Regulations Relating to Information Reporting by Foreign Financial Institutions and Withholding on Certain Payments to Foreign Financial Institutions and Other Foreign Entities, 9022-9109 [2012-2979]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 77, Number 31 (Wednesday, February 15, 2012)]
[Proposed Rules]
[Pages 9022-9109]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-2979]



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Vol. 77

Wednesday,

No. 31

February 15, 2012

Part III





 Department of the Treasury





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 Internal Revenue Service





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26 CFR Parts 1 and 301





 Regulations Relating to Information Reporting by Foreign Financial 
Institutions and Withholding on Certain Payments to Foreign Financial 
Institutions and Other Foreign Entities; Proposed Rule

Federal Register / Vol. 77 , No. 31 / Wednesday, February 15, 2012 / 
Proposed Rules

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 301

[REG-121647-10]
RIN 1545-BK68


Regulations Relating to Information Reporting by Foreign 
Financial Institutions and Withholding on Certain Payments to Foreign 
Financial Institutions and Other Foreign Entities

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations under chapter 4 of 
Subtitle A (sections 1471 through 1474) of the Internal Revenue Code of 
1986 (Code) regarding information reporting by foreign financial 
institutions (FFIs) with respect to U.S. accounts and withholding on 
certain payments to FFIs and other foreign entities. These regulations 
affect persons making certain U.S.-related payments to FFIs and other 
foreign entities and payments by FFIs to other persons. This document 
also provides a notice of a public hearing on these proposed 
regulations.

DATES: Written or electronic comments must be received by April 30, 
2012. Requests to speak and outlines of topics to be discussed at the 
public hearing scheduled for May 15, 2012, at 10 a.m. must be received 
by May 1, 2012.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-121647-10), room 
5205, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-
121647-10), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW., Washington, DC, or sent electronically via the Federal 
eRulemaking Portal at www.regulations.gov (IRS REG-121647-10). The 
public hearing will be held in the auditorium, Internal Revenue 
Building, 1111 Constitution Avenue NW., Washington, DC

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
John Sweeney, (202) 622-3840; concerning submissions of comments, the 
hearing, and/or to be placed on the building access list to attend the 
hearing, Oluwafunmilayo Taylor, 
Oluwafunmilayo.P.Taylor@irscounsel.treas.gov, (202) 622-7180 (not toll 
free numbers).

SUPPLEMENTARY INFORMATION:

Background

I. In General

    This document contains proposed amendments to 26 CFR part 1 under 
sections 1471 through 1474 of the Code. On March 18, 2010, the Hiring 
Incentives to Restore Employment Act of 2010, Public Law 111-147 (the 
HIRE Act), added chapter 4 of Subtitle A (chapter 4), comprised of 
sections 1471 through 1474, to the Code. These provisions were 
originally introduced as part of the Foreign Account Tax Compliance Act 
of 2009 (H.R. 3933), commonly referred to as FATCA.
    Chapter 4 generally requires foreign financial institutions (FFIs) 
to provide information to the Internal Revenue Service (IRS) regarding 
their United States accounts (U.S. accounts). Chapter 4 also requires 
certain non-financial foreign entities (NFFEs) to provide information 
on their substantial United States owners (substantial U.S. owners) to 
withholding agents. Chapter 4 imposes a withholding tax on certain 
payments to FFIs and NFFEs that fail to comply with their obligations.
    Since the enactment of chapter 4, the Department of the Treasury 
(Treasury Department) and the IRS have issued preliminary guidance on 
the implementation of chapter 4. See Notice 2010-60, 2010-37 I.R.B. 
329, Notice 2011-34, 2011-19 I.R.B. 765, and Notice 2011-53, 2011-32 
I.R.B. 124 (collectively, the FATCA Notices). See Sec.  
601.601(d)(2)(ii)(b). The Treasury Department and the IRS received 
numerous comments in response to the FATCA Notices, as well as on 
chapter 4 more generally. These comments were carefully considered in 
developing these proposed regulations.

II. Chapter 4 in the Context of the U.S. Federal Income Tax Laws

    Like the tax systems in many countries, the U.S. Federal income tax 
system relies on voluntary compliance. That is, taxpayers are expected 
to compute, report, and remit their Federal income tax liability each 
year. Also, as is the case in many countries, third-party payors of 
certain items are required to report these amounts to the IRS. Such 
reporting serves as an important and long-standing check on voluntary 
compliance.
    The reporting and diligence rules applicable to third-party payors 
are comprehensive. In particular, chapter 61 of subtitle A of the Code 
(chapter 61), comprised in relevant part of sections 6041 through 6049, 
requires certain payors to document their third-party payees and report 
certain types of payments (for example interest, dividends, and gross 
proceeds from broker transactions) made to those payees. These rules 
are subject to exceptions for certain non-U.S. payors (including many 
FFIs), certain payments of foreign source income, and certain payments 
to foreign persons. In addition, chapter 3 of subtitle A of the Code 
(chapter 3), comprised of sections 1441 through 1464, generally 
requires withholding agents to document their payees and to withhold 
and report with respect to certain U.S. source payments made to foreign 
persons. This third-party information reporting assists taxpayers in 
correctly computing and reporting their tax liabilities, increases 
compliance with tax obligations, reduces the incidence of and 
opportunities for tax evasion, and thus helps to maintain the fairness 
of the U.S. Federal income tax system.
    As a result of recent improvements in international communications 
and the associated globalization of the world economy, U.S. taxpayers' 
investments have become increasingly global in scope. FFIs now provide 
a significant proportion of the investment opportunities for, and act 
as intermediaries with respect to the investments of, U.S. taxpayers. 
Like U.S. financial institutions, FFIs are generally in the best 
position to identify and report with respect to their U.S. customers. 
Absent such reporting by FFIs, some U.S. taxpayers may attempt to evade 
U.S. tax by hiding money in offshore accounts. To prevent this abuse of 
the voluntary compliance system and address the use of offshore 
accounts to facilitate tax evasion, it is essential in today's global 
investment climate that reporting be available with respect to both the 
onshore and offshore accounts of U.S. taxpayers. This information 
reporting strengthens the integrity of the voluntary compliance system 
by placing U.S. taxpayers that have access to international investment 
opportunities on an equal footing with U.S. taxpayers that do not have 
such access or otherwise choose to invest within the United States.
    To this end, chapter 4 extends the scope of the U.S. information 
reporting regime to include FFIs that maintain U.S. accounts. Chapter 4 
also imposes increased disclosure obligations on certain NFFEs that 
present a high risk of U.S. tax avoidance. In addition, chapter 4 
provides for withholding on FFIs and NFFEs that do not comply with the 
reporting and other requirements of chapter 4. This withholding 
generally may be credited against the U.S. income tax liability of the 
beneficial owner of the payment to which the withholding is 
attributable, and generally may be

[[Page 9023]]

refunded to the extent the withholding exceeds such liability. An FFI 
that does not comply with the requirements of section 1471(b), however, 
and that beneficially owns the payment from which tax is withheld under 
chapter 4, may not receive a credit or refund of such tax except to the 
extent required by a treaty obligation of the United States.
    Recognizing that there are costs associated with the implementation 
of any new reporting regime, the Treasury Department and the IRS have 
considered carefully all comments received and have met extensively 
with stakeholders to develop an implementation approach that achieves 
an appropriate balance between fulfilling the important policy 
objectives of chapter 4 and minimizing the burdens imposed on 
stakeholders. Further to this end, the Treasury Department and the IRS 
will continue to engage with interested stakeholders, including foreign 
governments, in connection with finalizing these proposed regulations 
regarding the efficient and effective implementation of chapter 4. In 
particular, to minimize burden, facilitate coordination with local law 
restrictions, and improve collaboration in the battle against offshore 
tax evasion, the Treasury Department and the IRS are considering, in 
consultation with foreign governments, an alternative approach to 
implementation whereby an FFI could satisfy the reporting requirements 
of chapter 4 if: (1) the FFI collects the information required under 
chapter 4 and reports this information to its residence country 
government; and (2) the residence country government enters into an 
agreement to report this information annually to the IRS, as required 
by chapter 4, pursuant to an income tax treaty, tax information 
exchange agreement, or other agreement with the United States. 
Moreover, consistent with the policies underlying chapter 4, the 
Treasury Department and the IRS remain committed to working 
cooperatively with foreign jurisdictions on multilateral efforts to 
improve transparency and information exchange on a global basis.

III. Statutory Provisions and FATCA Notices

A. Statutory Provisions
    Section 1471(a) requires any withholding agent to withhold 30 
percent of any withholdable payment to an FFI that does not meet the 
requirements of section 1471(b). A withholdable payment is defined in 
section 1473(1) to mean, subject to certain exceptions: (i) any payment 
of interest, dividends, rents, salaries, wages, premiums, annuities, 
compensations, remunerations, emoluments, and other fixed or 
determinable annual or periodical gains, profits, and income (FDAP 
income), if such payment is from sources within the United States; and 
(ii) any gross proceeds from the sale or other disposition of any 
property of a type which can produce interest or dividends from sources 
within the United States.
    An FFI meets the requirements of section 1471(b) if it either 
enters into an agreement (an FFI agreement) with the IRS under section 
1471(b)(1) to perform certain obligations or meets requirements 
prescribed by the Treasury Department and the IRS to be deemed to 
comply with the requirements of section 1471(b). An FFI is defined as 
any financial institution that is a foreign entity, other than a 
financial institution organized under the laws of a possession of the 
United States (generally referred to as a U.S. territory in this 
preamble). For this purpose, section 1471(d)(5) defines a financial 
institution as, except to the extent provided by the Secretary, any 
entity that: (i) Accepts deposits in the ordinary course of a banking 
or similar business; (ii) as a substantial portion of its business, 
holds financial assets for the account of others; or (iii) is engaged 
(or holding itself out as being engaged) primarily in the business of 
investing, reinvesting, or trading in securities, partnership 
interests, commodities, or any interest in such securities, partnership 
interests, or commodities.
    Section 1471(b)(1)(A) and (B) requires an FFI that enters into an 
FFI agreement (a participating FFI) to identify its U.S. accounts and 
comply with verification and due diligence procedures prescribed by the 
Secretary. A U.S. account is defined under section 1471(d)(1) as any 
financial account held by one or more specified United States persons, 
as defined in section 1473(3), (specified U.S. persons) or United 
States owned foreign entities (U.S. owned foreign entities), subject to 
certain exceptions. Section 1471(d)(2) defines a financial account to 
mean, except as otherwise provided by the Secretary, any depository 
account, any custodial account, and any equity or debt interest in an 
FFI, other than interests that are regularly traded on an established 
securities market. A U.S. owned foreign entity is defined in section 
1471(d)(3) as any foreign entity that has one or more substantial U.S. 
owners (as defined in section 1473(2)).
    A participating FFI is required under section 1471(b)(1)(C) and (E) 
to report certain information on an annual basis to the IRS with 
respect to each U.S. account and to comply with requests for additional 
information by the Secretary with respect to any U.S. account. The 
information that must be reported with respect to each U.S. account 
includes: (i) The name, address, and taxpayer identifying number (TIN) 
of each account holder who is a specified U.S. person (or, in the case 
of an account holder that is a U.S. owned foreign entity, the name, 
address, and TIN of each specified U.S. person that is a substantial 
U.S. owner of such entity); (ii) the account number; (iii) the account 
balance or value; and (iv) except to the extent provided by the 
Secretary, the gross receipts and gross withdrawals or payments from 
the account (determined for such period and in such manner as the 
Secretary may provide). In lieu of reporting account balance or value 
and reporting gross receipts and gross withdrawals or payments, a 
participating FFI may, subject to conditions provided by the Secretary, 
elect under section 1471(c)(2) to report the information required under 
sections 6041, 6042, 6045, and 6049 as if such institution were a U.S. 
person and each holder of such U.S. account that is a specified U.S. 
person or U.S. owned foreign entity were a natural person and citizen 
of the United States. If foreign law would prevent the FFI from 
reporting the required information absent a waiver from the account 
holder, and the account holder fails to provide a waiver within a 
reasonable period of time, the FFI is required under section 
1471(b)(1)(F) to close the account.
    Section 1471(b)(1)(D)(i) requires a participating FFI to withhold 
30 percent of any passthru payment to a recalcitrant account holder or 
to an FFI that does not meet the requirements of section 1471(b) 
(nonparticipating FFI). A passthru payment is defined in section 
1471(d)(7) as any withholdable payment or other payment to the extent 
attributable to a withholdable payment. Section 1471(d)(6) defines a 
recalcitrant account holder as any account holder that fails to provide 
the information required to determine whether the account is a U.S. 
account, or the information required to be reported by the FFI, or that 
fails to provide a waiver of a foreign law that would prevent 
reporting. A participating FFI may, subject to such requirements as the 
Secretary may provide, elect under section 1471(b)(3) not to withhold 
on passthru payments, and instead be subject to withholding on payments 
it receives, to the extent those payments are allocable to recalcitrant 
account

