When Must a USFI Use the FATCA Withholding Stick?
Updated: Mar 2
FATCA requires U.S. Financial Institutions (USFIs) to withhold 30 percent on U.S. Source Withholdable Payments made to Foreign Financial Institutions (FFIs). When is this enforcement stick applicable?
What Is a Withholdable Payment?
The term “U.S. Source Withholdable Payment” means payments of interest (including any original issue discount), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income, if such payment is from sources within the U.S. This type of income is also known as FDAP income.
USFI’s Withholding Responsibility under FATCA
A USFI must withhold 30 percent on payments of U.S. source FDAP income made to:
Non-Participating FFIs (NPFFIs);
Electing Participating Foreign Financial Institutions (PFFIs);
Non-compliant Passive Non-Financial Foreign Entities (NFFEs) with a Substantial U.S. Owner; or
Non-compliant Owner-Documented FFIs (ODFFIs) with a Specified U.S. Person owning certain equity or debt interests in the FFI.
Starting January 1, 2019, a USFI must withhold 30 percent of any gross proceeds from the sale or other disposition of any property that produces U.S. source FDAP income. Ultimately, a USFI will also be required to withhold on foreign pass-through payments made to an NPFFI.
A USFI is not required to withhold on natural persons because individual account holders are out of scope for USFIs under FATCA.
Internal Management Decisions
Depending on the size of the USFI, the tasks involved in the withholding process may cut across functional areas. The assignment of steps involved in the FATCA assessment and withholding process should be documented in written policies and processes so it is clear which group or individual has responsibility to:
Determine the character and sourcing of payments.
Calculate and allocate FATCA withholding.
Deposit withheld tax with the IRS.
File appropriate IRS tax forms.
Determine whether you have adequate written policies and procedures in place Ensure that the written document matches the actual processes in use. Train your employees in a group setting to ensure understanding across specific functions.