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FATCA Overview - Crawford v. U.S. Dep't of the Treasury


In a U.S. District Court (Southern District of Ohio) opinion released on September 29, 2015, the U.S. District Court held that certain plaintiffs lacked standing to enjoin the U.S. government from enforcing FATCA, IGAs, and the FBAR. The following is an excerpt from the case that provides an overview of FATCA.

Congress passed the Foreign Accounts Tax Compliance Act (FATCA) in 2010 to improve compliance with tax laws by U.S. taxpayers holding foreign accounts. FATCA accomplishes this through two forms of reporting: (1) by foreign financial institutions (FFIs) about financial accounts held by U.S. taxpayers or foreign entities in which U.S. taxpayers hold a substantial ownership interest, 26 U.S.C. §1471; and, (2) by U.S. taxpayers about their interests in certain foreign financial accounts and offshore assets. 26 U.S.C. §6038D.


President Obama signed FATCA into law on March 18, 2010. Senator Carl Levin, a co-sponsor of the FATCA legislation, declared that “offshore tax abuses [targeted by FATCA] cost the federal treasury an estimated $100 billion in lost tax revenues annually” * * * FATCA became law as the IRS began its Offshore Voluntary Disclosure Program (OVDP), which since 2009 has allowed U.S. taxpayers with undisclosed overseas assets to disclose them and pay reduced penalties. By 2014, the OVDP collected $6.5 billion through voluntary disclosures from 45,000 participants. * * * The success of the voluntary program has likely been enhanced by the existence of FATCA.

2. Foreign Financial Institution Reporting Under FATCA

Foreign Financial Institution reporting encourages FFIs to disclose information on U.S. taxpayer accounts. If the FFI does not, then a 30% withholding tax may apply to U.S.-sourced payments to the non-reporting FFI. A 30% withholding tax may also apply to FFI account holders who refuse to identify themselves as U.S. taxpayers.

In the case of any withholdable payment to a foreign financial institution which does not meet the requirements of subsection (b) [specifying reporting criteria], the withholding agent with respect to such payment shall deduct and withhold from such payment a tax equal to 30 percent of the amount of such payment.

26 U.S.C. §1471(a).

Section 1471(b)(1) then provides that, “[t]he requirements of this subsection are met with respect to any foreign financial institution if an agreement is in effect between such institution and the Secretary [of the Treasury] under which such institution agrees” to make certain information disclosures and “to deduct and withhold a tax equal to 30 percent of … [a]ny [pass-through] payment which is made by such institution to a recalcitrant account holder or another foreign financial institution which does not meet the requirements of this subsection[.]” §1471(b)(1)(D)(i); see also §1471(d)(7) (defining “pass[-through] payment”). A “recalcitrant account holder” is one who “[f]ails to comply with reasonable requests for information” that is either information an FFI needs to determine if the account is a U.S. account (§1471(b)(1)(A)) or basic information like the account holder’s name, address, and taxpayer identification number (§1471(c)(1)(A)). Section 1471(c)(1) specifies the “information required to be reported on U.S. accounts,” including “account balance or value.” §1471(c)(1)(C). * * *

Under §1471(b)(2), “Financial Institutions Deemed to Meet Requirements in Certain Cases,” an FFI “may be treated by the Secretary as meeting the requirements of this subsection if … such institution is a member of a class of institutions with respect to which the Secretary has determined that the application of this section is not necessary to carry out the purposes of this section.” That means that an FFI that is treated this way is not subject to the reporting criteria in §1471(b)(1). The Secretary can statutorily exempt FFIs from “attempt[ing] to obtain a valid and effective waiver” of foreign nondisclosure laws from each account holder and can exempt FFIs from “close such account … if a waiver … is not obtained from each such holder within a reasonable period of time.” §1471(b)(1)(F). [footnote omitted] The Secretary’s exemption of an FFI under §1471(b)(2) also means that the FFI no longer has to make the report described in §1471(c)(1) because that report is based on “[t]he agreement described in subsection (b)” that an FFI that the Secretary has exempted does not need to have in place to avoid withholding. Furthermore, the FATCA statute provides that, “[t]he Secretary shall prescribe such regulations or other guidance as may be necessary or appropriate to carry out the purposes of, and prevent the avoidance of, this chapter,” i.e., §§1471-74. 26 U.S.C. §1474(f). The Government asserts that the intergovernmental agreements (IGAs) constitute the Secretary's exercise of the statutory discretion afforded by §§1471(b)(2) and 1474(f).

