On July 14, 2011, the Internal Revenue Service (“IRS”) released Notice 2011-53 which announced a series of phased-in effective dates for the Foreign Account Tax Compliance Act (“FATCA”) provisions of the Hiring Incentives to Restore Employment Act.

FATCA will require all foreign financial institutions (an “FFI”), including private investment funds organized outside the United States, to enter into an agreement with the IRS to report the name of and other identifying information regarding certain of their direct and indirect U.S. accountholders (an “FFI Agreement”). If an FFI fails to enter into an FFI Agreement with the IRS, then U.S. source dividends and interest and gross proceeds from the sales of U.S. securities (“withholdable amounts”) will be subject to a 30% U.S. withholding tax.

Very generally, an FFI Agreement will require offshore private investment funds to conduct additional due diligence to determine the identities of their ultimate beneficial owners. In particular, offshore private investment funds will be required to determine not only whether they have any direct U.S. shareholders, but also whether they have any indirect U.S. shareholders (for example, though a trust or other entity). This will effectively require some form of enhanced “know your customer” procedures. If a shareholder refuses to provide the required information to a private investment fund, then the private investment fund will be required to withhold 30% of the withholdable amounts otherwise payable to such shareholder.

By its terms, FATCA is effective on January 1, 2013. In Notice 2011-53, the IRS announced the following timeline for FATCA implementation:

• No later than December 31, 2011–Proposed Regulations to be issued by IRS.
• Summer of 2012–Final Regulations and model FFI Agreement to be issued by IRS.
• No later than January 1, 2013–IRS will begin accepting applications for FFI Agreements.
• June 30, 2013–Deadline for entering into an FFI Agreements with a July 1, 2013 effective date.¹
• Upon effective date of FFI Agreement–Begin compliance with FATCA due diligence procedures for new accounts.
• January 1, 2014–The 30% withholding tax will begin to be collected on U.S. source dividends and interest income.
• January 1, 2015–The 30% withholding tax will begin to be collected on all U.S. source withholdable payments (including gross proceeds).
• Two years after effective date of FFI Agreement–Begin compliance with FATCA due diligence procedures for existing accounts.

The actual procedures for implementing FATCA require the promulgation of Regulations by the Department of Treasury. Once the IRS issues Final Regulations, we will be able to provide definitive guidance on the procedures necessary to implement FATCA compliance for fund managers. We will keep you apprised of any developments in this area.

If you have any questions regarding this memorandum, please contact one of the attorneys listed below.

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¹ According to Notice 2011-53, if an FFI Agreement is not entered into before July 1, 2013, then it may not be effective in time for a paying agent to avoid withholding tax with respect to payments to the FFI beginning on January 1, 2014.