3), or Reg. § 1.1472-1(f)(2) on behalf of an electing FFI, sponsored FFI, or sponsored direct reporting NFFE, then the electing FFI, sponsored FFI, or sponsored direct reporting NFFE will not have a separate certification requirement under Reg. § 1.1471-4(f)(3), Reg. § 1.1471-5(f)(1)(ii)(B), or Reg. § 1.1472-1(c)(3)(vi). For example, if a participating FFI agrees to be a sponsored FFI, the FFI is not required to submit any certification with respect to its participating FFI status after it is registered as a sponsored FFI by its sponsoring entity, provided its sponsoring entity certifies on behalf of the FFI to the extent required under Reg. § 1.1471-5(j)(3). (Reg. §1.1471-4(f)(2)(ii)(A))

…Requirement for a written sponsorship agreement. The proposed regs require a responsible officer of a sponsoring entity to certify that the sponsoring entity is compliant with the requirements of a sponsoring entity and maintains effective internal controls with respect to all sponsored FFIs for which it acts. One of the statements to which the responsible officer must certify is that the sponsoring entity has a written sponsorship agreement in effect with each sponsored FFI authorizing the sponsoring entity to fulfill the requirements of Reg. § 1.1471-5(f)(1)(i)(F) or Reg. § 1.1471-5(f)(2)(iii) or an applicable Model 2 IGA. (Prop Reg §1.1471-5(j)(6))

The final regs provide that the written sponsorship agreement may be part of another agreement between the sponsoring entity and the sponsored FFI provided it refers to the requirements of a sponsored FFI under FATCA. (Reg. §1.1471-5(j)(6)) For example, a provision in a fund manager agreement that states that the sponsoring entity agrees to satisfy the sponsored FFI’s FATCA obligations would be sufficient.

Additionally, the proposed regs do not specify when a sponsorship agreement must be in place for purposes of a sponsoring entity’s certification requirements. To allow sufficient time for a sponsoring entity to enter into sponsorship agreements (or revise existing agreements), the final regs provide that a sponsoring entity of a sponsored FFI must have the written sponsorship agreement in place with such sponsored FFI by the later of Mar. 31, 2019, or the date when the sponsoring entity begins acting as a sponsoring entity for such sponsored FFI. (Reg. § 1.1471-5(j)(6))

These final regs include similar rules for a sponsoring entity of a sponsored direct reporting NFFE regarding the date by which the written sponsorship agreement must be in place and that it need not be a standalone agreement. (Reg. § 1.1472-1(f)(4))

…Extension of time for certifications for the certification period ending on Dec. 31, 2017.  The proposed regs provide that a sponsoring entity of a sponsored FFI or sponsored direct reporting NFFE and a trustee of a trustee-documented trust must make the certifications of compliance described in Reg. § 1.1471-5(j)(3), Reg. § 1.1471-5(l)(2), or Reg. § 1.1472-1(f)(2), as applicable, on or before July 1 of the calendar year following the end of the certification period. The proposed regs also provide that a sponsoring entity of a sponsored FFI must submit the preexisting account certification described in Reg. § 1.1471-4(c)(7) by the due date of the sponsoring entity’s certification of compliance for the certification period. The earliest certification period for a sponsoring entity or trustee of a trustee-documented trust ends on Dec. 31, 2017, under the proposed regs, making the earliest certification due date July 1, 2018.

The final regs provide additional time for sponsoring entities to make certifications that would otherwise be due on July 1, 2018. Under these final regs, certifications by sponsoring entities and trustees of trustee-documented trusts for the certification period ending on Dec. 31, 2017, must be submitted on or before Mar. 31, 2019. (Reg. §1.1471-5 (j)(3)(B))

…Terminated sponsoring entities.  The proposed regs provide that if a sponsoring entity of a sponsored FFI is terminated by IRS, the sponsored FFI of the terminated sponsoring entity may not register as a sponsored FFI of a sponsoring entity that has a relationship described in Code Sec. 267(b) with the terminated sponsoring entity unless the sponsored FFI obtains written approval from IRS. The proposed regs provide a similar rule regarding a terminated sponsoring entity of a sponsored direct reporting NFFE, but do not permit the sponsored direct reporting NFFE to obtain written approval from IRS to register as a sponsored direct reporting NFFE of a Code Sec. 267(b)-related sponsoring entity.

The final regs make two changes to this rule. First, they provide that the rules described above generally prohibit registration by a sponsored FFI or sponsored direct reporting NFFE under a sponsoring entity that has a relationship described in Code Sec. 267(b) or Code Sec. 707(b) to the terminated sponsoring entity. (Reg. §1.1471-5(k)(4)(ii))Thus, for example, a sponsored FFI of a terminated sponsoring entity that is a partnership may not register under another sponsoring entity that is a partnership if the same person owns, directly or indirectly, more than 50% of capital interests or profits interests of both sponsoring entities.

Additionally, the final regs conform the rule for sponsored direct reporting NFFEs with the rule for sponsored FFIs by allowing a sponsored direct reporting NFFE to register under a sponsoring entity, notwithstanding that there is the impermissible relationship described above, if the sponsored direct reporting NFFE obtains written approval from IRS. (Reg. §1.1472-1(g)(4)(ii))

…Sponsored entities located in a Model 1 IGA jurisdiction. The preamble to the proposed regs provides that a financial institution covered by a Model 1 IGA that chooses to qualify as a sponsored FFI under Reg. § 1.1471-5(f) instead of Annex II of the Model 1 IGA must satisfy all of the requirements of the regs applicable to such an entity.

Comments requested that a financial institution located in a jurisdiction with a Model 1 IGA that does not include a sponsored entity as a type of nonreporting financial institution in Annex II be allowed to comply with local guidance on sponsored entities or the Model 1 IGA Annex II rather than the regs.

In the final regs’ Preamble, IRS states that it is open to discussing the issue with the competent authorities of affected jurisdictions.

Effective date. The regs are effective on Mar. 25, 2019. (Reg. § 1.1471-1(c), Reg. § 1.1471-4(j), Reg. § 1.1471-5(m), Reg. § 1.1472-1(h))

References: For reporting under FATCA, see Federal Tax Coordinator 2d ¶ O-13070 et seq.; United States Tax Reporter ¶ 14,714 et seq.