* * *

B. The Canadian, Czech, Israeli, and Swiss Intergovernmental Agreements

Once FATCA became law, the Government began requiring coordination with FFIs and foreign governments. To facilitate FATCA implementation, the United States has concluded over 70 intergovernmental agreements (IGAs) with foreign governments addressing the exchange of tax information. * * *

The Canadian, Czech and Israeli IGAs are similar because they are all “Model 1” IGAs, whereas the Swiss IGA is a “Model 2” IGA. The key distinction is that under Model 1 IGAs, foreign governments agree to collect their FFIs’ U.S. account information and to send it to the IRS, whereas under Model 2 IGAs, foreign governments agree to modify their laws to the extent necessary to enable their FFIs to report their U.S. account information directly to the IRS. All four IGAs, in their preambulatory clauses, recognize the partner governments’ mutual “desire to conclude an agreement to improve international tax compliance” or, in the case of Switzerland, a “desire to conclude an agreement to improve their cooperation in combating international tax evasion.” * * *

Tags: 1471 FATCA

When an Active NFFE Can Be a Passive NFFE


Just over three years ago the IRS released a first draft of Form W-8BEN-E. We had blogged how the draft form was unnecessarily complex because the foreign entity had to certify that it was either an “excepted” non-financial foreign entity (“NFFE”) or a “passive” NFFE. There are various types of excepted NFFEs, including an “active” NFFE.

To determine whether a NFFE is active or passive, a complex income statement and balance sheet analysis must be performed. It may even be necessary to wholly or partially consolidate subsidiaries to complete this analysis.

If an entity was an active NFFE, it did not need to report whether it had substantial U.S. owners (“SUSOs”). On the other hand, if an entity was a passive NFFE, it did need to report if it had SUSOs. Many foreign entities would prefer to simply report that they have no SUSOs rather than perform the complex income statement and balance sheet analysis.

The final Form W-8BEN-E, when it was released, changed the language in the section titled “Passive NFFE” (Part XXVI of the form) to eliminate the need to do the complex income statement and balance sheet analysis for foreign entities that have no SUSOs.

You would think that the section titled “Passive NFFE” would only be for Passive NFFEs. However, this is not the case. The language on Line 40a in Part XXVI of the form now provides:

I certify that the entity identified in Part I is a foreign entity that is not a financial institution (other than an investment entity organized in a possession of the United States) and is not certifying its status as a publicly traded NFFE (or affiliate), excepted territory NFFE, active NFFE, direct reporting NFFE, or sponsored direct reporting NFFE.

Thus, the person signing the form where Line 40a is checked is certifying: (i) that the foreign entity is not a financial institution and (ii) that nothing else is being certified. Certifying that you are not certifying is superfluous. In other words, there is only one certification being made on Line 40a: the foreign entity is not a financial institution.

The instructions to the form are consistent with this. The instructions to Line 40a provide in part:

If you are an NFFE that may qualify as an active NFFE (or other NFFE described in another part of this form), you may still check line 40a and disclose your substantial U.S. owners or certify that you have no substantial U.S. owners (see instructions to lines 40b and 40c below).

Therefore, foreign entities that are not financial institutions can avoid any analysis as to whether they are active or passive NFFEs. They just complete Part XXVI of the form and then disclose their SUSOs or certify that they have no SUSOs.

If Line 40b is checked indicating that there are no SUSOs, that is the end of the story. 

On the other hand, if Line 40c is checked, indicating that the passive NFFE has one or more SUSOs, those SUSOs must be identified in Part XXIX of the Form W-8BEN-E.  In addition, in order for the withholding agent to avoid the 30% withholding under Chapter 4 (Code §1472(a)) on U.S. source FDAP payments to a passive NFFE with SUSOs, the withholding agent is required to file Form 8966, FATCA Report.  Treas. Reg. §§1.1472-1(b) and 1.1474-1(i)(2).  Thus, if the NFFE has SUSOs, it may want to perform the income statement and balance sheet analysis to see if it can check the active NFFE box.

Tags: 1471 FATCA, Form W-8 BEN / BEN-E

Payments to Foreign Contractor Entities: Form W-8BEN-E


    See Below For How to Fill Out BEN-E for Foreign-Performed Services

When requesting a Form W-8BEN-E from a foreign entity, most of the form does not need to be completed when the payments are for services performed outside the U.S.

U.S. businesses that make payments to foreign contractors for services may be familiar with Form W-8BEN (Rev. February 2006) (the “Old” W-8BEN).  In general, the Old W-8BEN allows a foreign individual or entity to certify its foreign status.  A U.S. payor with a valid W-8BEN in hand generally does not need to withhold or report such payments on a Form 1099 if the payments are for services performed outside the U.S.  See our prior blog post (Form 1099 for Payments to Foreign Contractors for Services).