[[Page 9024]]

holders or nonparticipating FFIs. Section 1471(b)(1)(D)(ii) requires a 
participating FFI that does not make such an election to withhold on 
passthru payments it makes to any participating FFI that makes such an 
election.
    Section 1471(e) provides that the requirements of the FFI agreement 
shall apply to the U.S. accounts of the participating FFI and, except 
as otherwise provided by the Secretary, to the U.S. accounts of each 
other FFI that is a member of the same expanded affiliated group, as 
defined in section 1471(e)(2).
    Section 1471(f) exempts from withholding under section 1471(a) 
certain payments beneficially owned by certain persons, including any 
foreign government, international organization, foreign central bank of 
issue, or any other class of persons identified by the Secretary as 
posing a low risk of tax evasion.
    Section 1472(a) requires a withholding agent to withhold 30 percent 
of any withholdable payment to an NFFE if the payment is beneficially 
owned by the NFFE or another NFFE, unless the requirements of section 
1472(b) are met with respect to the beneficial owner of the payment. 
Section 1472(d) defines an NFFE as any foreign entity that is not a 
financial institution as defined in section 1471(d)(5).
    The requirements of section 1472(b) are met with respect to the 
beneficial owner of a payment if: (i) The beneficial owner or payee 
provides the withholding agent with either a certification that such 
beneficial owner does not have any substantial U.S. owners, or the 
name, address, and TIN of each substantial U.S. owner; (ii) the 
withholding agent does not know or have reason to know that any 
information provided by the beneficial owner or payee is incorrect; and 
(iii) the withholding agent reports the information provided to the 
Secretary.
    Section 1472(c)(1) provides that withholding under section 1472(a) 
does not apply to payments beneficially owned by certain classes of 
persons, including any class of persons identified by the Secretary. In 
addition, section 1472(c)(2) provides that withholding under section 
1472(a) does not apply to any class of payment identified by the 
Secretary for purposes of section 1472(c) as posing a low risk of tax 
evasion.
    Section 1474(a) provides that every person required to withhold and 
deduct any tax under chapter 4 is made liable for such tax and is 
indemnified against the claims and demands of any person for the amount 
of any payments made in accordance with the provisions of chapter 4. In 
general, the beneficial owner of a payment is entitled to a refund for 
any overpayment of tax actually due under other provisions of the Code. 
However, with respect to any tax properly deducted and withheld under 
section 1471 from a payment beneficially owned by an FFI, section 
1474(b)(2) provides that the FFI is not entitled to a credit or refund, 
except to the extent required by a treaty obligation of the United 
States (and, if a credit or refund is required by a treaty obligation 
of the United States, no interest shall be allowed or paid with respect 
to such credit or refund). In addition, section 1474(b)(3) provides 
that no credit or refund shall be allowed or paid with respect to any 
tax properly deducted and withheld under chapter 4 unless the 
beneficial owner of the payment provides the Secretary with such 
information as the Secretary may require to determine whether such 
beneficial owner is a U.S. owned foreign entity and the identity of any 
substantial U.S. owners of such entity.
    Section 1474(c) provides that information provided under chapter 4 
is confidential under rules similar to section 3406(f), except that the 
identity of an FFI that meets the requirements of section 1471(b) is 
not treated as return information for purposes of section 6103.
    Section 1474(d) provides that the Secretary shall provide for the 
coordination of chapter 4 with other withholding provisions under the 
Code, including providing for the proper crediting of amounts deducted 
and withheld under chapter 4 against amounts required to be deducted 
and withheld under other provisions.
    Section 1474(f) provides that the Secretary shall prescribe such 
regulations or other guidance as may be necessary or appropriate to 
carry out the purposes of, and prevent the avoidance of, chapter 4.
B. FATCA Notices
    On August 29, 2010, the Treasury Department and the IRS released 
Notice 2010-60, which provided preliminary guidance regarding the 
implementation of chapter 4. In particular, Notice 2010-60: (i) Defined 
the scope of certain grandfathered obligations; (ii) provided initial 
guidance on what entities would be considered FFIs and NFFEs; (iii) set 
forth the account due diligence procedures for FFIs and U.S. financial 
institutions with respect to new and preexisting accounts held by 
individuals and entities; (iv) provided initial guidance on the 
information required to be reported by FFIs with respect to their U.S. 
accounts and recalcitrant account holders; and (v) requested further 
comments on a number of issues.
    On April 8, 2011, the Treasury Department and the IRS released 
Notice 2011-34, which modified and supplemented the guidance in Notice 
2010-60. Specifically, Notice 2011-34: (i) Modified the account due 
diligence procedures for preexisting accounts held by individuals; (ii) 
provided initial guidance regarding the definition and identification 
of passthru payments; (iii) provided guidance on initial categories of 
FFIs that would be deemed compliant with the requirements of section 
1471(b); (iv) modified and supplemented the guidance in Notice 2010-60 
regarding the reporting required of FFIs with respect to their U.S. 
accounts; (v) provided initial guidance regarding the interaction of 
the qualified intermediary (QI) regime and chapter 4; and (vi) provided 
initial guidance regarding the application of section 1471(b) to 
expanded affiliated groups.
    On July 14, 2011, the Treasury Department and the IRS released 
Notice 2011-53, which provides for phased implementation of certain 
requirements under chapter 4, and discusses certain substantive and 
procedural matters.

Explanation of Provisions

I. Executive Summary

    These proposed regulations seek to implement the chapter 4 
reporting and withholding regime efficiently and effectively by 
establishing adequate lead times to allow system development and by 
minimizing the overall compliance burdens in a manner that is 
consistent with chapter 4's enforcement goals. To accomplish this goal, 
the proposed regulations incorporate the guidance described in the 
FATCA Notices and, in response to comments and further consideration, 
revise and refine the rules discussed therein. The proposed regulations 
also provide guidance on topics that were not addressed in the FATCA 
Notices.
    The proposed regulations take into account the numerous helpful 
comments received, provide extensive guidance on all major aspects of 
the implementation of chapter 4, and, in response to requests received 
by the Treasury Department and the IRS, provide detail and certainty on 
the scope of obligations required under chapter 4. To facilitate review 
of this detailed operational guidance, the following section provides a 
summary of the most significant modifications and additions the 
proposed regulations

[[Page 9025]]

make to the guidance provided in the FATCA Notices, an overview of the 
obligations of FFIs, and the timeline for phased implementation as 
currently proposed.
A. Modifications and Additions to FATCA Notices
    Significant modifications and additions to the guidance in the 
FATCA Notices include the following:
    1. Expanded Scope of ``Grandfathered Obligations.'' Section 
501(d)(2) of the HIRE Act provides that no amount shall be required to 
be deducted or withheld from any payment under any obligation 
outstanding on March 18, 2012, or from the gross proceeds from any 
disposition of such an obligation. To facilitate implementation of 
chapter 4 by withholding agents and FFIs, the proposed regulations 
exclude from the definition of withholdable payment and passthru 
payment any payment made under an obligation outstanding on January 1, 
2013, and any gross proceeds from the disposition of such an 
obligation.
    2. Transitional Rules for Affiliates with Legal Prohibitions on 
Compliance. Section 1471(e) provides that the requirements of the FFI 
agreement shall apply to the U.S. accounts of the participating FFI 
and, except as otherwise provided by the Secretary, to the U.S. 
accounts of each other FFI that is a member of the same expanded 
affiliated group. Notice 2011-34 states that the Treasury Department 
and the IRS intend to require that each FFI that is a member of an 
expanded affiliated group must be a participating FFI or deemed-
compliant FFI in order for any FFI in the expanded affiliated group to 
become a participating FFI. Recognizing that some jurisdictions have in 
place laws that prohibit an FFI's compliance with certain of chapter 
4's requirements, the proposed regulations, pursuant to the authority 
granted in section 1471(e), provide a two-year transition, until 
January 1, 2016, for the full implementation of this requirement. 
During this transitional period, an FFI affiliate in a jurisdiction 
that prohibits the reporting or withholding required by chapter 4 will 
not prevent the other FFIs within the same expanded affiliated group 
from entering into an FFI agreement, provided that the FFI in the 
restrictive jurisdiction agrees to perform due diligence to identify 
its U.S. accounts, maintain certain records, and meet certain other 
requirements. Similar rules apply to branches of FFIs that are subject 
to comparable legal prohibitions on compliance.
    3. Additional Categories of Deemed-Compliant FFIs. Section 
1471(b)(2) provides that an FFI may be deemed to comply with the 
requirements of section 1471(b) if it meets certain requirements. 
Notice 2011-34 provides initial guidance regarding certain categories 
of FFIs that will be deemed to comply with the requirements of section 
1471(b). The proposed regulations expand the guidance in Notice 2011-34 
and provide additional categories of deemed-compliant institutions. The 
expansion of categories of deemed-compliant institutions is intended to 
focus the application of chapter 4's obligations on financial 
institutions that provide services to the global investment community 
and reduce or eliminate burdens on truly local entities and other 
entities for which entering into an FFI agreement is not necessary to 
carry out the purposes of chapter 4.
    4. Modification of Due Diligence Procedures for the Identification 
of Accounts. Section 1471(b) requires participating FFIs to identify 
their U.S. accounts. Notices 2010-60 and 2011-34 provide guidance 
regarding the due diligence procedures that participating FFIs will be 
required to undertake to identify their U.S. accounts. A number of 
comments suggested modifications to that guidance, in particular with 
respect to preexisting accounts, to reduce the administrative burden on 
FFIs. To address these concerns in a manner that is consistent with the 
policy objectives of chapter 4, the proposed regulations rely primarily 
on electronic reviews of preexisting accounts. For preexisting 
individual accounts that are offshore obligations, manual review of 
paper records is limited to accounts with a balance or value that 
exceeds $1,000,000 (unless the electronic searches meet certain 
requirements, in which case manual review is not required). In 
addition, the proposed regulations provide detailed guidance on the 
precise scope of paper records required to be searched. Additionally, 
with respect to preexisting accounts, individual accounts with a 
balance or value of $50,000 or less, and certain cash value insurance 
contracts with a value of $250,000 or less, are excluded from the due 
diligence procedure. With respect to preexisting entity accounts, a 
number of burden-reducing measures are proposed, including exclusions 
of accounts of $250,000 or less and extended reliance on information 
gathered in the context of the due diligence required to comply with 
anti-money laundering/``know your customer'' (AML/KYC) rules, and 
simplified procedures to identify the chapter 4 status of preexisting 
entity accounts. With respect to new accounts, the proposed due 
diligence rules rely extensively on an FFI's existing customer intake 
procedures. Accordingly, the proposed regulations generally do not 
require an FFI to make significant modifications to the information 
collected on customer intake, other than with respect to account 
holders identified as FFIs, as passive investment entities, or as 
having U.S. indicia.
    5. Guidance on Procedures Required to Verify Compliance. Section 
1471(b)(1)(B) requires a participating FFI to comply with such 
verification procedures as the Secretary may require with respect to 
the identification of U.S. accounts. Notice 2010-60 states that the 
Treasury Department and the IRS were exploring the possibility of 
relying on written certifications by high-level management employees 
regarding the steps taken to comply with chapter 4, and Notice 2011-34 
provides further guidance on the certifications to be provided by 
officers of a participating FFI. The proposed regulations modify and 
supplement the guidance in Notices 2010-60 and 2011-34 by providing 
that responsible FFI officers will be expected to certify that the FFI 
has complied with the terms of the FFI agreement. Verification of such 
compliance through third-party audits is not mandated. If an FFI 
complies with the obligations set forth in an FFI agreement, it will 
not be held strictly liable for failure to identify a U.S. account.
    6. Refinement of the Definition of Financial Account. Section 
1471(d)(2) defines a financial account to mean, except as otherwise 
provided by the Secretary, any depository account, any custodial 
account, and any equity or debt interest in an FFI, other than 
interests that are regularly traded on an established securities 
market. The proposed regulations refine the definition of financial 
accounts to focus on traditional bank, brokerage, money market 
accounts, and interests in investment vehicles, and to exclude most 
debt and equity securities issued by banks and brokerage firms, subject 
to an anti-abuse rule.
    7. Extension of the Transition Period for the Scope of Information 
Reporting. Notice 2011-53 provides for phased implementation of the 
reporting required under chapter 4 with respect to U.S. accounts. 
Pursuant to Notice 2011-53, only identifying information (name, 
address, TIN, and account number) and account balance or value of U.S. 
accounts would be required to be reported in 2014 (with respect to 
2013). Numerous commentators indicated that they would need additional 
time to make the systems adjustments necessary

