What are FATCA withholding needs in IGA-2 jurisdictions?
Participating FFI’s are required to withhold 30% FATCA tax on withholdable payments.
Involved as an advisor or project manager in FATCA, I came across the question, of whether Financial Institutions located in FATCA IGA-2 Jurisdictions have the obligation to withhold 30% of FATCA tax on withholdable payments.
The essay, based on the IGA-2 for Switzerland, explains the conditions when a Reporting Financial Institution located in IGA-2 jurisdictions does not have an obligation to withhold taxes.
You may ask why the essay especially is focused on Switzerland.
The reason for choosing Switzerland is driven by the broad requirements stipulated in the IGA, by which a FATCA withholding shall be suspended.
Under FATCA, any person in whatever capacity having control, receipt, custody, disposal, or payment of any withholdable payment (Withholding Agent) making a withholdable payment to a Foreign Financial Institute (FFI) must withhold 30% tax of the payment unless the withholding agent is able to treat the FFI as a participating FFI, deemed-compliant FFI, or exempt beneficial owner.
The term FFI refers to a non-US Financial Institution.
A withholding agent must also withhold 30% on a withholdable payment made to a payee that is a foreign entity other than an FFI (that is, a nonfinancial foreign entity, or NFFE) that fails to identify its substantial U.S. owners (or certify that it does not have any substantial U.S. owners) unless the payment is excepted from withholding under the regulations to section 1472.
A withholdable payment is any payment of interest (including original issue discount (OID)), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodic (FDAP) gains, profits, and income from sources within the United States, including gross proceeds from the sale or other disposition occurring after December 31, 2018, of any property that can produce interest or dividends from sources within the United States (IRC § 1473(1)(A); Reg. §1.1473-1(a))
A participating FFI (PFFI) is a withholding agent under FATCA and is required to withhold on a withholdable payment to the extent required under the FFI agreement, including on a payment made to an account holder that the FFI is required to treat as a recalcitrant account holder (see the definition below).
Each Model-2 IGA contains a so-called suspension rule which clearly states “that the United States shall not require a Reporting [FATCA Partner] Financial Institution to withhold tax under section 1471 or 1472 Reporting” with respect to an account held by a recalcitrant account holder if certain conditions are met.
3.1. Suspension rule Switzerland
The suspension rule is titled “Article 7 - Suspension of Rules Relating to Non-Consenting U.S. Accounts”.
Within an IGA-Model 2, a Non-Consenting Client is defined as:
“The term “Non-Consenting U.S. Account” means a Pre-existing Account with respect to which
(i) A Reporting Swiss Financial Institution has determined that it is a U.S. Account in accordance with the due diligence procedures in Annex I,
(ii) the laws of Switzerland prohibit the reporting required under an FFI Agreement absent consent of the Account Holder,
(iii) the Reporting Swiss Financial Institution has sought, but was unable to obtain, the required consent to report or the Account Holder’s U.S. TIN; and
(iv) the Reporting Swiss Financial Institution has reported or was required to report, aggregate account information to the IRS as prescribed under sections 1471 to 1474 of the U.S. Internal Revenue Code and the relevant U.S. Treasury Regulations.”
The Suspension Rule itself states the following:
1. Subject to paragraph 2 of this Article, the United States shall not require a Reporting Swiss Financial Institution to withhold tax under section 1471 or 1472 of the U.S. Internal Revenue Code with respect to an account held by a recalcitrant account holder (as defined in Section 1471 of the U.S. Internal Revenue Code), or to close such account, if:
a) the Reporting Swiss Financial Institution complies with the directives in Article 3 with respect to the account; and
b) the Swiss Competent Authority exchanges with the IRS the requested information described in paragraph 1 of Article 5 within 8 months from the date of the receipt of such request.
