FATCA: Limited Conditional Status Terminates on January 1, 2017

December 22, 2016

To provide a bridge between the start of FATCA and the time necessary for jurisdictions to enter into Intergovernmental Agreements (IGAs) and implement local legislation, the IRS created a limited conditional status.  Pursuant to this status, certain branches and Foreign Financial Institutions (FFIs) were able to register with the IRS as a “Limited Branch” or “Limited FFI.”


As of January 1, 2017, the “Limited” status terminates.  If a Limited Branch or Limited FFI is still unable to fully comply with FATCA due to local law restrictions, then it may taint the FFI to which the Limited Branch belongs and the FFIs in the Expanded Affiliated Group (EAG) to which the Limited FFI or Limited Branch belong.


What Does “Limited” Status Mean?


A Limited Branch or a Limited FFI is an FFI that cannot comply with the terms of an FFI Agreement or otherwise comply with FATCA due to local law restrictions but which agrees to satisfy certain obligations for its treatment as a Limited Branch or Limited FFI.


These obligations include:

 

  • If possible, obtain a valid and effective waiver of the local law precluding FATCA compliance.

  • Agree that the Limited Branch or Limited FFI will not open accounts that it is required to treat as U.S. accounts or accounts held by nonparticipating FFIs (NPFFIs).

  • Identify itself to withholding agents as an NPFFI.

  • Report certain U.S. accounts to the IRS, close these U.S. accounts within a reasonable period of time, or transfer these U.S. accounts to a U.S. financial institution (USFI), a participating FFI (PFFI), or a reporting Model 1 FFI.

  • With respect to recalcitrant account holders and accounts held by NPFFIs, withhold, block, close within a reasonable period of time, or transfer each such account to a USFI, a PFFI, or a reporting Model 1 FFI.

  • Follow FATCA due diligence rules.

 

Why Is The Limited Status Transitional Rule Important?

 

The IRS created a transitional rule for branches of FFIs and FFIs located in a jurisdiction which does not permit compliance with FATCA.  This rule requires the Limited Branch and Limited FFI to register with the IRS in the FATCA portal.


Neither a Limited Branch nor a Limited FFI receives a GIIN through the IRS FATCA registration process.  In addition, the Limited Branch and Limited FFI (regardless of whether either is a member of an EAG) must identify itself to withholding agents as an NPFFI.


Each FFI that is a member of an EAG must have one of the following FATCA statuses: PFFI, Deemed-Compliant FFI, or Exempt Beneficial Owner.  Absent each entity maintaining one of these statuses, any PFFI or Registered Deemed-Compliant FFIs (RDC FFI) will not be able to maintain its own FATCA status.  Thus, if any one member of an EAG is or becomes an NPFFI, all members of the EAG might become NPFFIs.  And as NPFFIs, all members might be subject to withholding.


The transitional rule permits the Limited Branch or Limited FFI to declare itself non-compliant due to local laws but this non-compliance (subject to certain rules) does not change the status of the other members of the EAG or the FFI to which the Limited Branch belongs.


However, when the Limited status expires on January 1, 2017 the other members of the EAG or the FFI to which the Limited Branch belongs may no longer be able to obtain or maintain status as a PFFI or deemed-compliant FFI.


What Happens to Previously Registered Limited Branches and Limited FFIs?

 

A branch of a PFFI that is registering as a Limited Branch is confirming that it will comply with the terms applicable to a Limited Branch.  An FFI that is registering as a Limited FFI is confirming that it will comply with the terms applicable to a Limited FFI.  GIINs will not be issued to a Limited Branch or Limited FFI.


Once a Limited Branch or Limited FFI becomes able to comply with the terms of the FFI agreement or becomes a PFFI or deemed-compliant FFI pursuant to an applicable IGA, it should amend its IRS FATCA registration to reflect its changed FATCA status. Limited Branch and Limited FFI will no longer be valid statuses as of January 1, 2017.


After December 31, 2016, all new and existing Limited Branch and Limited FFI IRS FATCA registrations will be placed in “registration incomplete” status in the IRS FATCA portal.

 

In addition to updating the status of Limited Branches and Limited FFIs in the IRS FATCA portal, it will be necessary to evaluate the current status of PFFIs and Registered Deemed-Compliant FFIs to the extent their status has been adversely impacted by non-compliant branches and FFIs.


For further guidance on Limited Branches and Limited FFIs and assistance in amending the IRS FATCA registrations for your Limited Branches and Limited FFIs in the IRS FATCA portal, contact me at elizabeth@elizabethmcmorrowlaw.com

 

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