[[Page 9026]]

to be able to report income and gross proceeds. To facilitate the 
implementation of chapter 4 by FFIs, the proposed regulations provide 
that reporting on income will be phased in beginning in 2016 (with 
respect to the 2015 calendar year), and reporting on gross proceeds 
will begin in 2017 (with respect to the 2016 calendar year). In 
addition, the proposed regulations provide that FFIs may elect to 
report information either in the currency in which the account is 
maintained or in U.S. dollars.
    8. Passthru Payments. Section 1471(b)(1)(D) requires participating 
FFIs to withhold on passthru payments made to nonparticipating FFIs and 
recalcitrant account holders. Notice 2011-53 states that participating 
FFIs will not be obligated to withhold on passthru payments that are 
not withholdable payments (foreign passthru payments) made before 
January 1, 2015. The Treasury Department and the IRS have received 
numerous comments expressing concern about the costs, administrative 
complexity, and legal impediments associated with identifying and 
withholding on passthru payments. The comments indicated that, without 
additional time to work through these issues, it would be impossible 
for many FFIs to commit to fulfill their obligations under chapter 4. 
In recognition of these concerns, and to facilitate implementation of 
the chapter 4 rules by FFIs, the proposed regulations provide that 
withholding will not be required with respect to foreign passthru 
payments before January 1, 2017. Instead, until withholding applies, to 
reduce incentives for nonparticipating FFIs to use participating FFIs 
to block the application of the chapter 4 rules, the proposed 
regulations require participating FFIs to report annually to the IRS 
the aggregate amount of certain payments made to each nonparticipating 
FFI. With respect to the scope and ultimate implementation of 
withholding on foreign passthru payments, the Treasury Department and 
the IRS request comments on approaches to reduce burden, for example, 
by providing a de minimis exception from foreign passthru payment 
withholding and a simplified computational approach or safe harbor 
rules to determine an FFI's passthru payment percentage. In the case of 
jurisdictions that enter into agreements to facilitate FATCA 
implementation, the Treasury Department and the IRS will work with the 
governments of such jurisdictions to develop practical alternative 
approaches to achieving the policy objectives of passthru payment 
withholding. In addition, where such an agreement provides for the 
foreign government to report to the IRS information regarding U.S. 
accounts and recalcitrant account holders, FFIs in such jurisdictions 
may not be required to withhold on any foreign passthru payments to 
recalcitrant account holders.
B. Summary of Obligations of FFIs
    The proposed regulations provide a detailed explanation of how an 
FFI can satisfy the obligations imposed by the statutory provisions of 
chapter 4 and thus avoid withholding. A summary of the proposed rules 
follows.
1. Due Diligence Required To Identify U.S. Accounts
    Chapter 4 requires FFIs to identify U.S. accounts, which include 
both accounts held by U.S. individuals and certain U.S. entities, and 
accounts held by foreign entities with substantial U.S. owners 
(generally, owners with a greater than ten percent interest). To 
provide certainty, and minimize costs and burdens in a manner that is 
consistent with policy objectives, the proposed regulations outline the 
due diligence required to be undertaken by FFIs to identify U.S. 
accounts. For this purpose, the proposed regulations distinguish 
between the diligence expected with respect to individual accounts and 
entity accounts and between preexisting accounts and new accounts. It 
is intended that FFIs that adhere to the diligence guidelines outlined 
in the proposed regulations will be treated as compliant with the 
requirement to identify U.S. accounts and will not be held to a strict 
liability standard.
a. Preexisting Individual Accounts
     Accounts with a balance or value that does not exceed 
$50,000 are exempt from review, unless the FFI elects otherwise.
     Certain cash value insurance and annuity contracts held by 
individual account holders that are preexisting accounts with a value 
or balance of $250,000 or less are exempt from review, unless the FFI 
elects otherwise.
     Accounts that are offshore obligations with a balance or 
value that exceeds $50,000 ($250,000 for a cash value insurance or 
annuity contract) but does not exceed $1,000,000 are subject only to 
review of electronically searchable data for indicia of U.S. status. 
For this purpose, U.S. indicia include: (1) Identification of an 
account holder as a U.S. person; (2) a U.S. place of birth; (3) a U.S. 
address; (4) a U.S. telephone number; (5) standing instructions to 
transfer funds to an account maintained in the United States; (6) a 
power of attorney or signatory authority granted to a person with a 
U.S. address; or (7) a U.S. ``in-care-of'' or ``hold mail'' address 
that is the sole address the FFI has identified for the account holder. 
No further search of records or contact with the account holder is 
required unless U.S. indicia are found through the electronic search. 
The $1,000,000 threshold replaces the $500,000 threshold and the 
private banking test proposed in the FATCA Notices. Accordingly, FFIs 
will not be required to distinguish between private banking accounts 
and other accounts.
     Accounts with a balance that exceeds $1,000,000 are 
subject to review of electronic and non-electronic files for U.S. 
indicia, including an inquiry of the actual knowledge of any 
relationship manager associated with the account. To minimize burden, 
review of non-electronic files is limited to the current customer files 
and certain other documents, and is required only to the extent that 
the electronically searchable files do not contain sufficient 
information about the account holder.
b. New Individual Accounts
    For individual accounts opened after the effective date of an FFI's 
agreement, the FFI will be required to review the information provided 
at the opening of the account, including identification and any 
documentation collected under AML/KYC rules. If U.S. indicia are 
identified as part of that review, the FFI must obtain additional 
documentation or treat the account as held by a recalcitrant account 
holder. Accordingly, FFIs will generally not need to make significant 
changes to the information collected during the account opening process 
in order to identify U.S, accounts, except to the extent that U.S. 
indicia are identified.
c. Preexisting Entity Accounts
     Preexisting entity accounts with account balances of 
$250,000 or less are exempt from review until the account balance 
exceeds $1,000,000.
     For remaining preexisting entity accounts, FFIs can 
generally rely on AML/KYC records and other existing account 
information to determine whether the entity is an FFI, is a U.S. 
person, is excepted from the requirement to document its substantial 
U.S. owners (for example, because it is engaged in a nonfinancial trade 
or business), or is a passive investment entity (referred to in the 
regulations as a ``passive NFFE'').

[[Page 9027]]

    [cir] In the case of preexisting accounts of passive investment 
entities with account balances that do not exceed $1,000,000, FFIs may 
generally rely on information collected for AML/KYC due diligence 
purposes to identify substantial U.S. owners.
    [cir] In the case of preexisting entity accounts of passive 
investment entities with account balances that exceed $1,000,000, FFIs 
must obtain information regarding all substantial U.S. owners or a 
certification that the entity does not have substantial U.S. owners.
d. New Entity Accounts
     The following new entity accounts are exempt from 
documentation of substantial U.S. owners:
    [cir] Accounts of another FFI (other than an owner-documented FFI 
for which the participating FFI has agreed to perform reporting); and
    [cir] Accounts of an entity engaged in an active nonfinancial trade 
or business or otherwise excepted from documentation requirements.
     With respect to the remaining entities (essentially, 
passive investment entities), FFIs will be required to determine 
whether the entity has any substantial U.S. owners upon opening a new 
account, generally by obtaining a certification from the account 
holder.
2. Deemed-Compliant FFIs
    The statute grants the Treasury Department and the IRS regulatory 
authority to identify certain FFIs as ``deemed-compliant'' FFIs that 
may avoid withholding under chapter 4 without entering into an FFI 
agreement. The FATCA Notices identified certain types of FFIs that 
would be deemed to be compliant with chapter 4. The proposed 
regulations implement the exclusions provided in the FATCA Notices, and 
expand the categories of deemed-compliant FFIs to include certain banks 
and investment funds conducting business only with local clients, low-
risk entities, or participating FFIs, subject to restrictions designed 
to prevent the FFIs from being used for U.S. tax evasion. In addition, 
the proposed regulations expand the category of retirement plans that 
are treated as posing a low risk of tax evasion and thus are excepted 
from the chapter 4 requirements.
3. Transitional Rule for Affiliated Groups
    The proposed regulations provide that, until January 1, 2016, a 
nonparticipating FFI or branch that is subject to foreign laws that 
prohibit that FFI or branch from complying with the requirements of 
section 1471(b) will not disqualify an otherwise participating FFI 
group with which it is affiliated, as long as the FFI or branch 
complies with the due diligence procedures required of participating 
FFIs for identifying U.S. accounts and maintains records of the account 
holder documentation it collects. These ``limited FFI affiliates'' and 
``limited branches'' will be subject to withholding upon receipt of 
withholdable payments.
4. Phase-In of Reporting Obligations
    The proposed regulations phase in the reporting obligations of FFIs 
as follows:
     For reporting in 2014 and 2015 (with respect to calendar 
years 2013 and 2014), participating FFIs are required to report only 
name, address, TIN, account number, and account balance with respect to 
U.S. accounts.
     Beginning with reporting in 2016 (with respect to calendar 
year 2015), in addition to the aforementioned information, income 
associated with U.S. accounts must be reported.
     Beginning with reporting in 2017 (with respect to calendar 
year 2016), full reporting, including information on the gross proceeds 
from broker transactions, will be required.
5. Phase-In of Scope of Passthru Payments
    The proposed regulations phase in the passthru payment regime in 
two steps.
     Beginning on January 1, 2014, FFIs, like U.S. withholding 
agents, will be required to withhold on passthru payments that are 
withholdable payments. FFIs will also be required to report annually on 
the aggregate amount of certain payments to each nonparticipating FFI 
for the 2015 and 2016 calendar years.
     Beginning no earlier than January 1, 2017, the scope of 
passthru payments will be expanded beyond withholdable payments and 
FFIs will be required to withhold on such payments pursuant to and in 
accordance with future guidance. In the case of jurisdictions that 
enter into agreements to facilitate FATCA implementation, Treasury and 
IRS will work with the governments of such jurisdictions to develop 
practical alternative approaches to achieving the policy objectives of 
passthru payment withholding.
6. Refunds
    The statute provides that, to the extent withholding on a payment 
under chapter 4 exceeds the beneficial owner's underlying U.S. tax 
liability, the beneficial owner may claim a refund for the overwithheld 
amount. No refund is available, however, for payments beneficially 
owned by nonparticipating FFIs, except to the extent required under an 
income tax treaty. In addition, the proposed regulations provide that 
an NFFE claiming a refund (other than a refund attributable to a 
reduced rate of tax under a tax treaty obligation of the United States) 
must provide information regarding the NFFE's substantial U.S. owners, 
or certification that the NFFE does not have substantial U.S. owners. 
The Treasury Department and the IRS intend to issue future guidance 
regarding the substantiation requirements necessary for claiming a 
refund.

