Procedures for withholding foreign partnerships and withholding foreign trusts coordinated with FATCA.

• Author: Dell, Michael
• Position: Foreign Account Tax Compliance Act

The IRS issued updated procedures in Rev. Proc. 2014-47 (released and effective Aug. 8,2014) for "withholding foreign partnerships" (WPs) and "withholding foreign trusts" (VVTs) that elect to assume certain U.S. withholding tax responsibilities. This guidance required existing VVPs and VVTs to renew their status with the IRS by Aug. 31, 2014, for their agreements to be effective as of June 30, 2014. WPs and WTs with a renewal approved by the IRS after Aug. 31,2014, will have a WP or WT agreement effective as of the date the renewal is approved.

The revised agreements coordinate the existing rules for WPs and WTs with Foreign Account Tax Compliance Act (FATCA) withholding under Secs. 1471 and 1472 and make the following notable changes to the existing guidance:

* As envisaged by the regulations, a WP or WT will take over primary FATCA withholding responsibilities to the same extent that it currently takes over primary withholding responsibilities under pre-FATCA law.

* To the extent that a VVP or WT that is not a U.S. financial institution, a U.S.-owned financial institution, or a financial institution acting through a U.S. branch performs account-level reporting on U.S. partners/benefi-ciaries under the FATCA rules, the WP/WT will no longer be required to perform payment-level Form 1099 reporting and backup withholding with respect to such U.S. partners/ beneficiaries.

* In some cases, a WP or WT may now assume primary withholding responsibilities with respect to a partner/beneficiary that is itself a foreign partnership or trust. Previously, a WP or WT could not do so and had to pass withholding tax documentation for the "indirect" partners/beneficiaries of such a partnership or trust through to its withholding agent, with two limited exceptions.

* A WP or WT located in a jurisdiction where the IRS has approved the local "know your customer" (KYC) rules may now use KYC documentation to establish the status of its partners/beneficiaries in the same way that a qualified intermediary (Q1) in that jurisdiction may do so. Previously WPs and WTs were only allowed to use IRS forms to document their partners/beneficiaries and were not allowed to use KYC documentation.

* WPs and WTs will no longer have to be examined periodically by external auditors to demonstrate compliance with their agreements but instead will have to adopt internal compliance programs similar to those required of Qls (including the requirement for a periodic external review).

* All WP/WT agreements will expire periodically and will need to be renewed.

Background U.S. persons making payments to non-US. persons of U.S.-source interest, dividends, and other income (excluding capital gains) must withhold a 30% tax under Secs. 1441 and 1442. Exemptions and reduced rates are available but generally require the beneficial owner to document its right to the exemption on the appropriate version of Form W-8. Such payments generally must be reported to the IRS on Form 1042-S, Foreign...