Earlier this month, the U.S. Treasury Department proposed regulations (the “Proposed Regulations”) that would amend the existing FATCA regulations to, among other things, eliminate certain withholding requirements.
This Memorandum summarizes these proposed changes. As a result of the Proposed Regulations, you may see updated FATCA disclosure in your fund documents, but these Proposed Regulations should not have a material impact on the FATCA compliance obligations of private investment funds.
- FATCA currently imposes U.S. federal withholding tax on payments of certain items of income (e.g., dividends and certain interest income) (“withholdable payments”) to a foreign financial institution (“FFI”), such as a private investment fund, that is not compliant with FATCA. Beginning January 1, 2019, FATCA withholding was scheduled to apply to gross proceeds from the sale of assets that can produce a withholdable payment, such as U.S. stocks and securities. The Proposed Regulations eliminate this withholding requirement on gross proceeds from such assets.
- Generally, offshore funds that comply with FATCA are required to withhold on certain payments made to so-called “recalcitrant account holders” (i.e., generally, investors that are not compliant with their FATCA obligations). This requirement was repeatedly deferred pursuant in various IRS notices and the Proposed Regulations further defer application of this requirement.
- Although the Proposed Regulations clarify the definition of an investment entity, this change should not impact private funds. This clarification may ease the potential FATCA compliance burden on certain entities investing into mutual funds and ETFs.
- The Proposed Regulations also contain various provisions affecting withholding agents. The intent of these changes is to ease the compliance burden in determining the rate and amount of withholding on withholdable payments to a non-United States person.
For additional information on recent tax developments, please contact Jonathan P. Brose (212-574-1615), James C. Cofer (212-574-1688), Ronald P. Cima (212-574-1471), Peter E. Pront (212-574-1221), Daniel C. Murphy (212-574-1210), or Brett R. Cotler (212-574-1269).