II. Detailed Description of the Provisions of the Proposed Regulations

A. Section 1.1471-1--Scope of Chapter 4 Provisions and Definitions
    Proposed Sec.  1.1471-1(a) describes the purpose and scope of the 
proposed regulations under sections 1471 through 1474. Paragraph (b) 
provides definitions of terms relevant to the provisions of chapter 4 
and the regulations thereunder. In order to maintain consistency with 
the structure of the statutory provisions of chapter 4, certain terms 
are defined in other sections of the regulations. For example, Sec.  
1.1471-5 contains certain definitions that apply only for purposes of 
section 1471 and the regulations thereunder, and Sec.  1.1473-1 
contains definitions of certain terms contained in section 1473. In 
order to facilitate review of the regulations, Sec.  1.1471-1(b) 
contains specific cross-references to the sections in which each such 
term is defined. Many of the relevant terms are also used in chapters 3 
and 61, and the proposed regulations in most cases adopt the terms and 
definitions provided in the regulations under those chapters. In the 
instances in which a different definition is used for purposes of the 
proposed regulations, the Treasury Department and the IRS generally 
intend to revise the definitions provided in the regulations under 
chapter 3 or 61 to conform to the chapter 4 definitions. It is expected 
that these conforming changes, and the other changes to chapter 3 or 61 
guidance needed to conform to chapter 4, as noted in this preamble, 
will become effective on January 1, 2014, when the withholding and 
reporting obligations under chapter 4 begin to be phased in.
B. Rules Applicable to Withholding Agents
1. Overview
    Under the proposed regulations, the rules relating to the 
requirement to withhold U.S. tax on certain payments

[[Page 9028]]

apply principally to U.S. financial institutions or withholding agents. 
FFIs, other than FFIs serving as intermediaries with respect to 
withholdable payments, will generally not be required to withhold tax 
on payments made to account holders or nonparticipating FFIs before 
January 1, 2017. In the case of jurisdictions that enter into 
agreements to facilitate FATCA implementation, Treasury and IRS will 
work with the governments of such jurisdictions to develop practical 
alternative approaches to achieving the policy objectives of passthru 
payment withholding. In addition, where such an agreement provides for 
the foreign government to report to the IRS information regarding U.S. 
accounts and recalcitrant account holders, FFIs in such jurisdictions 
may not be required to withhold on any foreign passthru payments to 
recalcitrant account holders. The proposed regulations generally 
coordinate withholding under chapters 3 and 4 by requiring a 
withholding agent to withhold on payments of U.S. source FDAP income 
under chapter 4 when the withholding agent would be responsible for 
withholding under chapter 3.

2. Section 1.1471-2--Requirement To Deduct and Withhold Tax on 
Withholdable Payments to Certain FFIs

    Paragraph (a)(1) of Sec.  1.1471-2 provides the general rule that, 
absent an exception, a withholding agent must withhold under section 
1471(a) on a withholdable payment made after December 31, 2013, to an 
FFI regardless of whether the FFI receives the withholdable payment as 
a beneficial owner or intermediary. Paragraph (a)(2) provides special 
withholding rules, including a requirement for withholding agents to 
withhold with respect to payments of U.S. source FDAP to a 
participating FFI that is not a QI and is acting as an intermediary or 
that is a nonwithholding flow-through entity for chapter 3 purposes, 
unless the participating FFI provides the documentation necessary to 
determine the portion of the payment for which no withholding is 
required under chapter 4. A participating FFI that acts as an 
intermediary or that is a nonwithholding flow-through entity and that 
provides a valid withholding certificate and all required documentation 
is not required to withhold or report such payment under chapter 4 
unless it knows or has reason to know that the withholding agent failed 
to withhold the correct amount or failed to report the payment 
correctly. These rules are intended to reduce instances in which 
overwithholding occurs because a withholding agent applies withholding 
under chapter 3 to a withholdable payment that is also subject to 
withholding by the participating FFI with respect to its own account 
holders under chapter 4.
    Paragraph (a)(2)(iii) describes the circumstance in which a 
participating FFI will be permitted to make an election under section 
1471(b)(3) to be withheld upon rather than to withhold on a passthru 
payment. Generally, a participating FFI that is a QI may make an 
election under section 1471(b)(3) to be withheld upon rather than to 
withhold only with respect to a payment that is U.S. source FDAP income 
and only if the participating FFI has not assumed primary withholding 
responsibility under chapter 3. A participating FFI that is a QI and 
that does not make the election under section 1473(b)(3) with respect 
to U.S. source FDAP income must assume primary withholding 
responsibility under chapter 3. The election under section 1471(b)(3) 
is not extended to withholding foreign partnerships (WPs) or 
withholding foreign trusts (WTs) because these entities are generally 
required to assume chapter 3 withholding responsibilities under their 
respective agreements with respect to their partners, beneficiaries, or 
owners, and the Treasury Department and the IRS intend to expand their 
responsibilities to assume chapter 4 withholding to coordinate their 
withholding requirements. Similarly, a foreign branch of a U.S. 
financial institution that is a QI not assuming primary withholding 
responsibility under chapter 3 must provide a withholding agent with 
the documentation necessary to perform withholding under chapter 4 with 
respect to payments of U.S. source FDAP income.
    Paragraph (a)(2)(iv) describes the obligation of a financial 
institution organized under the laws of one of the U.S. territories 
(territory financial institution) to withhold on withholdable payments. 
Similar to the rules provided in chapter 3, a territory financial 
institution that acts as an intermediary with respect to a withholdable 
payment may agree to be treated similarly to a U.S. financial 
institution with respect to withholding and reporting under chapter 4. 
If a territory financial institution is a flow-through entity or acts 
as an intermediary with respect to a withholdable payment, the 
territory financial institution does not have an obligation to withhold 
under chapter 4, if it has provided its withholding agent with certain 
information to allow the withholding agent to withhold.
    Paragraph (a)(2)(v) provides that when multiple withholding agents 
that are brokers are involved in effecting a sale, each broker must 
determine whether it is required to withhold on its payment of gross 
proceeds by reference to the status of its payee for chapter 4 
purposes.
    This paragraph also provides that for a ``delivery versus payment'' 
transaction, ``cash on delivery'' transaction, or other similar account 
or transaction, each broker that pays the gross proceeds is a 
withholding agent with respect to the payment.
    Paragraph (a)(3) coordinates the withholding requirements of 
sections 1471(a) and 1471(b) with respect to participating FFIs that 
make withholdable payments to account holders, and generally provides 
that a participating FFI that complies with the withholding 
requirements of section 1471(b), as described in Sec.  1.1471-4(b) and 
its FFI agreement, will be deemed to satisfy its withholding 
obligations with respect to withholdable payments under section 
1471(a).
    Paragraph (a)(4) describes payments for which no withholding is 
required, including payments for which the withholding agent lacks 
control, custody, or knowledge, and certain payments to participating 
FFIs and territory financial institutions. Paragraph (a)(4) also sets 
forth a transitional rule that exempts from withholding under section 
1471(a) certain payments made prior to January 1, 2015, with respect to 
a preexisting account for which the withholding agent does not have 
documentation indicating the payee's status as a nonparticipating FFI, 
unless the payee is a prima facie FFI. The rules for determining if a 
payee is a prima facie FFI require the withholding agent to search its 
electronic data for certain indications that the payee is an FFI. In 
addition, paragraph (a)(4) provides for certain exceptions to 
withholding for payments made to certain classes of payees.
    Paragraph (b) of Sec.  1.1471-2 describes certain obligations the 
payments on which will be exempt from withholding under chapter 4. 
Section 501(d)(2) of the HIRE Act provides that no amount shall be 
deducted or withheld from any payment under any obligation outstanding 
on March 18, 2012, (two years after the date of enactment of the HIRE 
Act) or from the gross proceeds from any disposition of such an 
obligation. Paragraph (b)(1) provides that withholding is not required 
with respect to any payment under a grandfathered obligation or from 
the gross proceeds from any disposition of

[[Page 9029]]

such an obligation. Paragraph (b)(2)(ii) defines the term grandfathered 
obligation as any obligation outstanding on January 1, 2013, and the 
term obligation as a legal agreement that produces or could produce a 
withholdable payment or passthru payment, other than an instrument that 
is treated as equity for U.S. tax purposes or that lacks a stated 
expiration or term.
    Paragraphs (b)(2)(iii) and (iv) provide that the determination of 
whether an obligation is outstanding on January 1, 2013, depends upon 
the type of obligation. A debt instrument is outstanding on January 1, 
2013, if it has an issue date, as determined under U.S. tax law, before 
January 1, 2013. A significant modification under Sec.  1.1001-3 will 
result in the obligation being treated as newly issued as of the date 
of the significant modification. An obligation that is not a debt 
instrument is outstanding on January 1, 2013, if a legally binding 
agreement establishing the obligation was executed before January 1, 
2013. A material modification of the obligation will result in the 
obligation being treated as newly issued or executed as of the 
effective date of such modification, and whether (and when) a material 
modification has occurred will be determined based upon all relevant 
facts and circumstances. Paragraph (b)(3) describes special rules to 
determine when a payment is made under a grandfathered obligation in 
the case of a flow-through entity with respect to a partner, 
beneficiary, or owner in such entity. See section XIX.G of this 
preamble for a request for comments regarding a potential grandfather 
status for certain investment vehicles.

IV. Section 1.1471-3--Establishing a Payee's Chapter 4 Status

    Paragraph (a) of Sec.  1.1471-3 sets forth the rules for 
determining the payee for chapter 4 purposes and the documentation 
requirements to establish a payee's chapter 4 status. These rules 
generally follow the rules under Sec.  1.1441-1(b)(2) for determining 
the payee of a payment subject to withholding or reporting for chapter 
3 purposes, but are modified in several ways, including to account for 
the requirement of withholding agents to determine an FFI's status for 
chapter 4 purposes and to determine whether an NFFE that is a flow-
through entity is an active NFFE under Sec.  1.1472-1(c)(1)(v). The 
Treasury Department and the IRS intend to revise Forms W-8 and W-9 as 
necessary to permit a payee to establish its status for both chapters 3 
and 4 on one form.
    Paragraph (c) of Sec.  1.1471-3 provides rules for when a 
withholding agent may reliably associate a withholdable payment with 
valid documentation. Paragraph (c)(2) sets forth the documentation 
requirements for payments made through an intermediary or flow-through 
entity that is not the payee. Paragraph (c)(3) provides the standards 
for withholding certificates, written statements (in lieu of 
withholding certificates), withholding statements, and documentary 
evidence; describes a withholding agent's responsibilities with respect 
to changes in circumstances and documenting payees after payments are 
made; allows for the electronic transmission of withholding 
certificates (including by facsimile); and allows a withholding agent 
to continue to accept a prior version of the withholding certificate 
for six months after an IRS revision of the withholding certificate 
(based on the revision date shown on the updated withholding 
certificate).
    Paragraph (d) of Sec.  1.1471-3 provides the general documentation 
requirements to establish a payee's chapter 4 status for determining 
whether withholding applies under section 1471 or 1472. Paragraph (d) 
also sets forth the specific documentation requirements that must be 
met in order to treat a payee as having a particular chapter 4 status, 
and provides certain exceptions and special rules for payees that hold 
offshore and preexisting accounts. Consistent with the rules for 
documentation of offshore accounts contained in Sec.  1.6049-5(c)(4), 
paragraph (d) allows a withholding agent that makes a payment to an 
account that is an offshore obligation to rely on documentary evidence, 
in certain cases supplemented by a written statement, to establish the 
payee's chapter 4 status in lieu of obtaining a withholding 
certificate. To minimize the burden on withholding agents to collect 
new documentation for preexisting accounts, paragraph (d) provides that 
for withholdable payments made prior to January 1, 2017, with respect 
to a preexisting account, a withholding agent may treat a payee as a 
participating FFI or a registered deemed-compliant FFI if it has a 
valid withholding certificate establishing the payee's foreign status 
and the withholding agent has verified the payee's FFI-EIN (provided by 
the payee either orally or in writing) on the IRS's published FFI list. 
With respect to preexisting accounts held by passive NFFEs with a 
balance or value of $1,000,000 or less, paragraph (d)(11)(vi)(D)(2) 
permits a withholding agent to rely upon its review conducted for AML 
due diligence purposes to identify any substantial U.S. owners of the 
payee.
    Paragraph (e) sets forth the standards of knowledge for when a 
withholding agent knows or has reason to know that a withholding 
certificate is unreliable or incorrect, and modifies the standards set 
forth in chapter 3 for a withholding agent to determine the foreign 
status of a payee by adding a telephone number in the United States and 
a U.S. place of birth as reasons to know that a withholding certificate 
establishing foreign status is unreliable or incorrect, unless 
additional documentation of foreign status is obtained. The Treasury 
Department and the IRS intend to modify the chapter 3 rules regarding 
standards of knowledge to conform to these requirements. Paragraph (e) 
also requires a withholding agent to review the IRS's published FFI 
list and to check annually to confirm a payee's claim to be a 
participating FFI or registered deemed-compliant FFI.
    Paragraph (f) of Sec.  1.1471-3 sets forth presumption rules for 
determining the payee's chapter 4 status in the absence of 
documentation or when documentation is unreliable or incorrect. The 
presumption rules set forth in paragraph (f) for purposes of chapter 4 
differ from the presumption rules of chapters 3 and 61 because the 
rules in paragraph (f) require a withholding agent to presume that 
certain entities that are treated as exempt recipients under Sec.  
1.6049-4(c)(1)(ii) and for which reliable documentation is not obtained 
are foreign persons. The Treasury Department and the IRS intend to make 
a conforming change to the presumption rules set forth in chapters 3 
and 61.

