[Editor’s Note: The following update is authored by Kirkland & Ellis LLP]
The Foreign Account Tax Compliance Act (FATCA), enacted in 2010, imposed burdensome federal income tax reporting and withholding obligations on many business enterprises (including private funds and their portfolio companies), intended to prevent U.S. citizens and residents from avoiding U.S. income tax by hiding ownership of U.S. assets overseas.
The IRS has issued voluminous FATCA regulations and has several times delayed implementation of the FATCA reporting and withholding obligations. In fact, on July 12, 2013, the IRS extended further a number of FATCA deadlines. Nevertheless, a private fund should have already begun organizing its compliance with FATCA reporting and withholding obligations.
This PEN discusses three things:
- what every private fund organized under U.S. law must know about FATCA,
- what every private fund organized under non-U.S. law and every U.S. fund with a feeder, AIV or blocker entity organized under non-U.S. law must know about FATCA, and
- what every private fund (and its portfolio companies) borrowing from a lender organized under non-U.S. law must know about FATCA.
U.S. Private Fund
Once FATCA goes into effect, a private fund organized under U.S. law (e.g., a Delaware partnership) must withhold (and pay over to the IRS) 30 percent of the fund’s U.S. source income allocable to a general or lim- ited partner which is an entity (an “entity partner”) organized under non-U.S. law, unless the non-U.S. entity partner has agreed to supply the IRS with information as to its U.S. investors and account holders. The FATCA 30 percent withholding tax is not intended to impose a new tax. Rather, amounts withheld by the private fund are credited against the U.S. tax liability (if any) of the person or entity entitled to receive the U.S. source payment, with any excess withholding generally refunded upon filing of a U.S. income tax return or refund claim.
The types of the U.S. fund’s income that are subject to FATCA’s 30 percent withholding are (a) U.S. source dividends, interest, royalties, certain rent income and (b) gross proceeds (not merely gain) from sale of most U.S. debt instruments and corporate stock (e.g., stock in a portfolio company organized under U.S. law).
For a U.S. private fund, the withholding obligations now generally go into effect on July 1, 2014, unless the non-U.S. entity partner has agreed to supply the IRS with information as to its U.S. investors and account holders.
Non-U.S. Private Fund or U.S. Private Fund with Non-U.S. Feeder, AIV, or Blocker Entity
Once FATCA goes into effect, a private fund organized under non-U.S. law (e.g., a Cayman partnership) or an entity organized under non-U.S. law that is related to a fund organized under U.S. law (e.g., a non-U.S. feeder, AIV or blocker entity) must agree to supply the IRS with information as to any of its U.S. equity owners in order to avoid FATCA withholding on its U.S. source income. As part of this agreement with the IRS, the non-U.S. private fund must also withhold (and pay over to the IRS) 30 percent of the fund’s U.S. source income allocable to any entity partner organized under non-U.S. law, unless the non-U.S. entity partner has agreed to supply the IRS with information as to its U.S. investors and account holders.
The types of the non-U.S. entity’s income that are subject to FATCA’s 30 percent withholding are (a) U.S. source dividends, interest, royalties, certain rent income and (b) gross proceeds (not merely gain) from sale of most U.S. debt instruments and corporate stock (e.g., stock in a portfolio company organized under U.S. law).
For a non-U.S. private fund or a non-U.S. entity related to a U.S. private fund, the withholding obligations now generally go into effect on July 1, 2014, unless such fund or such related entity has obtained information from its non-U.S. entity partners as to their U.S. investors and account holders and supplied such information to the IRS.
The IRS strongly suggests that, in order to ensure no FATCA withholding as of July 1, 2014, a non-U.S. private fund or a non-U.S. entity related to a U.S. private fund enter into the required agreement (or otherwise register) with the IRS on or before April 25, 2014.
Click here to read the entire update.