Tuesday, October 12, 2010

FATCA Guidance: Notice 2010-60

On August 27, 2010, the Internal Revenue Service (the “IRS”) published Notice 2010-60 (the “Notice”), which provides preliminary guidance concerning withholding and reporting obligations under the FATCA provisions of the Hiring Incentives to Restore Employment Act. For a discussion of the FATCA provisions, please see our blog post from March 23, 2010.

I. Grandfathered Obligations
The Notice excludes from FATCA withholding any payments on obligations outstanding on March 18, 2012. For these purposes, an obligation is any legal agreement that does not constitute equity and that has a definitive term or expiration date.

II. Definition of Financial Institution
The Notice clarifies the statutory definition of “financial institution.” Under the Notice, financial institutions include:

  • Entities that accept deposits in the ordinary course of a banking or similar business, such as savings banks, commercial banks, savings and loan associations, thrifts, building societies, and other cooperative banking institutions. The fact that an entity is subject to banking and credit laws is relevant but not determinative as to whether that entity is a financial institution.

  • Entities that, as a substantial portion of their business, hold financial assets for the account of others, such as broker-dealers, clearing organizations, trust companies, custodial banks, and entities that act as custodians with respect to the assets of employee benefit plans. The fact that an entity is subject to banking and credit laws or to broker-dealer regulations is relevant but not determinative as to whether that entity is a financial institution.

  • Entities that are engaged primarily in the business of investing, reinvesting, or trading in securities, partnership interests, or commodities, such as mutual funds, funds of funds, exchange-traded funds, hedge funds, private equity and venture capital funds, commodity pools, and other investment vehicles. For these entities, “business” will likely have a broad meaning, with isolated transactions possibly constituting a “business.”

The Notice provides that the term “financial institution” does not include start-up companies that will operate a non-financial institution business, certain non-financial entities that are liquidating or emerging from bankruptcy, hedging or financing centers of a non-financial group, and certain holding companies with subsidiaries that are not engaged primarily in a financial institution business.

The Notice also excludes from the definition of financial institution certain foreign retirement plans and insurance companies that issue insurance or reinsurance contracts without cash value, such as property and casualty insurance or term life insurance contracts.

Finally, the Notice does not exclude from the definition of financial institution any foreign financial institutions that receive withholdable payments solely via their U.S. branches, nor any controlled foreign corporations that are also foreign financial institutions.

III. Foreign Financial Institutions and Their Collection of Account Information
The Notice describes procedures for how a foreign financial institution can fulfill its FATCA due diligence obligations for determining which, if any, of its accounts are U.S. accounts. A foreign financial institution must (i) determine whether its account holders that are individuals are to be treated as U.S. persons or as other persons, and (ii) determine whether its account holders that are entities are to be treated as U.S. persons, foreign financial institutions, or non-financial foreign entities.

The Notice provides procedures for how a foreign financial institution can make these determinations. Generally, a foreign financial institution must divide its accounts into four groups: individual account holders versus entity account holders, and pre-existing accounts versus new accounts. Within each of these four groups, the Notice then provides procedures for determining which accounts are presumptively U.S. accounts, which accounts are presumptively not U.S. accounts, and which accounts the foreign financial institution must request additional information from to determine if they are U.S. accounts.

IV. Reporting Requirements on U.S. Accounts
If a foreign financial institution has U.S. accounts, the Notice provides preliminary guidance on what information about such accounts the foreign financial institution must report to the IRS. Generally, the foreign financial institution must report the name, address, and taxpayer identification number of the account holder, along with the account balance or value, and gross receipts and withdrawals from the account.

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Monday, October 11, 2010

IRS Releases Proposed Regulations Covering Series LLCs

On September 13, 2010, the Internal Revenue Service (“IRS”) released proposed regulations that would treat an individual series of a domestic series LLC as a separate entity formed under local law regardless of whether that series is a juridical person for local law purposes. The proposed regulations generally do not apply to a series entity organized under the laws of a foreign jurisdiction unless the foreign series entity engages in an insurance business.

The proposed regulations define a series as a segregated group of assets and liabilities that is established pursuant to a “series statute” by agreement of a “series organization”. Thus, a series generally includes a cell, segregated account or segregated portfolio. A series organization is a juridical entity that establishes and maintain a series. A series statute is a statute of a state that provides for the organization of a series of a juridical person and permits: (1) members of a series organization to have rights with respect to the series; (2) a series to have separate rights, powers or duties with respect to specified property or obligations; and (3) the segregation of assets and liabilities of the series organization such that none of the debts and liabilities of the series organization or any other series of the series organization are enforceable against the assets of a particular series of the series organization.

The proposed regulations include a transition rule that would allow a series to continue to be treated together with the series organization as a single entity for federal tax purposes if, among other things, the series was established and conducted business or investment activity prior to September 14, 2010 and there was a reasonable basis for claiming single-entity classification.

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