Chapter 3 of the Internal Revenue Code requires withholding on payments of certain types. These include “fixed or determinable annual or periodic income” (“F.D.A.P.”) to foreign persons, disposition of U.S. real property interests by foreign persons, and U.S. effectively connected income attributable to foreign partners of a partnership engaged in a U.S. trade or business. Historically, withholding agreements allowed a foreign partnership or trust to become a Withholding Foreign Partnership (“W.P.”) or a Withholding Foreign Trust (“W.T.”) and to assume the withholding and reporting responsibilities of a withholding agent under Chapter 3.
Chapter 4 of the Internal Revenue Code (regarding F.A.T.C.A.) generally requires foreign financial institutions (“F.F.I.’s”) to provide information to the Internal Revenue Service (“I.R.S.”) with regard to account holders who are U.S. persons. Chapter 4 also requires certain non-financial foreign entities (“N.F.F.E.’s”) to provide information on their substantial U.S. owners to withholding agents. Chapter 4 imposes a withholding tax on certain payments to F.F.I.’s and N.F.F.E.’s that fail to comply with their F.A.T.C.A. obligations. (For a more detailed discussion of F.A.T.C.A., please see our Insights monthly F.A.T.C.A. 24/7 column.)
On August 8, 2014, the I.R.S. released Rev. Proc. 2014-47, which provides guidance on entering into W.P. and W.T. agreements and for renewing such agreements under F.A.T.C.A., thereby essentially integrating the two reporting systems. Rev. Proc. 2014-17 permits a W.P. and W.T. to assume the withholding and reporting responsibilities of a withholding agent under both Chapter 3 and Chapter 4. Rev. Proc. 2014-47 publishes revised W.P. and W.T. agreement procedures, which apply to W.P. and W.T. agreements effective on or after June 30, 2014. Additionally, existing W.P. and W.T. agreements are updated to coordinate with the withholding and reporting requirements of F.A.T.C.A.