2. If the condition of subparagraph b) of paragraph 1 of this Article is not fulfilled, the
Reporting Swiss Financial Institution shall be required to treat the account as held by a recalcitrant account holder as defined in relevant U.S. Treasury Regulations, including by withholding tax where required by those U.S. Treasury Regulations, beginning on the date that is 8 months after the date of the receipt of the request described in paragraph 1 of Article 5 and ending on the date on which the Swiss Competent Authority exchanges the requested information with the IRS. For purposes of Swiss law, the amount of tax withheld on payments to a Financial Account, including a Cash Value Insurance Contract and an Annuity Contract, shall be borne by the Account Holder.
Just for completness, Article 5 Paragraph 1 mentioned in the above-cited Suspension Rule enables the U.S. Tax Authorities based on Article 26 of the double tax treaty between the U.S. and Switzerland to obtain data of recalcitrant account holders based on a Group Request.
The term recalcitrant account holder means any holder of an account maintained by an FFI if such account holder is not an FFI (or presumed to be an FFI under §1.1471-3(f)), the account does not meet the requirements of the exception to U.S. account status described in paragraph (a)(4) of this section (for depository accounts with a balance of $50,000 or less) and does not qualify for any of the exceptions from the documentation requirements described in §1.1471-4(c)(3)(iii), (c)(4)(iii), (c)(5)(iii), (c)(5)(iv)(E) (or the participating FFI elects to forego such exceptions) and
(i) The account holder fails to comply with requests by the FFI for the documentation or information that is required under §1.1471-4(c) for determining the status of such account as a U.S. account or other than a U.S. account; [§1.1471-5(g)(2)(i)]
(ii) The account holder fails to provide a valid Form W-9 upon request from the FFI or fails to provide a correct name and TIN combination upon request from the FFI when the FFI has received notice from the IRS indicating that the name and TIN combination reported by the FFI for the account holder is incorrect; [§1.1471-5(g)(2)(ii)]
(iii) If foreign law would (but for a waiver) prevent reporting by the FFI (or branch or division thereof) of the information described in §1.1471-4(d)(3) or (5) with respect to such account, the account holder (or substantial U.S. owner of an account holder that is a U.S. owned foreign entity) fails to provide a valid and effective waiver to permit such reporting; or [§1.1471-5(g)(2)(iii)]
(iv) The account holder provides the documentation described in §1.1471-3(d)(12) to establish its status as a passive NFFE (other than a WP or WT) but fails to provide the information regarding its owners required under §1.1471-3(d)(12)(iii). [§1.1471-5(g)(2)(iv)]
3.3. Modification of Withholding Requirements for PFFI
The IRS Revenue Procedure 2014-38 (“Procedure”) provides a modification of Withholding Requirements for a Reporting Model 2 FFI.
In Section 4.B “Modification of Withholding Requirements for a Reporting Model 2 FFI" of the Procedure it is stated that:
“Notwithstanding the withholding requirements described in section 4.01(A) of this agreement, a reporting Model 2 FFI is not required to deduct and withhold tax on any withholdable payment made to its non-consenting U.S. accounts, provided that the conditions under the applicable Model 2 IGA regarding the suspension of withholding relating to non-consenting U.S. accounts are met. If such conditions are not met, the reporting Model 2 FFI is required to treat its non-consenting U.S. accounts as held by recalcitrant account holders and is required to deduct and withhold a tax equal to 30 percent of any withholdable payment made to such accounts in accordance with section 4.02 of this agreement. In addition, a reporting Model 2 FFI is required to withhold in accordance with section 4.02 of this agreement on any withholdable payment made to a nonparticipating FFI that is an account holder or a payee other than an account holder.”
Following the analysis, I concluded that Reporting Financial Institutions are not liable to withhold 30% of FATCA tax provided the account has been reported as a recalcitrant account under FATCA.
Armenia, Austria, Bermuda, Chile, Hong Kong, Iraq, Japan, Macao, Moldova, Nicaragua, Paraguay, San Marino, Switzerland, Taiwan
 IRS Publication 515 – Page 4
 Article 3 Directive to Swiss Financial Institutions