V. Section 1.1471-4--Foreign Financial Institution Agreement (FFI 
Agreement)

A. In General
    The Treasury Department and the IRS intend to publish a draft model 
FFI agreement in early 2012, and intend to publish a final model FFI 
agreement, incorporating comments received, in the fall of 2012. 
Section 1.1471-4 sets forth the general requirements that will apply to 
an FFI under an FFI agreement. Paragraph (a) of Sec.  1.1471-4 includes 
a general description of the withholding, due diligence, reporting, 
verification, and certain other requirements under the FFI agreement. 
Paragraphs (b), (c), and (d) set forth in more detail the withholding, 
due diligence, and account reporting requirements that will apply to an 
FFI under an FFI agreement.
    The FFI agreement will also provide the IRS's verification process 
for

[[Page 9030]]

determining a participating FFI's compliance with its FFI agreement. As 
described in paragraph (a), this will require, among other things, that 
a participating FFI: (i) Adopt written policies and procedures 
governing the participating FFI's compliance with its responsibilities 
under the FFI agreement; (ii) conduct periodic internal reviews of its 
compliance (rather than periodic external audits, as is presently 
required for many QIs); and (iii) periodically provide the IRS with a 
certification and certain other information that will allow the IRS to 
determine whether the participating FFI has met its obligations under 
the FFI agreement. The Treasury Department and the IRS intend to 
include the requirements to conduct these periodic reviews and to 
provide their certifications in the FFI agreement or in other guidance. 
The Treasury Department and the IRS request comments regarding the 
scope and content of such reviews and the factual information and 
representations FFIs should be required to include as part of such 
certifications. The proposed FFI agreement also will provide that 
repetitive or systematic failures of the participating FFI's processes 
relating to its compliance with the FFI agreement may result in 
enhanced compliance verification requirements such as an external audit 
of one or more issues identified by the IRS. The proposed FFI agreement 
also will provide the egregious circumstances that will cause a 
participating FFI to be in default with respect to its FFI agreement.
B. Withholding Requirements Under the FFI Agreement
    Paragraph (b) of Sec.  1.1471-4 describes the withholding 
requirements of participating FFIs and provides that a participating 
FFI is required to withhold on any passthru payment that is a 
withholdable payment made to a recalcitrant account holder or a 
nonparticipating FFI (or a participating FFI that has made an election 
to be withheld upon under section 1471(b)(3)) after December 31, 2013. 
The requirements for withholding on foreign passthru payments are 
reserved.
    Paragraph (b) of Sec.  1.1471-4 also provides that a participating 
FFI is a withholding agent for purposes of chapter 4 and thus is 
subject to the requirements of sections 1471(a) and 1472(a) with 
respect to withholdable payments. Paragraph (b)(2) provides, however, 
that a participating FFI that complies with the withholding 
requirements of paragraph (b) and its FFI agreement will be deemed to 
satisfy its withholding obligations with respect to withholdable 
payments under sections 1471(a) and 1472(a).
    Paragraph (b)(4) provides a special rule for dormant accounts, 
under which a participating FFI that withholds on passthru payments 
(including withholdable payments) made to a recalcitrant account holder 
of a dormant account may, in lieu of depositing the tax withheld, set 
aside the amount withheld in escrow until the date that the account 
ceases to be a dormant account. Paragraph (b)(4) provides that within 
90 days of the account ceasing to be dormant, the participating FFI 
must obtain the appropriate documentation for the account holder, in 
which case the tax withheld is refunded to the account holder. If the 
participating FFI fails to obtain the required documentation within 90 
days, the participating FFI must deposit the tax withheld.
    Paragraph (b)(5) provides a special withholding rule for U.S. 
branches of participating FFIs, which treats a U.S. branch similar to a 
U.S. financial institution with respect to the withholding requirements 
under chapter 4. This paragraph provides that a U.S. branch that 
satisfies its backup withholding obligations under section 3406(a) with 
respect to accounts treated as held by U.S. non-exempt recipients will 
be treated as satisfying its withholding obligations under section 
1471(b) with respect to such accounts. Paragraph (b)(5) thereby 
eliminates duplicate withholding that would otherwise occur with 
respect to account holders of a U.S. branch that are (or are presumed 
to be) U.S. non-exempt recipients to which backup withholding under 
section 3406 would apply. A U.S. branch of a participating FFI is also 
subject to special reporting requirements described in paragraph (d) of 
Sec.  1.1471-4, which are coordinated with its withholding requirements 
under this paragraph.
C. Identification of Account Holders Under the FFI Agreement
    Paragraph (c) of Sec.  1.1471-4 describes the procedures for 
participating FFIs to identify and document U.S. accounts and accounts 
other than U.S. accounts. Paragraph (c)(2) describes the general 
requirements with respect to identification of account holders and 
incorporates the principles of Sec.  1.1471-3 that determine the 
chapter 4 status of an account holder, associate an account with valid 
documentation (without regard to payments), and establish the standards 
of knowledge for reliance on documentation. Paragraph (c)(2) also 
requires a participating FFI to retain records of documentation 
collected, including electronic searches and responses to relationship 
manager inquiries with respect to certain high-value accounts, for a 
minimum of six years. The account identification and documentation for 
participating FFIs described in paragraph (c) generally follow the 
procedures described in Notice 2011-34 with some modifications made in 
response to comments.
    For identification of entity accounts, paragraph (c)(3) 
incorporates the identification and documentation rules of Sec.  
1.1471-3 and provides an exception from these procedures for 
preexisting accounts held by entities that are offshore obligations 
with an account balance or value of $250,000 or less, subject to 
further diligence if the account balance or value subsequently exceeds 
$1,000,000. An account that meets this exception is not treated as a 
U.S. account, and the account holder is not treated as a 
nonparticipating FFI for withholding and reporting purposes with 
respect to the account.
    For new accounts established for individual account holders, a 
participating FFI is required to review all information collected under 
its existing account opening procedures to determine whether the 
account holder has U.S. indicia (defined in paragraph (c)(4)(i)(A)). 
Where an account has U.S. indicia, paragraph (c)(4)(i)(B) describes the 
documentation a participating FFI is required to obtain in order to 
establish whether the account is a U.S. account. For accounts that are 
required to be treated as U.S. accounts, the participating FFI is 
generally required to collect a Form W-9 from each individual account 
holder. Except for such cases, these rules are intended to minimize the 
extent to which participating FFIs would need to modify their account 
opening and documentation collection procedures to comply with these 
requirements.
    Paragraph (c)(4)(ii) of Sec.  1.1471-4 incorporates the rule 
provided in Sec.  1.1471-5(a)(4), which provides that a participating 
FFI may treat as other than a U.S. account a preexisting account with a 
balance or value of $50,000 or less that is held by one or more 
individuals. Paragraph (c)(4)(iii) provides a documentation exception 
for preexisting accounts of individual account holders that are 
offshore obligations, other than cash value insurance or annuity 
contracts, with an account balance or value of $50,000 or less. 
Paragraphs (c)(4)(iii)(A), (B), and (C) provide the requirements for 
accounts to meet this documentation exception, including aggregation 
rules. Paragraph (c)(4)(iv) provides a

[[Page 9031]]

documentation exception for preexisting cash value insurance or annuity 
contracts of individual account holders if such account has an account 
balance or value of $250,000 or less on the last day of the calendar 
year preceding the effective date of the FFI's FFI agreement. Accounts 
that meet these two exceptions will be subject to further due diligence 
procedures if the account balance or value subsequently exceeds 
$1,000,000. Further, an account that meets a documentation exception is 
not treated as a U.S. account and the account holder of such account is 
not treated as a recalcitrant account holder for withholding and 
reporting purposes.
    Paragraph (c)(5) provides the currency translation rules for 
determining the account balance or value. Paragraph (c)(6) provides 
several examples illustrating the application of the aggregation rules 
described in paragraphs (c)(4)(iii) and (iv).
    Paragraph (c)(7) provides an alternative to the general 
identification and documentation procedure of paragraph (c)(4)(i) for 
preexisting offshore accounts of individual account holders. Paragraph 
(c)(7)(ii) requires, as part of this alternative procedure, that the 
participating FFI conduct an electronic search for U.S. indicia and 
obtain the appropriate documentation to establish the account holder's 
status if U.S. indicia are found. A participating FFI that follows this 
alternative procedure with respect to an account will not be attributed 
knowledge with respect to information contained in any account files 
that the participating FFI did not review and that it was not required 
to review under this alternative procedure. Additionally, under this 
alternative procedure, a participating FFI will be treated as having 
obtained the required documentary evidence if the participating FFI's 
file contains a notation stating that documentary evidence has been 
examined and listing the type of document examined and the name of the 
employee that reviewed the document. The rule described in the 
preceding sentence is intended to limit those cases in which a 
participating FFI would need to contact its preexisting account holders 
to obtain additional documentation of their chapter 4 status.
    In response to comments, the proposed regulations do not 
incorporate the requirement to identify and perform an enhanced review 
of private banking accounts, as described in Notice 2011-34. Instead, 
paragraph (c)(8) requires that a participating FFI perform an 
additional enhanced review of high-value accounts. A high-value account 
is any account with a balance or value that exceeds $1,000,000 at the 
end of the calendar year preceding the effective date of the 
participating FFI's FFI agreement, or at the end of any subsequent 
calendar year. As part of the enhanced review, the participating FFI 
must identify all high-value accounts for which a relationship manager 
has actual knowledge that the account holder is a U.S. person. For 
these accounts, the participating FFI is required to obtain from the 
account holder a Form W-9, and a valid and effective waiver, if 
necessary. For other high-value accounts, paragraph (c)(8)(iii) also 
requires an enhanced review of paper and electronic files. In response 
to comments, paragraph (c)(8)(iii)(B) provides that the paper review is 
limited to the current customer master file and certain documents, 
described in paragraphs (c)(8)(iii)(A)(1) through (5), obtained by the 
participating FFI in the five years prior to the effective date of its 
FFI agreement, and the review is required only to the extent sufficient 
information about the account holder is not available in the 
participating FFI's electronically searchable information. Paragraph 
(c)(8)(iv) provides an exception from the enhanced review requirement 
for any high-value account for which the participating FFI has obtained 
a Form W-8BEN and documentary evidence to establish the foreign status 
of the account holder, but the participating FFI is still required to 
perform the relationship manager inquiry. Paragraph (c)(9) provides an 
exception from the electronic search and, if the account is a high-
value account, the enhanced review requirement (excluding the 
relationship manager inquiry) if the account was previously documented 
by the participating FFI to establish the account holder's status as a 
foreign individual in order to meet its obligations under a QI, WP, or 
WT agreement or to fulfill its reporting obligations as a U.S. payor 
under sections 6041, 6042, 6045, and 6049.
    Paragraph (c)(10) requires a responsible officer of a participating 
FFI to make certain certifications. The first certification is required 
to confirm, with respect to its preexisting accounts that are high-
value accounts, that within one year of the effective date of the FFI 
agreement the participating FFI has completed the required review and 
to the best of the responsible officer's knowledge, after conducting a 
reasonable inquiry, the participating FFI did not have any formal or 
informal practices or procedures in place at any time from August 6, 
2011 (120 days from the release of Notice 2011-34 to the public) 
through the date of such certification to assist account holders in the 
avoidance of chapter 4. The Treasury Department and the IRS request 
comments regarding alternative due diligence or other procedures that 
should be required of FFIs that are unable to certify that no such 
practices or procedures were in place after such date in order to 
maintain participating FFI status.
    The second certification by a responsible officer is required to 
confirm, with respect to all of its preexisting accounts, that within 
two years of the effective date of its FFI agreement the participating 
FFI has completed the account identification procedures and 
documentation requirements or, if it has not obtained the documentation 
required to be obtained with respect to an account, the participating 
FFI treats the account holder of such an account as a recalcitrant 
account holder or nonparticipating FFI.
D. Reporting Requirements of Participating FFIs
    Paragraph (d) of Sec.  1.1471-4 describes the reporting 
responsibilities of participating FFIs with respect to U.S. accounts 
and accounts held by recalcitrant account holders, and includes rules 
to phase in the reporting requirements. Paragraph (d)(2)(i) provides 
that a participating FFI is required to report any account that it is 
required to treat as a U.S. account or as held by a recalcitrant 
account holder that it maintained at any time during the preceding 
calendar year or as of the end of the year, respectively.
    Paragraph (d)(2)(ii) provides that the participating FFI that 
maintains the account is responsible for reporting the account for each 
calendar year subject to an exception that requires a participating FFI 
to report with respect to account holders of a territory financial 
institution that acts as an intermediary with respect a withholdable 
payment and that does not agree to be treated as a U.S. person with 
respect to the payment. Paragraph (d)(2)(ii)(C) also provides an 
exception for a participating FFI that elects for one or more of its 
branches to separately report the accounts maintained by each such 
branch. This election is intended to address legal restrictions on 
sharing account holder information across branches located in different 
jurisdictions and the limitations of many FFIs' information technology 
systems.
    Paragraph (d)(2)(iii)(A) provides a special reporting rule for 
participating FFIs (other than U.S. branches) that are U.S. payors to 
coordinate their chapter

