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FATCA as a Guide to Cross-Border Mergers and Acquisitions Deal Structuring and Transaction Compliance Introduction FATCA has become

a household name to both tax practitioners and international accountholders. The regime also imposes requirements upon parties to cross-border mergers and acquisitions: FATCAs obligations should both guide parties goals in planning cross-border M&A deals and determine their obligations within such deals. The following article is directed toward parties to M&A transactions who want a clearer picture of their withholding and reporting obligations under the new regime. While FATCA is part of an international tax enforcement regime, for purposes of this article it is viewed from the US perspective. Under the Foreign Account Tax Compliance Act (FATCA), foreign financial institutions (FFIs) are urged to participate in a disclosure regime intended to give the US Internal Revenue Service (IRS) detailed information on FFI accounts held by US persons. Of course, FFIs may decline to participate in the program; such FFIs are called non-participating foreign financial institutions (NPFFIs), as opposed to participating FFIs (PFFIs). A third category, deemed compliant FFIs (DCFFIs), do not face FATCA withholding obligations. Three types of DCFFIs exist: (i) registered deemed-compliant FFIs (RDCFFIs), entities which have registered with the IRS (and have satisfied requirements showing they have no US or NPFFI customers; (ii) certified deemed-compliant FFIs (CDCFFIs), which certify to a withholding agent that they are DCFFIs (e.g., local banks, retirement funds, nonprofits organizations, FFIs with low value accounts); and (iii) owner-documented FFIs, which are small investment vehicles and family trusts that provide withholding agents with their owner(s) information so that withholding agents may directly withhold from the owners, as appropriate. Finally, the FATCA regime includes US financial institutions (USFIs) and territory financial institutions (TFIs). At its core, FATCA requires parties to withhold tax on payments to NPFFIs; however, the regimes reporting obligations extend much further. In ascertaining its withholding and reporting obligations, a withholding agent (any party that falls into the US tax codes tax withholding regime, see Internal Revenue Code of 1986, as amended, 871, 881, 1441, 1442, 1445), such as a party to an M&A deal involving an outbound payment, should first ask itself whether the entity to which it remits payment is an FFI at all. An entity is an FFI if it (i) (ii) accept deposits in the ordinary course of banking or similar business; holds as a substantial part of its business (at least 20% of its gross income during the shorter of its existence or the three year period ending on Dec. 31 of the year in which the determination is made) financial assets for the account of others; is engaged (or holds itself out as engaged) primarily (at least 50% of its gross income during the same timeframe as above) in the business of investing, reinvesting, or trading in securities, partnership interests, commodities notional principal contracts, insurance or annuity contracts, or any interest in such securities, partnership interests, or commodities; or is an insurance company (or its holding company) that issues or is obligated to make payments with respect to a financial account.

(iii)

(iv)

If the payee is an FFI, FATCAs reporting and withholding obligations must be analyzed. If the payee is not an FFI, and is instead a non-foreign financial entity (NFFE), FATCA does not apply to the transactionbut other sections of the US tax code may still impose reporting or withholding requirements. Reporting Reporting: On payments to whom? Prop. Treas. Regs. 1.1471-4 and 1.1474-1 require the payor to report payments to FFIs, even if no withholding occurs. The following table elaborates on when a reporting obligation arises, both under FATCA and under traditional US tax law. Reporting Obligation PFFIs, DCFFIswhether they are passthrough entities or not. NPFFIs that are the beneficial owners of the transfer TFIs that agree to be treated as US persons Certain accountholders of PFFIs, if the PFFI issues a Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, with regard to that accountholder and/or a Code section 1471(b)(3) election (Election to be withheld upon rather than withhold on payments to recalcitrant account holders and nonparticipating foreign financial institutions) is in effect. NFFEs, unless the NFFE is a passthrough entity whose owners are treated as the accountholders. Partners, owners, or beneficiaries of a NFFE treated as a flow-through entity Exempt beneficial owners No Reporting Obligation US persons PFFIs, RDCFFIs, Qualified Intermediaries (QIs) that are intermediariesbut only to the extent that the final recipient provides information to such intermediary sufficient for such intermediary to report Its Complicated Disregarded or passthrough entities, the partners, beneficiaries, or owners of which are treated as recipients (this category includes NPFFIs that are intermediaries/passthro ugh entities)the payor should investigate to determine whether any of the ultimate recipients of the payments fall into the Reporting Obligation category. Recalcitrant Accountholders (those who refuse reasonable requests to identify US accounts or to provide names, addresses, or taxpayer ID numbers on accounts, or fail to provide a bank secrecy waiver upon request) the FFI should probably be treated as the recipient, but IRS forms are forthcoming.