This year the IRS released an updated version of Form W-8BEN (Rev. February 2014) (the “New” W-8BEN), and also released a new form, Form W-8BEN-E (the “BEN-E”).  The forms were updated in order to address the requirements of the Foreign Account Tax Compliance Act (“FATCA”).

In the past, the Old W-8BEN could be used by foreign individuals or foreign entities receiving payments from U.S. persons.  Now, foreign individuals use the New W-8BEN (still one page long and relatively simple) and foreign entities must use the BEN-E.

Form BEN-E

The BEN-E form is 8 pages long and contains 30 parts.  Line 5 of the BEN-E contains 31 different “FATCA Statuses” (also known as “Chapter 4 Statuses”).

Characterizing an entity’s FATCA Status can be challenging.  Fortunately, not all foreign entities need to complete Line 5 of the BEN-E.  The instructions to Line 5 of the form provide in part:

[Y]ou are only required to provide a chapter 4 status if you are the payee of a withholdable payment or are documenting the status of an account you hold with an FFI requesting this form.

Thus, if there is no withholdable payment and you are not documenting the status of an account you hold with a foreign financial institution (“FFI”), you do not need to complete Line 5.  This blog post focuses on withholdable payments and does not address accounts held with FFIs.

Withholdable Payments

Code §1473(1)(A) provides that the term “withholdable payment” means:

(i) any payment of interest (including any original issue discount), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income, if such payment is from sources within the United States, and

(ii) any gross proceeds from the sale or other disposition of any property of a type which can produce interest or dividends from sources within the United States.

See also Treas. Reg. §1.1473-1(a)(1).

Under both the statute and the regulations, in order for a payment to be a withholdable payment, it must be “from sources within the United States” or gross proceeds from the sales of certain assets.  Payments for services are not considered gross proceeds from the sales of assets.

As described in our earlier post, services performed outside the U.S. are not considered U.S. source income.  Code §861(a)(3) and Treas. Reg. §1.861-4.  See also Treas. Reg. §1.1473-1(a)(2)(i)(B).  Consequently, payments for services performed outside the United States should not be “withholdable payments.”

The FATCA regulations further provide that services payments, other than certain financial services payments, are not “withholdable payments.”  Treas. Reg. §1.1473-1(a)(4)(iii).  However, it is important to note that U.S. source payments for services (financial or nonfinancial) may be subject to withholding under Chapters 3 or 61 of the Internal Revenue Code.

How to Fill Out BEN-E for Foreign-Performed Services

When payments are being made for foreign-performed services, the payments are not “withholdable payments” and the foreign entity does not need to complete Line 5 of the BEN-E.  Further, the foreign entity does not need to complete Parts 2 through 28 or Part 30 of the form.  Instead, in this circumstance the foreign entity must only complete the following:

  1. Part I, Lines 1-4, 6 & 7 (perhaps also Line 9b), and
  2. Part XXIX (an authorized individual signs and dates, and checks the certification box).

By signing the BEN-E, the authorized individual of the entity is certifying that (i) the entity is the beneficial owner of the income (ii) the entity is not a U.S. person, and (iii) the income is not effectively connected income (“ECI”).

Tags: 1441 U.S. Withholding Taxes, 1471 FATCA, Form W-8 BEN / BEN-E

FATCA, NFFEs, and Draft W-8BEN-E - Unnecessary Complexity


UPDATE (6/3/15): The unnecessary complexity of the form was removed with the release of the final Form W-8BEN-E.  See: When an Active NFFE Can Be a Passive NFFE.


UPDATE (9/22/14): For foreign performed services, see:

Payments to Foreign Contractor Entities: Form W-8BEN-E.

The U.S. Treasury Department recently finalized the FATCA regulations.(FN 1)

The bulk of the regulations deal with certain U.S. source payments to foreign financial institutions (“FFIs”).

However, the regulations also require a withholding agent to generally withhold 30% of certain U.S. source payments (made after December 31, 2013) to a payee that is a non-financial foreign entity (“NFFE”) unless three requirements are met. The three requirements are:

  1. The beneficial owner of the payment is the NFFE or another NFFE;
  2. The withholding agent can treat the beneficial owner of the payment as an NFFE that does not have any substantial U.S. owners, or as an NFFE that has identified its substantial U.S. owners; and
  3. The withholding agent reports certain information relating to substantial U.S. owners of the NFFE.(FN 2) 

Simple Reporting in Many Circumstances

In many circumstances it will be quite easy to confirm that the NFFE has no substantial U.S. owners or to identify who the substantial U.S. owners are. For example, a Canadian non-financial company that is wholly owned by a Canadian citizen who lives in Canada should be able to easily certify that it is the beneficial owner of a payment and that it has no substantial U.S. owners.

