Source: https://tax.thomsonreuters.com/news/irs-finalizes-fatca-regs-on-requirements-for-sponsoring-entities/
Timestamp: 2019-04-25 11:49:46+00:00

Document:
IRS has issued final regs under Code Sec. 1471 through Code Sec. 1474—i.e., the Foreign Account Tax Compliance Act, or FATCA—that provide compliance requirements and verification procedures for sponsoring entities of foreign financial institutions (FFIs) and certain nonfinancial foreign entities (NFFEs). The regs also explain the certification requirements and procedures for IRS’s review of certain trustees of trustee — documented trusts, the procedures for IRS’s review of periodic certifications provided by registered deemed-compliant foreign financial institutions, and the requirements for certifications of compliance for participating FFIs that are members of two consolidated compliance groups.
The final regs contain only limited revisions to proposed regs issued in 2017.
… satisfies the Code Sec. 1471(b) requirements, but elects to be withheld upon rather than withhold on certain payments.
The FATCA rules are essentially a mechanism to enforce reporting requirements. Chapter 4 also imposes withholding, documentation, and reporting requirements on withholding agents, with respect to certain payments made to certain non-financial foreign entities (NFFEs).
In cases in which foreign law would prevent an FFI from complying with the terms of an FFI agreement, IRS has collaborated with other governments to develop two alternative model intergovernmental agreements (Model 1 and Model 2 IGAs) that facilitate FATCA implementation. The main distinction between Model 1 and Model 2 IGAs is essentially whether the financial institution provides specified information about U.S. accounts to its government, followed by an automatic information exchange with the U.S. (for Model 1 jurisdictions), or whether the information is reported directly to IRS (for Model 2 jurisdictions).
Background—FATCA sponsoring entities, etc. Chapter 4 regs permit certain FFIs and NFFEs to be sponsored by other entities (sponsoring entities) for purposes of satisfying their chapter 4 requirements. Generally, a sponsoring entity is an entity that agrees to perform chapter 4 due diligence, withholding, and reporting requirements on behalf of certain FFIs (sponsored FFIs) or chapter 4 due diligence and reporting obligations on behalf of certain direct reporting NFFEs (sponsored direct reporting NFFEs). An FFI that is a sponsored FFI is a deemed-compliant FFI, and a NFFE that is a sponsored direct reporting NFFE is an excepted NFFE.
The chapter 4 regs permit a participating FFI that is a member of an expanded affiliated group to elect to be part of a consolidated compliance program under the authority of a participating FFI, reporting Model 1 FFI, or U.S. financial institution that is a member of the same expanded affiliated group (“compliance FI”). The compliance FI must establish and maintain the consolidated compliance program and perform a consolidated periodic review on behalf of each member FFI that elects to be part of the consolidated compliance program (electing FFI).
…Definition of responsible officer. The proposed regs require a sponsoring entity of a sponsored FFI to appoint a responsible officer to oversee the compliance of the sponsoring entity with respect to each sponsored FFI. Prop Reg §1.1471-1(b)(116) defines the term responsible officer with respect to a sponsoring entity as an officer of the sponsoring entity with sufficient authority to fulfill the duties of a responsible officer described in Reg. § 1.1471-5(j) or Reg. § 1.1472-1(f) (as applicable).
The final regs provide that the written sponsorship agreement may be part of another agreement between the sponsoring entity and the sponsored FFI provided it refers to the requirements of a sponsored FFI under FATCA. (Reg. §1.1471-5(j)(6)) For example, a provision in a fund manager agreement that states that the sponsoring entity agrees to satisfy the sponsored FFI’s FATCA obligations would be sufficient.
…Extension of time for certifications for the certification period ending on Dec. 31, 2017. The proposed regs provide that a sponsoring entity of a sponsored FFI or sponsored direct reporting NFFE and a trustee of a trustee-documented trust must make the certifications of compliance described in Reg. § 1.1471-5(j)(3), Reg. § 1.1471-5(l)(2), or Reg. § 1.1472-1(f)(2), as applicable, on or before July 1 of the calendar year following the end of the certification period. The proposed regs also provide that a sponsoring entity of a sponsored FFI must submit the preexisting account certification described in Reg. § 1.1471-4(c)(7) by the due date of the sponsoring entity’s certification of compliance for the certification period. The earliest certification period for a sponsoring entity or trustee of a trustee-documented trust ends on Dec. 31, 2017, under the proposed regs, making the earliest certification due date July 1, 2018.
Observation: IRS’s “FATCA—FAQs General” webpage was updated on 3/20/2019 to provide, in question Q20, that, for purposes of completing the certifications required for the certification period ending Dec. 31, 2017, a sponsoring entity may rely on the rules provided in the proposed regs. See that webpage here.
…Terminated sponsoring entities. The proposed regs provide that if a sponsoring entity of a sponsored FFI is terminated by IRS, the sponsored FFI of the terminated sponsoring entity may not register as a sponsored FFI of a sponsoring entity that has a relationship described in Code Sec. 267(b) with the terminated sponsoring entity unless the sponsored FFI obtains written approval from IRS. The proposed regs provide a similar rule regarding a terminated sponsoring entity of a sponsored direct reporting NFFE, but do not permit the sponsored direct reporting NFFE to obtain written approval from IRS to register as a sponsored direct reporting NFFE of a Code Sec. 267(b)-related sponsoring entity.
The final regs make two changes to this rule. First, they provide that the rules described above generally prohibit registration by a sponsored FFI or sponsored direct reporting NFFE under a sponsoring entity that has a relationship described in Code Sec. 267(b) or Code Sec. 707(b) to the terminated sponsoring entity. (Reg. §1.1471-5(k)(4)(ii))Thus, for example, a sponsored FFI of a terminated sponsoring entity that is a partnership may not register under another sponsoring entity that is a partnership if the same person owns, directly or indirectly, more than 50% of capital interests or profits interests of both sponsoring entities.
…Sponsored entities located in a Model 1 IGA jurisdiction. The preamble to the proposed regs provides that a financial institution covered by a Model 1 IGA that chooses to qualify as a sponsored FFI under Reg. § 1.1471-5(f) instead of Annex II of the Model 1 IGA must satisfy all of the requirements of the regs applicable to such an entity.
Comments requested that a financial institution located in a jurisdiction with a Model 1 IGA that does not include a sponsored entity as a type of nonreporting financial institution in Annex II be allowed to comply with local guidance on sponsored entities or the Model 1 IGA Annex II rather than the regs.
In the final regs’ Preamble, IRS states that it is open to discussing the issue with the competent authorities of affected jurisdictions.
References: For reporting under FATCA, see Federal Tax Coordinator 2d ¶ O-13070 et seq.; United States Tax Reporter ¶ 14,714 et seq.

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