IRS releases long-awaited draft FFI Agreement and previews updates to FATCA regulations

International Tax Compliance Alert


The IRS has released Notice 2013-69, including a draft FFI Agreement and several intended updates to the existing Treasury Regulations implementing the Foreign Account Tax Compliance Act (FATCA).


The draft FFI Agreement outlines the obligations of foreign financial institutions (FFIs) that will register with the IRS to become participating FFIs (PFFIs) under FATCA.


FFIs and their branches located in countries that have entered into a Model 2 intergovernmental agreement (IGA) with the United States (Model 2 FFIs) will also be required to agree to comply with the terms of an FFI Agreement, as modified by the terms of the applicable Model 2 IGA. PFFIs and Model 2 FFIs will avoid the new 30 percent FATCA withholding tax on US source payments made to FFIs, beginning July 1, 2014.




The draft FFI Agreement comes on the heels of the opening of the FATCA Registration Website in August this year.i PFFIs and Model 2 FFIs must agree to comply with the terms of an FFI Agreement as part of their FATCA registration.


The draft FFI Agreement is substantially consistent with the final Treasury Regulations implementing FATCA and subsequent Treasury guidance. The Notice provides that the draft FFI Agreement will be finalized by December 31, 2013. With respect to a PFFI or a branch of a PFFI, the effective date of an FFI Agreement is the later of the date on which the IRS issues a Global Intermediary Identification Number (GIIN) to the PFFI or its branch, or June 30, 2014. An FFI Agreement entered into by a PFFI or Model 2 FFI will expire on December 31, 2016, unless terminated under the terms of the FFI Agreement on an earlier date. An FFI Agreement may be renewed by a PFFI or Model 2 FFI under the procedure set forth in the FFI Agreement.




Under forthcoming Treasury Regulations, non-financial foreign entities (NFFEs)ii that would otherwise be classified as “passive NFFEs”iii will be able to avoid being so classified if they:

(i) elect to report directly to the IRS on Form 8966 (FATCA Report)iv certain information about their direct or indirect substantial US owners, in lieu of providing such information to withholding agents or PFFIs, and


(ii) register with the IRS to obtain a GIIN.


Withholding agents and PFFIs will have to identify and document these “direct reporting NFFEs” in a manner similar to how they will document a PFFI, including by verifying the direct reporting NFFE’s GIIN on the published IRS FFI List.v


This new category is a welcome development because it allows NFFEs to avoid disclosure of their ownership structure to withholding agents and PFFIs – a particularly sensitive issue for certain foreign trusts and property and casualty insurance and reinsurance companies.




The Notice specifies that the IRS and Treasury Department intend to modify the definition of “US person” in the final Treasury Regulations implementing FATCA to include certain foreign insurance companies that have elected to be treated as domestic corporations for federal tax purposes.


As a result, property and casualty insurers and reinsurers and other insurers and reinsurers that are not “specified insurance companies”vi that have made such an election generally should not be subject to FATCA reporting. The final Treasury Regulations implementing FATCA exclude such electing entities from the definition of a US person if such entities are not licensed to do business in any state.




In the case of a withholdable paymentvii that is also a reportable paymentviii made by a PFFI or Model 2 FFI to a recalcitrant account holder, backup withholding will not apply if tax is withheld under FATCA, unless backup withholding is elected.




PFFIs and FFIs that are not US payors or US middlemen and that are located in IGA countries will be excused from Form 1099 reporting if they report relevant account information pursuant to an FFI Agreement or pursuant to an applicable Model 1 IGA.




Withholding under FATCA begins July 1, 2014. Financial institutions that have not already considered the steps necessary to become FATCA compliant should do so now.


Financial institutions worldwide can begin entering their registration information into the FATCA Registration Website now, using the remainder of 2013 to become familiar with the website. Starting in January 2014, financial institutions will be expected to finalize their registration information. This should be done by April 25, 2014, in order to be included on the first monthly IRS FFI List, which will be posted on June 2, 2014 and used for verification by withholding agents.


For more information about FATCA compliance, please contact the authors.



Using the new FATCA registration website: FAQs for financial institutions  

IRS opens online FATCA registration system: financial institutions may now sign in
The final FATCA Regulations: highlights


i Available here.

ii An NFFE is a foreign entity that is not a financial institution.

iii FATCA imposes a withholding tax on withholdable payments to a passive NFFE unless the NFFE (i) certifies to the withholding agent that it does not have any “substantial US owners”; or (ii) provides the name, address and taxpayer identification number of each “substantial US owner” of the NFFE to the withholding agent, which, in turn, transmits that information to the IRS.

iv A draft Form 8966 was released by the IRS on August 13, 2013.

v The IRS will publish a list of registered and approved FFIs and their GIINs every month. This list is scheduled to be published monthly beginning June 2014.

vi These are insurance companies or holding companies that issue, or are obligated to make payments with respect to, a cash value insurance or annuity contracts.

vii A “withholdable payment” generally includes US source income and gross proceeds from any sale or other disposition after December 31, 2016, of property that can produce US source interest or dividends.

viii A “reportable payment” means a payment of interest or dividends, as defined in section 3406(b)(2) of the Internal Revenue Code (the Code), and other reportable payments, as defined in section 3406(b)(3) of the Code, made to a US person.