Attention: Taxpayers holding financial assets outside the United States and foreign financial institutions.
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May 22, 2019 

IRS Finalizes FATCA Regulations on Requirements for Sponsoring Entities

Hi There!,

The IRS recently issued final regulations regarding the Foreign Account Tax Compliance Act (FATCA). The final regulations provide compliance requirements and verification procedures for sponsoring entities of foreign financial institutions (FFIs) and certain nonfinancial foreign entities (NFFEs).  Sponsoring entities are normally FFIs themselves and perform the various FATCA compliance requirements for the sponsored entity.

The regulations also explain the:

  • Certification requirements and procedures for IRS review of certain trustees of trustee-documented trusts,
  • Procedures for IRS review of periodic certifications provided by registered deemed-compliant foreign financial institutions, and
  • Requirements for certifications of compliance for participating FFIs that are members of two consolidated compliance groups.

FATCA - A Recap

The Hiring Incentives to Restore Employment Act of 2010 added Chapter 4 — that is, the FATCA — to the Internal Revenue Code. Under Section 1471(b), a withholding agent is generally required to withhold a 30% tax on certain payments to an FFI unless the FFI:

  • Has entered into an FFI agreement with the U.S. to, among other things, report certain information with respect to U.S. accounts (a participating FFI),
  • Is treated as complying with the requirements (a deemed-compliant FFI), or
  • Satisfies the requirements but elects to be withheld upon rather than withhold on certain payments.

The FATCA rules are essentially a mechanism to enforce reporting requirements. Chapter 4 also imposes withholding, documentation and reporting requirements on withholding agents regarding certain payments made to certain NFFEs.

In cases in which foreign law would prevent an institution from complying with the terms of an FFI agreement, the IRS has collaborated with other governments to develop two alternative model intergovernmental agreements (Model 1 and Model 2 IGAs) that facilitate FATCA implementation. The main distinction between the two is essentially whether the financial institution provides specified information about U.S. accounts to its government, followed by an automatic information exchange with the United States (for Model 1 jurisdictions), or whether the information is reported directly to the IRS (for Model 2 jurisdictions).

Sponsoring Entities, etc.

The regulations permit certain FFIs and NFFEs to be sponsored by other entities (sponsoring entities) for purposes of satisfying their Chapter 4 requirements. Generally, a sponsoring entity is one that agrees to perform due diligence, withholding and reporting requirements on behalf of certain FFIs (sponsored FFIs) or due diligence and reporting obligations on behalf of certain direct reporting NFFEs (sponsored direct reporting NFFEs). An FFI that’s a sponsored FFI is a deemed-compliant FFI, and an NFFE that’s a sponsored direct reporting NFFE is an excepted NFFE.

The regulations permit a participating FFI that’s a member of an expanded affiliated group (EAG) to elect to be part of a consolidated compliance program under the authority of a:

  • Participating FFI,
  • Reporting Model 1 FFI, or
  • S. financial institution that’s a member of the same expanded affiliated group (compliance FI).

The compliance FI must establish and maintain the consolidated compliance program and perform a consolidated periodic review on behalf of each member FFI that elects to be part of the consolidated compliance program (electing FFI).

The 2017 proposed regulations provide verification requirements (including certifications of compliance) and events of default for sponsoring entities. The proposed regulations also provide certification requirements and procedures for IRS review of trustees of certain trustee-documented trusts and procedures for IRS review of periodic certifications provided by registered deemed-compliant FFIs.

For more specifics on the final regulations read our latest blog post here.


Grensy Quintero

Grensy Qunitero. CPA
+41 43 433 1040

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