Similarly, if that same Canadian company were 50% owned by the Canadian citizen and 50% owned by a U.S. citizen, the company should be able to easily certify that it is the beneficial owner of a payment and that it has a 50% substantial U.S. owner. The reporting of the substantial U.S. owner will be done on I.R.S. Form 8966 (or such other form as the I.R.S. may prescribe).(FN 3)

Excepted NFFEs

No withholding is required under the FATCA rules if the payment is beneficially owned by an “excepted NFFE.”(FN 4) Excepted NFFEs include:

  1. Publicly traded companies;
  2. Affiliates of publicly traded companies;
  3. Certain entities organized in U.S. territories;
  4. Active NFFEs;
  5. Certain non-financial entities (such as holding companies, treasury centers, captive financial companies of a non-financial group, start-up companies, liquidating or bankrupt companies, and not-for-profit organizations).

An “active NFFE” is an entity that meets an income test and an asset test.(FN 5) Under the income test, the entity must have less than 50% of its gross income for the preceding calendar year as passive income. Under the asset test, the entity must have less than 50% of its assets for the preceding calendar year as passive assets (i.e., assets that produce or are held for the production of passive income).

Very generally, “passive income” can be thought of as investment income, such as dividends, interest, rents and royalties (other than certain active rents and royalties), annuities, the excess of gains over losses from the sale or exchange of the foregoing types of property, etc.(FN 6)

A “passive NFFE” is an NFFE other than an excepted NFFE.(FN 7)

Draft Form W-8BEN-E

The current draft version of the Form W-8BEN-E (found here) is eight pages long and has 25 parts.

Parts 1, 2, 3, and 24 represent the four parts included in the existing W-8BEN. Parts 4 through 22 include various categories, including multiple types of FFIs and excepted NFFEs.

Part 23 addresses passive NFFEs and requires that the foreign entity certify that (i) it is not a financial institution, (ii) it is not an excepted NFFE, and (iii) either (a) it has no substantial U.S. owners, or (b) it has provided certain information about each of its substantial U.S. owners in Part 25 of the form.

Unnecessary Complexity

Unfortunately, the way that the W-8BEN-E is currently drafted, a foreign non-financial entity must certify that it is either an active NFFE (in Part 22) or a passive NFFE (in Part 23). If it is an active NFFE, then there is no need to provide information about the substantial U.S. owners. If it is a passive NFFE, then it must provide information about the substantial U.S. owners in Part 25 of the form.

As currently drafted, there is no option to avoid the legwork required to determine whether the NFFE is active or passive, and to simply volunteer the information about the substantial U.S. owners (or lack thereof).

To determine whether a foreign entity is an active or passive NFFE, both its income statement and its balance sheet must be reviewed for the prior calendar year. What if the NFFE has a fiscal year rather than a calendar year? Must calendar year financial statements be created and reviewed? What if there are substantial book-tax differences? Are assets valued on a fair market value basis or using U.S. tax basis? If using fair market value, must a valuation be performed? If using U.S. tax basis, has the foreign entity been tracking the U.S. tax bases of its assets (even though it may be 100% foreign owned)?

Foreign non-financial entities should be able to avoid making the determination as to whether they are active or passive NFFEs.  The NFFE would voluntarily provide the information about the substantial U.S. owners (or lack thereof). The I.R.S. would get the information that it seeks without requiring an extensive analysis to be performed with respect to the foreign entity’s financial statements.

The Form W-8BEN-E should be modified to allow a NFFE to volunteer the substantial U.S. owner information in Part 25 and not have to certify that it is or is not an active NFFE (or any other type of excepted NFFE). One can only hope that the Treasury Department will add this simplification to the final Form W-8BEN-E.


1    Treasury Decision 9610.

2    Treas. Reg. §1.1472-1(b)(1).

3    Treas. Reg. §1.1474-1(i)(2).

4    Treas. Reg. §1.1472-1(c).

5    Treas. Reg. §1.1472-1(c)(1)(iv).

6    Id.

7    Treas. Reg. §1.1471-1(b)(88).

Tags: 1441 U.S. Withholding Taxes, 1471 FATCA, Form W-8 BEN / BEN-E

Joint FATCA Implementation Statements


The U.S. has now made joint statements regarding the implementation of FATCA with the following seven countries:

Tags: 1471 FATCA