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FATCA impact on real estate industry

The Foreign Account Tax Compliance Act (“FATCA”) addresses perceived abuses by US taxpayers with respect to assets held offshore. Enacted in 2010, FATCA compels non-US entities to report US asset holders to the IRS beginning in 2013 and 2014 with a new, US-sourced withholding tax levied against non-cooperative foreign entities.


Specifically, the FATCA regime imposes a new 30% US withholding tax on withholdable payments made to a Non-Financial Foreign Entity (“NFFE”) or a Foreign Financial Institution (“FFI”).


The definition of FFI is quite broad, and appears to include virtually all non-US investment vehicles, including foreign feeder funds, foreign stand-alone funds and blocker corporations as well as foreign alternative investment vehicles, regardless of being offered or traded publicly.


US based investment vehicles, while not technically FFIs themselves, will still be considered withholding agents and have an obligation to withhold on certain payments made to foreign investors, if those partners are considered to be noncompliant FFIs or NFFEs.


To avoid FATCA withholding, foreign entities, unless otherwise exempt, must comply with FATCA by either registering with the IRS as an FFI or if the entity is an NFFE, by providing the withholding agent with either (1) certification that it does not have any substantial specified US owners or (2) information on the identities of its substantial specified US owners.


The definition of a withholdable payment is broad and includes US-source payments such as interest (including long term original issue discount), dividends, royalties, rents or any other fixed or determinable, annual or periodic (“FDAP”) income.


Additionally, a withholdable payment also includes the gross proceeds from the sale or disposition of any property that could produce US source interest or dividends. Income which is “effectively connected” (“ECI”) with a US trade or business is specifically exempt from FATCA withholding.


Withholdable payments made to an FFI will not be subject to withholding if the FFI enters into a formalised agreement (a “FFI Agreement”) with the IRS to identify and report certain US account holders.


Withholdable payments to a NFFE will not be subject to withholding if the NFFE provides information about its substantial US owners (generally more than 10%) or is an excepted NFFE (e.g., a publicly-traded corporation or its affiliates).


Proposed regulations released in February 2012 by the US Treasury provide detailed requirements that FFIs, NFFEs and US withholding agents must comply with to avoid the withholding liability under FATCA.


The proposed regulations also provide details on exceptions, exclusions and a broader framework of international cooperation aimed at easing foreign entities’ costs of FATCA compliance that was announced in a joint statement between the US and five European countries on the same day the regulations were issued.


Understanding the implications of these new rules will allow you to navigate the hurdles and seize opportunities to start preparing your processes, systems, and business relationships for a smooth transition to the new, more transparent international business environment that FATCA attempts to create.

Contacts

  • Pascal Eber
    Partner - Operations Excellence & Infrastructure Operations
  • Pascal Rapallino
    Partner - Private Wealth Services Leader
  • Pascal Noël
    Partner - Tax - International Tax-GFSI
  • Basil Sommerfeld
    Partner - Operations & Human Capital Leader
  • Alain Verberken
    Directeur - Tax - International Tax-GFSI

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