Overview of FATCA and Grandfathered Obligations

The United States (US) Foreign Account Tax Compliance Act (FATCA) stipulates that a 30% withholding tax must be made on any ‘withholdable payments’ made to any ‘Foreign Financial Institution’ (FFI) or ‘Non-Financial Foreign Entity’ (NFFE)[1] that does not comply with FATCA requirements. However, there are numerous exceptions available under FATCA. For instance, any payment made under a ‘Grandfathered Obligation’ (GO), or any gross proceeds from the disposition of such an obligation, is not considered to be a withholdable payment.[2] Withholding agents would be well advised to put in place a FATCA Grandfathered Obligations framework in order to identify GOs, and subsequently monitor for ‘Material modifications’, as Internal Revenue Service (IRS) penalties for incorrectly reporting amounts on withholding forms in under-withholding and over-withholding cases may be severe.

 

[1] FFIs include banks, custodial institutions, mutual funds, hedge funds, private equity funds, specified insurance companies, treasury centers.

[2] NFFEs include all foreign entities that are not classified as FFIs.

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If you would like to discuss any of the implications of FATCA on your business, or for more information on our FATCA reporting solutions and prices, please email DataTracks at: enquiry@datatracks.co.uk.

 

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