[[Page 9032]]

61 reporting requirements with respect to U.S. non-exempt recipients 
with their chapter 4 reporting with respect to U.S. accounts. This rule 
provides that a participating FFI that is a U.S. payor may add the 
information required under paragraph (d)(5)(ii) to its reporting for 
chapter 61 purposes to satisfy the participating FFI's reporting 
requirements for U.S. accounts under chapter 4. Paragraph 
(d)(2)(iii)(B) describes a special reporting rule for a U.S. branch of 
a participating FFI to satisfy its reporting requirements under chapter 
4 and to coordinate this reporting with its withholding requirements 
under Sec.  1.1471-4(b). This reporting rule requires a U.S. branch to 
report for chapter 4 purposes in the same manner as a U.S. financial 
institution.
    Paragraph (d)(2)(iv) requires a participating FFI that maintains an 
account held by a financial institution that it has identified as an 
owner-documented FFI to report information with respect to each owner 
of the owner-documented FFI that is a specified U.S. person.
    Paragraph (d)(3) provides rules for reporting accounts held by 
specified U.S. persons and accounts held by U.S. owned foreign entities 
under section 1471(c)(1). These rules prescribe the information to be 
reported with respect to accounts required to be treated as U.S. 
accounts, the time and manner of filing the required form, and 
procedures for requesting an extension to file such forms. If a 
separate reporting election is not made with respect to a branch (as 
described in this preamble), a participating FFI is also required to 
report the jurisdiction of the branch that maintains the U.S. account 
being reported.
    Paragraph (d)(4) provides guidance on the information required to 
be included on the U.S. account information reporting form, including 
the methods for determining the account balance or value and the 
currency to be used for reporting account balances and payments made 
with respect to the account. These rules generally follow the proposed 
guidance described in Notice 2011-34, but allow a participating FFI to 
report its U.S. accounts in the currency in which the account is 
maintained. Paragraph (d)(4)(vi) provides record retention requirements 
for account statements. The IRS is developing a form for U.S. account 
reporting and the procedures for processing the form.
    Paragraph (d)(5) prescribes the reporting requirements for those 
participating FFIs that elect to report U.S. accounts under section 
1471(c)(2). This paragraph provides that a participating FFI that makes 
such election must report under sections 6041, 6042, 6045, and 6049 
with respect to reportable payments to the same extent as is required 
of a U.S. payor and requires that the participating FFI treat each 
holder of a U.S. account that is a specified U.S. person or U.S. owned 
foreign entity as a payee who is an individual and citizen of the 
United States. Paragraph (d)(5) also provides that the election under 
section 1471(c)(2) does not apply to cash value insurance or annuity 
contracts that are financial accounts and that would otherwise be 
subject to the reporting requirements of section 6047.
    For accounts held by recalcitrant account holders, paragraph (d)(6) 
provides for aggregate reporting of recalcitrant account holders in 
separate categories. The separate categories of accounts held by 
recalcitrant account holders are accounts with U.S. indicia, accounts 
of other recalcitrant account holders, and dormant accounts. Paragraph 
(d)(6)(ii) defines dormant accounts and prescribes when an account 
ceases to be treated as a dormant account.
    Paragraph (d)(7) sets forth special reporting rules for accounts 
maintained for the 2013 through 2015 calendar years. Paragraph 
(d)(7)(v)(B) provides that, with respect to the 2013 year, 
participating FFIs must report by September 30, 2014, those accounts 
identified as U.S. accounts or as held by recalcitrant account holders 
as of June 30, 2014. However, this paragraph further provides that a 
U.S. payor (including a U.S. branch) is not required to follow this 
special June 30, 2014, determination date and may instead report with 
respect to the 2013 calendar year in accordance with the reporting 
dates provided under chapter 61 with respect to all accounts identified 
as U.S. accounts or as held by recalcitrant account holders as of 
December 31, 2013. These rules also phase in the extent of information 
required to be reported by participating FFIs with respect to the 2013 
through 2015 calendar years.
    Paragraphs (d)(8) through (10) reserve on the reporting 
requirements for participating FFIs that are QIs, and for WPs and WTs 
with respect to their partners, owners, and beneficiaries. The Treasury 
Department and the IRS seek comments on coordinating the chapter 3 
reporting requirements and existing withholding requirements of these 
entities under their respective agreements with the reporting and 
withholding requirements under chapter 4 (including QIs that are 
foreign branches of U.S. financial institutions). With respect to QIs, 
the Treasury Department and the IRS do not intend to limit reporting 
under chapter 4 to QI designated accounts as currently defined in the 
QI model agreement.
E. Expanded Affiliated Group Requirements
    Paragraph (e)(1) of Sec.  1.1471-4 provides the general rule that, 
for any member of an expanded affiliated group to be a participating 
FFI or registered deemed-compliant FFI, each FFI that is a member of 
the group must be either a participating FFI or registered deemed-
compliant FFI. Paragraphs (e)(2), (3), and (4) provide exceptions to 
this general rule for certain branches, FFI affiliates, and QIs. 
Paragraph (e)(1) also provides that each FFI that is a member of an 
expanded affiliated group must complete a registration form with the 
IRS and agree to all the requirements for the status for which it 
applies with respect to all of the accounts it maintains.
    Paragraph (e)(2) permits an FFI to be a participating FFI 
notwithstanding that one or more of its branches cannot satisfy all of 
the requirements of the FFI agreement. Paragraph (e)(2)(ii) defines a 
branch as a unit, business or office of the FFI that is treated as a 
branch under the regulatory regime of the country in which it is 
located or is otherwise regulated under the laws of such country as 
separate from other offices, units, or branches of the FFI, and 
maintains books and records separate from the books and records of the 
participating FFI (and any other of its branches). Further, all units, 
businesses, or offices of a participating FFI in a single country 
(including the country of organization or incorporation) are treated as 
a single branch. Paragraph (e)(2)(iii) defines a limited branch as a 
branch that cannot report the information required to be reported with 
respect to its U.S. accounts to the IRS and cannot close or transfer 
such accounts, or that cannot withhold on its recalcitrant account 
holders or accounts held by nonparticipating FFIs and cannot close or 
transfer such accounts. To qualify for limited branch status, the FFI, 
as part of its registration process, must: (i) Identify the relevant 
jurisdiction of each branch for which it seeks limited branch status; 
(ii) agree that each such branch will identify its account holders 
under the due diligence requirements applicable to participating FFIs; 
(iii) retain account holder documentation pertaining to those 
identification requirements for six years from the effective date of 
its FFI agreement; (iv) report to the IRS with

[[Page 9033]]

respect to its accounts that it is required to treat as U.S. accounts 
to the extent permitted under the relevant laws pertaining to the 
branch; (v) treat each such branch as a separate entity for purposes of 
withholding; (vi) agree that each such branch will not open new 
accounts that it is required to treat as U.S. accounts or accounts held 
by nonparticipating FFIs; and (vii) agree that each such branch will 
identify itself to withholding agents (including affiliates of the FFI) 
as a nonparticipating FFI. Paragraph (e)(2)(v) requires a participating 
FFI to withhold on certain withholdable payments that it is considered 
to receive on behalf of a limited branch. Paragraph (e)(2)(vi) provides 
that a branch will cease to be a limited branch after the earlier of 
December 31, 2015, or the beginning of the third calendar quarter 
following the date on which the branch is no longer prohibited from 
complying with the requirements of the FFI agreement. In order to 
retain its status, a participating FFI must notify the IRS by such date 
that the branch will comply with the FFI agreement.
    Paragraph (e)(3) permits an FFI that is a member of an expanded 
affiliated group to obtain status as a participating FFI 
notwithstanding that one or more members of the group cannot satisfy 
the requirements of the FFI agreement. Similar to the requirements 
under paragraph (e)(2) for a limited branch, paragraph (e)(3)(ii) 
defines a limited FFI as an FFI that, under the laws of each 
jurisdiction that apply with respect to the accounts maintained by the 
affiliate, cannot report or withhold as required under the FFI 
agreement. Paragraph (e)(3)(iii) also provides registration 
requirements for limited FFI status that are similar to those for 
limited branches. Paragraph (e)(3)(iv) requires participating and 
deemed-compliant FFIs to treat limited FFIs as nonparticipating FFIs 
with respect to withholdable payments made to these affiliates. No 
withholding will be required, however, with respect to foreign passthru 
payments made to a limited FFI. Paragraph (e)(3)(v) provides that an 
FFI will cease to qualify as a limited FFI either after December 31, 
2015, or the beginning of the third calendar quarter following the date 
on which the FFI is no longer prohibited from complying with the 
requirements of the FFI agreement. Participating and deemed-compliant 
FFIs that are members of the same expanded affiliated group will retain 
their status if, by such date, the FFI that ceased to be limited 
notifies the IRS that it will comply with the FFI agreement.
    Paragraph (e)(4) provides a special rule for QIs. The Treasury 
Department and the IRS intend to require all QIs that are FFIs to 
become participating FFIs. Therefore, in order for an FFI to renew its 
QI agreement for chapter 3 purposes, an FFI will be required to be a 
participating FFI. However, paragraph (e)(4) permits QIs to retain 
their status as a QI for a limited period of time (until December 31, 
2015) even though the QI cannot comply with the provisions of an FFI 
agreement. In such case, the QI is treated as a limited FFI and must 
identify itself to its withholding agents as a nonparticipating FFI.