Some qualified intermediaries Limited branches

Reporting: What information must be reported? Withholding agents must report amounts normally reported as withholdable payments on Form 1042S, Foreign Persons U.S. Source Income Subject to Withholding. According to Prop. Treas. Regs. 1.1471-1, 1.1474-1, withholdable payments include,

subject to certain exceptions: (i) any payment of interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income (FDAP income), if such payment is from sources within the United States; and (ii) [starting Jan. 1, 2015,] any gross proceeds from the sale or other disposition of any property of a type which can produce interest or dividends from sources within the United States.
See Withholding: What payments must be withheld upon? below for a list of exemptions to withholdable payments. Reporting: When do obligations arise? Reporting obligations begin January 1, 2014, and Form 1042-S is due March 15 following the year of payment (and would include payments occurring in 2013). Reporting on gross proceeds from property that can produce FDAP income begins on January 1, 2015. Withholding Withholding: On payments to whom? If the entity receiving the payment is an FFI, the next step is to determine whether it is a DCFFI or an NPFFI. If the entity is a DCFFI, no withholding is required. Withholding Obligation NPFFIs Recalcitrant account holders FFIs that have opted to have the payments to them withheld upon rather than to themselves withhold No Withholding Obligation DCFFIs (RDCFFIs or CFCFFIs) Its Complicated Owner-documented FFIsthe withholding agent may agree to perform its withholding duties against the owner directly Intermediaries that furnish appropriate withholding certificates and statements the withholding agent must treat the intermediarys partners or beneficiaries, or persons for whom the intermediary is acting (if the intermediary is a

passthrough entity) as the payees

Identifying the payee of a payment is as follows: The payee is the person to whom payment is made, but if that person is an intermediary and is not a qualified intermediary who has assumed withholding responsibility, then the payees are the ultimate partners, beneficiaries, or owners of the payment, unless the intermediary is (i) an active NFFE, (ii) a DCFFI; an FFI (other than a PFFI receiving US source FDAP), (iii) a withholding foreign partnership, or (v) a withholding foreign trust. Withholding: What payments must be withheld upon? Just as with reporting requirements, withholding agents must withhold tax on amounts normally deemed withholdable payments on Form 1042-S (see above). The following items are not withholdable payments: 1. Payments on which the withholding agent lacks control, custody, or knowledge of the facts giving rise to such payment (for example, wire transfers from deposit accounts); a. The knowledge standard is objective. A withholding agent has reason to know if a reasonably prudent person in the withholding agents position would question the claims made. b. Starting January 1, 2013, incomplete financial identity / IRS forms and conflicting financial information each constitute a reason to know of withholdable facts. 2. Certain short-term obligations (183 days or less); 3. Income effectively connected with a U.S. trade or business; 4. Payments made in the ordinary course of the withholding agents business for nonfinancial services, goods, or the use of property; 5. Gross proceeds from the disposition of excluded property (property that can produce US source FDAP income excluded from the definition of withholdable payment); 6. Sales of fractional shares of stock (if gross proceeds are below $20); 7. Certain accrued interest (but withholding will likely begin for this category in 2015; 8. Payments made under a grandfathered obligation (the cut-off date for such obligations is January 1, 2013); 9. Payments on which the withholding agent can reliably associate the payment with documentation upon which it is permitted to treat the payment as exempt. Withholding: When do obligations arise? Starting January 1, 2014, portions of a withholdable payment that are US sourced FDAP must be withheld upon. Starting January 1, 2015, withholding on all withholdable payments, including on gross proceeds, must occur. Summary

Withholding agents enhanced reporting and withholding obligations should not only be considered an element of every cross-border M&A transaction, but should inspire parties adopt the most FATCAfriendly structure feasible in the early stages of such deals. An acquireror or payer of considerationa definition that includes virtually any party to a cross-border dealshould examine the party to which consideration would be remitted to determine whether it is an FFI (and whether FATCAs additional requirements apply) or not. Even if FATCA does not apply, the withholding agent should consult a tax attorney to determine the optimal structure, from a tax perspective, of the proposed transaction. Please contact Royse Law Firm, PC, at www.rroyselaw.com for more information.

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