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Understanding New Withholding Reporting Requirements with FATCA

October 08, 2014

Understanding corporate structure in order to properly identify entities for FATCA reporting requirements.

Companies have known for a while that they need to be compliant with the Foreign Account Tax Compliance Act (“ FATCA”), but effective July 1, 2014 there is no hiding from the fact that companies need to understand their corporate structure in order to properly identify their entities for FATCA reporting requirements.

There are two types of entities that FATCA identifies: a foreign financial institution (“FFI”) and a non-financial foreign entity (“NFFE”). FFI’s are usually banks, investment companies, trusts/fiduciary companies, hedge funds, and private equity companies. All those companies that are not considered as participating in some sort of financial investment are identified as NFFEs. Moreover, for reporting purposes, NFFEs are considered either active (an operating company) or passive (generally a holding company with investments in active companies).

Although it may be easy to identify whether an entity itself is a FFI or a NFFE, it may not be easy to understand how to report these entities when it comes to the new W-8 series of forms and Form W-9, or for withholding agents to understand if they received a proper withholding form from a vendor. First, the IRS has finally released the new Form W-8BEN-E, which is for foreign entities, while the new Form W-8BEN is for foreign individuals only. An individual is considered an actual person, where an entity is any corporation or certain types of trusts that are treated for tax purposes as the beneficiary of the income on which withholdings will be required. A disregarded entity must be looked at to determine whether the owners of the entity are corporations or individuals that are the beneficial owners of the income in question. It is those owners that will have to submit one of the W-8 series or a W-9 if the owner is a U.S. person.

Once the beneficial owner of the income is identified, and the correct form is chosen, then it is important to understand how to fill out the form in order to be compliant with the FATCA rules. The new Form W-9 for U.S. persons (individuals and entities) is still the most straight-forward of these withholding reporting forms, but it does have a new “Exemptions” box which requires the payee to report if they are an exempt entity, or exempt from FATCA reporting, and codes must be placed in this box if the payee is exempt.

The most complex of these forms is the new W-8BEN-E which requires that once the entity is identified as either a FFI or NFFE, it then must check off a box that further identifies the type and status of FFI or the type of NFFE the entity is and requires the payee to complete additional parts of the form depending on the box they choose. There are over thirty boxes to choose from and once a box is chosen to identify the entity, the payee must then complete the section the box directs them to. These sections require the payee to make specific certifications regarding their status as an FFI or NFFE. Some of these certifications are quite detailed. For example, one of these certifications asks the payee to confirm that revenues or assets meet specified thresholds, and another asks for the submission of the names, addresses and TINs for substantial U.S. owners of a passive NFFE (which are usually foreign holding companies).

The new withholding reporting requirements for Form W-8BEN-E are quite detailed, and if filled out improperly could result in an entity not being in compliance with FATCA as well as the withholding agent also being considered non-compliant. If you are the payee or the payor and have any questions regarding the proper completion of these forms please, contact us.

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