VI. Section 1.1471-5--Section 1471 Definitions

    Section 1.1471-5 sets forth additional definitions that are 
applicable to the regulations under section 1471 and to the FFI 
agreement.
A. U.S. Account
    Paragraph (a)(2) of Sec.  1.1471-5 defines the term U.S. account as 
any financial account maintained by a financial institution that is 
held by one or more specified U.S. persons or U.S. owned foreign 
entities. Paragraph (a)(3) generally provides that an account is held 
by the person listed or identified as the holder of such account with 
the financial institution that maintains the account, even if that 
person is a flow-through entity. Paragraphs (a)(3)(ii) through (v) set 
forth exceptions and other rules that supplement the general rule for 
determining the holder of an account. For accounts held by a grantor 
trust, the grantor is treated as the owner of the account or assets in 
the account to the extent required under the principles of sections 671 
through 679. For accounts held by agents, investment advisors, and 
similar persons, the person on whose behalf such person is acting is 
treated as the account holder. For accounts held jointly, each joint 
holder will be treated as owning the account. Finally, for accounts 
that are insurance and annuity contracts, the account holder is the 
person who can access the cash value of the contract or change the 
beneficiary, or, if there is no such person, the account holder is the 
beneficiary.
    Paragraph (a)(4) sets forth the exception from U.S. account status 
provided in section 1471(d)(1)(B) for any depository account held by 
one or more individuals with an aggregate balance or value that does 
not exceed $50,000. Paragraph (a)(4)(ii) provides aggregation rules for 
determining the aggregate balance or value of the account for purposes 
of this exception to U.S. account status. The same rules apply to both 
preexisting and new accounts. Generally, the rules provide that 
depository accounts are aggregated with other depository accounts only 
for purposes of applying the exception from U.S. account status 
provided in section 1471(d)(1)(B).
B. Financial Account
    Section 1471(d)(2) provides that except as provided by the 
Secretary, the term financial account means, with respect to any 
financial institution, any depository account maintained by such 
financial institution; any custodial account maintained by such 
financial institution; and any equity or debt interest in such 
financial institution (other than interests which are regularly traded 
on an established securities market). In addition, the technical 
explanation of the HIRE Act prepared by the Joint Committee on Taxation 
states that the Secretary may ``prescribe special rules addressing 
circumstances in which certain categories of companies, such as 
insurance companies, are financial institutions or the circumstances in 
which certain contracts or policies, for example annuity contracts or 
cash value life insurance contracts, are financial accounts or United 
States accounts * * *.'' Joint Committee on Taxation, Technical 
Explanation of the Revenue Provisions Contained in Senate Amendment 
3310, the ``Hiring Incentives to Restore Employment Act,'' under 
Consideration by the Senate,'' (JCX-4-10), February 23, 2010, at 44 
(Technical Explanation).
    Paragraph (b)(1) of Sec.  1.1471-5 defines the term financial 
account. First, the proposed regulations define a depository account to 
include a commercial, checking, savings, time, or thrift account, an 
account evidenced by a certificate of deposit or similar instruments, 
and any amount held with an insurance company under an agreement to pay 
interest. A custodial account is defined to include an account that 
holds any financial instrument or contract held for investment for the 
benefit of another person. The proposed regulations exclude from the 
definition of a financial account certain savings accounts (including 
both retirement and pension accounts and nonretirement savings 
accounts) that meet certain requirements with respect to tax treatment 
and the type and amount of contributions. They also exclude any account 
that otherwise constitutes a financial account if it is held solely by 
one or more exempt beneficial owners described in Sec.  1.1471-6 or by 
nonparticipating FFIs that hold the

[[Page 9034]]

account as intermediaries solely on behalf of one or more such owners. 
Thus, a participating FFI need not determine whether such an account is 
a U.S. account or held by a recalcitrant account holder.
    The proposed regulations also provide guidance on the treatment of 
debt or equity as a financial account. First, as provided in section 
1471(d)(2)(C), debt or equity that is regularly traded on an 
established securities market is not a financial account. For this 
purpose, debt or equity interests are considered regularly traded on an 
established securities market if trades in such interests are effected, 
other than in de minimis quantities, on such market or markets on at 
least 60 days during the prior year, and the aggregate number of such 
interests that are traded on such market or markets during the prior 
year is at least ten percent of the average number of such interests 
outstanding during the prior year.
    Second, the proposed regulations provide that an equity interest 
includes a capital or profits interest in a partnership and, in the 
case of a trust that is a financial institution, the interest of an 
owner under sections 671 through 679 and a beneficial interest in a 
trust described in Sec.  1.1473-1(b)(3).
    Third, the proposed regulations provide that an equity or debt 
interest in a financial institution is a financial account if it is an 
equity or debt interest in a financial institution that is engaged 
primarily in the business of investing, reinvesting, or trading 
securities. In the case of a financial institution that is engaged in a 
banking or similar business, holds financial assets for the account of 
others, or is an insurance company, equity or debt instruments in such 
financial institution will constitute financial accounts only if the 
value of those interests is determined, directly or indirectly, 
primarily by reference to assets that give rise to withholdable 
payments.
    Finally, to address the circumstances in which certain insurance or 
annuity contracts are financial accounts, paragraph (b)(1)(iv) includes 
in the definition of a financial account insurance contracts that 
include an investment component--namely cash value insurance contracts 
and annuity contracts. The proposed regulations exclude from the 
definition of financial account insurance contracts that provide pure 
insurance protection (such as term life, disability, health, and 
property and casualty insurance contracts).
C. U.S. Owned Foreign Entity
    Paragraph (c) of Sec.  1.1471-5 defines the term U.S. owned foreign 
entity as any foreign entity that has one or more substantial U.S. 
owners. Additionally, paragraph (c) provides that an owner-documented 
FFI will be treated as a U.S. owned foreign entity if it has one or 
more direct or indirect owners that are specified U.S. persons, whether 
or not it has a substantial U.S. owner.
D. Financial Institution and FFI
    Section 1471(d)(4) and Sec.  1.1471-5(d) provide that an FFI means 
any financial institution that is a foreign entity. A territory 
financial institution is not an FFI.
    Section 1471(d)(5) provides that except as otherwise provided by 
the Secretary, the term financial institution means any entity that: 
(i) Accepts deposits in the ordinary course of a banking or similar 
business; (ii) holds as a substantial portion of its business financial 
assets for the account of others; or (iii) is engaged (or holding 
itself out as being engaged) primarily in the business of investing, 
reinvesting, or trading in securities (as defined in section 475(c)(2) 
without regard to the last sentence thereof), partnership interests, 
commodities (as defined in section 475(e)(2)), or any interest 
(including a futures or forward contract or option) in such securities, 
partnership interests, or commodities.
    In addition, the Technical Explanation states that the Secretary 
has authority to ``prescribe special rules addressing circumstances in 
which certain categories of companies, such as insurance companies, are 
financial institutions.'' Technical Explanation, at 44.
    Paragraph (e) of Sec.  1.1471-5 provides guidance on the types of 
entities that constitute ``financial institutions.'' Paragraph (e)(2) 
lists the activities that constitute a ``banking or similar business'' 
for a deposit-taking institution, and clarifies that entities engaged 
in a banking or similar business include, but are not limited to, 
entities that would qualify as a ``bank'' under section 585(a)(2) 
(including ``banks'' as defined in section 581 and any corporation to 
which section 581 would apply except for the fact that it is a foreign 
corporation). Instead, the proposed regulations provide that the 
determination of whether an entity conducts a banking or similar 
business is based on the character of the business conducted, and the 
fact that the entity is subject to local regulation is relevant, but 
not necessarily determinative.
    Paragraph (e)(3) defines what constitutes holding financial assets 
as a ``substantial portion'' of an entity's business by reference to a 
bright line test based on gross income. As in the case of deposit-
taking institutions, the fact that an entity is subject to the banking 
or credit laws of one or more jurisdictions is relevant to, but not 
necessarily determinative of, financial institution status.
    The proposed regulations also provide guidance regarding whether an 
entity is engaged primarily in the business of investing, reinvesting, 
or trading securities and other relevant assets. Paragraph (e)(1)(iii) 
includes within the types of securities that cause a financial 
institution to be engaged primarily in the business of investing, 
reinvesting, or trading notional principal contracts and insurance and 
annuity contracts that are traded, held for investment, or securitized. 
Paragraph (e)(4) provides that an entity is engaged primarily in the 
business of investing, reinvesting, or trading if the entity's gross 
income from those activities is at least 50 percent of the entity's 
total gross income over the testing period.
    Paragraph (e)(1)(iv) of the proposed regulations provides that an 
entity that is an insurance company and issues (or is obligated to make 
payments with respect to) a cash value insurance policy or an annuity 
contract is a financial institution.
    Finally, the proposed regulations describe entities that are 
excluded from the definition of a financial institution and are treated 
as excepted NFFEs. These entities are certain nonfinancial holding 
companies, certain start-up companies, nonfinancial entities that are 
liquidating or emerging from reorganization or bankruptcy, hedging/
financing centers of a nonfinancial group, and entities described in 
section 501(c).
E. Deemed-Compliant FFIs
    Paragraph (f) of Sec.  1.1471-5 describes the FFIs that will be 
deemed compliant with the requirements of section 1471(b), and 
therefore exempt from withholding under section 1471(a) and (b). The 
categories of deemed-compliant FFIs described in these proposed 
regulations are broader than the categories of deemed-compliant FFIs 
described in Notice 2011-34. Paragraph (f) provides for two general 
types of deemed-compliant FFI: registered and certified deemed-
compliant FFIs. A registered deemed-compliant FFI generally is required 
to register with the IRS to declare its status as deemed-compliant and 
to attest to the IRS that it satisfies certain procedural requirements. 
The categories of registered deemed-compliant FFIs are

[[Page 9035]]

