The proposed withholding requirements are scheduled to be gradually phased in over several years starting with US-sourced income payments beginning on 1 January 2014. This includes payments that are considered fixed, determinable, annual, and periodic (FDAP), such as US-sourced interest, dividends, long term original issue discount, rents and royalties.
The withholding expands to include gross proceeds from the sale of property that generates US-sourced interest or dividends beginning on 1 January 2015.
The regulations exclude original issue discount from certain short-term obligations, non-financial service payments in the ordinary course of the Withholding Agent’s business, the sale of fractional shares, and interest and proceeds from state and local bonds.
Withholding also will not be required if the Withholding Agent lacks control, custody or knowledge of a payee’s money or property or a beneficial owner’s payment.
The proposed regulations also expand the scope of certain “grandfathered” obligations, which will likely be exempt from FATCA withholding if they are issued before 1 January 2013, as long as they are not materially modified.
Previously, certain obligations issued before 18 March 2012, were not subject to withholding.
Finally, withholding will not be required with respect to foreign passthru payments until 1 January 2017.
However, participating FFIs still have to report the aggregate amount of certain payments made to non-participating FFIs for calendar years 2015 and 2016.
Additionally, US Treasury and the IRS have indicated they will work with the governments of jurisdictions that have entered into FATCA partner agreements to find practical alternatives to foreign passthru payment withholding and that FFIs in such jurisdiction may not be required to withhold on such payments if the payments are made to another entity within a FATCA partner jurisdiction.