local FFIs, nonreporting members of participating FFI groups, qualified 
investment vehicles, restricted funds, and FFIs that comply with the 
requirements of section 1471(b) under an agreement between the United 
States and a foreign government.
    To qualify as a local FFI, generally, each FFI in the group (or in 
the case of a standalone FFI, the FFI) must meet certain licensing and 
regulation requirements. In addition, it must have no fixed place of 
business outside its country of organization and must not solicit 
account holders outside its country of organization. In addition, 98 
percent of the accounts maintained by the FFI must be held by residents 
of the FFI's country of organization, and the FFI must be subject to 
reporting or withholding requirements in its country of organization 
with respect to resident accounts. For this purpose, an FFI that is 
organized in a European Union (EU) Member State may treat account 
holders that are residents of other EU Member States as residents of 
the country in which the FFI is organized. The Treasury Department and 
the IRS included this rule for FFIs established in EU Member States 
because financial institutions in EU Member States have common tax 
reporting or withholding obligations with respect to EU residents. A 
local FFI must also establish policies and procedures to ensure that it 
does not open or maintain accounts for specified U.S. persons that are 
not residents in the country in which the FFI is organized, for 
nonparticipating FFIs, or for entities controlled or beneficially owned 
by specified U.S. persons, and must perform due diligence with respect 
to its entity accounts and certain individual accounts.
    The registered deemed-compliant category for nonreporting members 
of participating FFI groups permits an FFI that is a member of an 
expanded affiliated group that includes at least one participating FFI 
to become a deemed-compliant FFI if it transfers any preexisting 
accounts that are identified under specified procedures as U.S. 
accounts or accounts held by nonparticipating FFIs to an affiliate that 
is a participating FFI or U.S. financial institution. Paragraph 
(f)(1)(i)(B) also requires the nonreporting member to implement 
policies and procedures to ensure that if it opens or maintains any 
U.S. accounts or accounts held by nonparticipating FFIs, it either 
transfers any such accounts to an affiliate that is a participating FFI 
or U.S. financial institution or becomes a participating FFI itself, in 
either case within 90 days of having opened the account or of having 
knowledge or reason to know of a change in circumstances resulting in 
an account becoming a U.S. account or an account held by a 
nonparticipating FFI. In response to comments, this type of deemed-
compliant FFI is not limited to those FFIs that operate within a single 
country and that solicit account holders in such country, as was 
required under Notice 2011-34.
    Paragraph (f)(1)(i)(C) sets forth a deemed-compliant category for 
qualified investment vehicles. In general, an FFI regulated as a 
collective investment vehicle (CIV) is a qualified investment vehicle 
if all holders of record of a direct interest in the FFI are 
participating FFIs, deemed-compliant FFIs, or exempt beneficial owners.
    In response to comments, paragraph (f)(1)(i)(D) provides a separate 
deemed-compliant category for an FFI that is regulated as an investment 
fund under the law of its country of organization and for which each 
distributor of the investment fund's interests is a participating FFI, 
a registered deemed-compliant FFI, a nonregistering local bank, or a 
restricted distributor (defined in paragraph (f)(4)). Paragraph 
(f)(1)(i)(D) requires that each agreement that governs the distribution 
of the investment fund's debt or equity interests (other than interests 
which are both distributed by and held through a participating FFI) 
prohibit sales of debt or equity interests in the fund to U.S. persons, 
nonparticipating FFIs, or passive NFFEs with one or more substantial 
U.S. owners, and its prospectus must indicate that sales to U.S. 
persons, passive NFFEs, and nonparticipating FFIs (other than interests 
which are both distributed by and held through a participating FFI) are 
prohibited. The FFI must also establish procedures to review 
preexisting direct accounts and ensure proper treatment of new direct 
accounts.
    Paragraph (f)(1)(ii) sets forth the procedural requirements for 
registered deemed-compliant FFIs and provides that a registered deemed-
compliant FFI must certify to the IRS that it meets the requirements of 
its applicable deemed-compliant category, agrees to the conditions for 
deemed-compliant status, and will renew its certification every three 
years (or earlier if there is a change in circumstance).
    The certified categories of deemed-compliant FFIs are 
nonregistering local banks, retirement plans, non-profit organizations, 
certain owner-documented FFIs, and FFIs with only low-value accounts. 
Institutions that satisfy the requirements of these categories are not 
required to register with the IRS, but each will certify to the 
withholding agent that it meets the requirements of its certified 
deemed-compliant category on a Form W-8.
    To qualify as a nonregistering local bank, generally, a bank must 
offer basic banking services, operate solely in its country of 
incorporation (or if it is a member of an expanded affiliated group, 
all members must operate in the same country), and the assets on each 
member FFI's balance sheet must be no more than $175 million (and the 
entire expanded affiliated group must have no more than $500 million on 
their combined balance sheets).
    Paragraph (f)(2)(ii) describes the requirements for retirement 
plans to qualify for certified deemed-compliant status. Generally, the 
FFI must be organized for the provision of retirement or pension 
benefits under the law of each country in which it is established or in 
which it operates. Contributions to the FFI must consist only of 
employer, government, or employee contributions and must be limited by 
reference to earned income. In addition, no single beneficiary may have 
a right to more than five percent of the FFI's assets. Finally, 
contributions to the FFI must be excluded from the income of the 
beneficiary and/or taxation of the income attributable to the 
beneficiary must be deferred under the laws of the country in which the 
FFI is organized or operates, or the FFI must receive 50 percent or 
more of its total contributions from the government or employers. 
Alternative criteria are provided for FFIs that provide retirement or 
pension benefits and that have fewer than 20 participants and meet 
certain other requirements.
    Paragraph (f)(2)(iii) describes the requirements for non-profit 
organizations to qualify for certified deemed-compliant status. A non-
profit organization will qualify for certified deemed-compliant status 
if it: (i) Is established and maintained in its country of residence 
exclusively for religious, charitable, scientific, artistic, cultural, 
or educational purposes; (ii) is exempt from income tax in its country 
of residence; (iii) has no shareholders or members that have a 
proprietary interest in its income or assets; and (iv) is subject to 
restrictions preventing the private inurement of its income and assets.
    Paragraph (f)(2)(iv) describes the requirements for FFIs with only 
low-value accounts to qualify for certified deemed-compliant status. An 
FFI with only low-value accounts will qualify for certified deemed-
compliant status if: (i) The FFI is an FFI solely because it accepts 
deposits in the ordinary course of a banking or similar business as

[[Page 9036]]

described in Sec.  1.1471-5(e)(1)(i) or, as a substantial portion of 
its business, holds financial assets for the account of others as 
described in Sec.  1.1471-5(e)(ii); (ii) no financial account 
maintained by the FFI (or, in the case of an FFI that is a member of an 
expanded affiliated group, by any member of the expanded affiliated 
group) has a balance or value in excess of $50,000; and (iii) the FFI 
has no more than $50 million in assets on its balance sheet (and, in 
the case of an FFI that is a member of an expanded affiliated group, 
the entire expanded affiliated group has no more than $50 million in 
assets on its consolidated or combined balance sheet).
    Paragraph (f)(3) provides, generally, that an owner-documented FFI 
is eligible for certified deemed-compliant status if it is not 
described in Sec.  1.1471-5(e)(1)(i), (ii), or (iv) and is not 
affiliated with another FFI described in those sections, it maintains 
no financial accounts for nonparticipating FFIs, it does not issue debt 
that constitutes a financial account in excess of $50,000 to any 
person, it provides a withholding agent with all required documentation 
regarding its owners, and the withholding agent agrees to report to the 
IRS the information required with respect to any of the owners of the 
owner-documented FFI that are specified U.S. persons. Because an owner-
documented FFI is required to provide each withholding agent with 
documentation and the withholding agent must agree to report on behalf 
of the owner-documented FFI, an owner-documented FFI may have certified 
deemed-compliant status only with respect to a specific withholding 
agent.
    The Treasury Department and the IRS are considering how to address 
specific organizations or classes of organizations that may not be 
deemed to comply with the requirements of section 1471(b) due to their 
use to circumvent the purposes of chapter 4.
    In addition, the Treasury Department and the IRS are considering 
how the conditions for deemed-compliant status should apply where an 
FFI is described in more than one subparagraph of section 1471(d)(5), 
because, for example, it accepts deposits in the ordinary course of a 
banking business and, as a substantial portion of its business, holds 
financial assets for the account of others.
F. Recalcitrant Account Holder
    Paragraph (g) defines the term recalcitrant account holder and 
provides guidance on when an account holder will be treated as 
recalcitrant. Generally, a recalcitrant account holder is any holder of 
an account maintained by a participating FFI if the account holder is 
not an FFI and the account holder either (i) Fails to comply with the 
participating FFI's request for documentation or information to 
establish whether the account is a U.S. account, (ii) fails to provide 
a valid Form W-9 upon the request of the participating FFI, (iii) fails 
to provide a correct name and TIN upon request of the FFI after the 
participating FFI receives notice from the IRS indicating a name/TIN 
mismatch, or (iv) fails to provide a valid and effective waiver of 
foreign law if foreign law prevents reporting with respect to the 
account holder by the participating FFI. The IRS intends to extend the 
``B'' notice process currently used for name/TIN mismatches in Form 
1099 reporting to the reporting of U.S. accounts and will notify a 
participating FFI if a name and TIN combination provided on a form is 
incorrect. The Treasury Department and the IRS are considering whether 
participating FFIs should be required to use the IRS on-line TIN 
matching program to ensure that its U.S. account holders have provided 
the correct name and TIN combination prior to filing the form for 
reporting U.S. accounts with the IRS, but if this requirement were 
adopted, it would begin no earlier than January 1, 2015. Paragraph (g) 
also sets forth the rules for when a participating FFI will start and 
cease treating an account holder as recalcitrant.
G. Passthru Payments
    Paragraph (h) of Sec.  1.1471-5 defines a passthru payment as any 
withholdable payment and any foreign passthru payment. The proposed 
regulations reserve on the definition of a foreign passthru payment, 
but see the discussions regarding the proposed implementation of 
reporting on certain foreign payments in section X of this preamble and 
withholding in section XIX of this preamble.
H. Expanded Affiliated Groups
    Section 1471(e)(2) provides the definition of an expanded 
affiliated group for purposes of section 1471(e) and chapter 4, and 
Sec.  1.1471-5(i) incorporates that definition.

VII. Section 1.1471-6--Exempt Payments to Certain Beneficial Owners

    Section 1.1471-6 describes classes of beneficial owners that are 
exempt from withholding under section 1471(a) pursuant to section 
1471(f) (exempt beneficial owners). The classes of persons treated as 
exempt beneficial owners are: foreign governments, political 
subdivisions of a foreign government, and wholly owned 
instrumentalities and agencies of a foreign government; international 
organizations and wholly owned agencies or instrumentalities of an 
international organization; foreign central banks of issue; governments 
of U.S. territories; and certain foreign retirement plans.
    In general, the principles of section 892 and the regulations 
thereunder apply in determining whether a beneficial owner qualifies as 
a foreign government. The definition of a controlled entity of a 
foreign government has been expanded from the definition set forth in 
Sec.  1.892-2T to include entities that are owned and controlled by 
more than one foreign sovereign, and paragraph (b)(5) prescribes that 
such entities will qualify as exempt beneficial owners except when they 
are financial institutions described in section 1471(d)(5)(A) or (B) 
and the regulations thereunder. The principles of section 7701(a)(18) 
and the regulations thereunder generally apply to determine whether a 
beneficial owner qualifies as an international organization. The 
principles of section 895 and the regulations thereunder generally 
apply to determine whether a beneficial owner qualifies as a foreign 
central bank. Additionally, a foreign central bank is exempt from 
withholding under chapter 4 with respect to income earned on collateral 
held by the foreign central bank in the normal course of its 
operations.
    Under paragraph (f), certain foreign retirement funds will qualify 
as exempt beneficial owners. Specifically, a fund that is eligible for 
the benefits of an income tax treaty with the United States with 
respect to income that the fund derives from U.S. sources and that is 
generally exempt from income tax in that country is an exempt 
beneficial owner if it operates principally to administer or provide 
pension or retirement benefits. A fund that is formed for the provision 
of retirement or pension benefits under the law of the country in which 
it is established will also qualify as an exempt beneficial owner if: 
(i) It receives only employer, government, or employee contributions 
that are limited by reference to earned income, (ii) no single 
beneficiary has a right to more than five percent of the fund's assets, 
and (iii) its investment income is exempt from tax under the laws of 
the country in which it is organized or in which it operates as a 
result of its status as a retirement or pension plan in that country, 
or it receives 50 percent or more of its total contributions from the 
government or employers.

[[Page 9037]]

    An entity that is described in Sec.  1.1471-6(g) and is wholly 
owned by one or more exempt beneficial owners is also an exempt 
beneficial owner.

VIII. Section 1.1472-1--Withholdable Payments to Non-Financial Foreign 
Entities (NFFEs)

A. General Rules for Withholding Under Section 1472
    Section 1.1472-1 provides rules regarding the withholding and 
reporting requirements of section 1472. Except as otherwise provided in 
section 1472 and Sec.  1.1472-1, a withholding agent must withhold tax 
of 30 percent of any withholdable payment made to an NFFE, unless the 
beneficial owner of such payment is the NFFE or another NFFE, the 
withholding agent can treat the beneficial owner as an NFFE that does 
not have any substantial U.S. owners or as an NFFE that has identified 
its substantial U.S. owners, and the withholding agent reports the 
required information with respect to any substantial U.S. owners. 
Paragraph (b)(2) also provides a rule to coordinate the withholding 
obligations under these proposed regulations with the withholding 
obligations set forth in an applicable FFI agreement for withholdable 
payments made by a participating FFI. In general, a participating FFI 
that complies with its FFI agreement is considered to have satisfied 
its obligations under section 1472(a) and Sec.  1.1472-1.
C. Exceptions From Withholding Under Section 1472
    Paragraph (c) contains exceptions to the withholding rules 
described in Sec.  1.1472-1(b) for withholdable payments made to 
certain excepted NFFEs. Paragraphs (c)(1)(i) through (vi) of Sec.  
1.1472-1 identify categories of entities that are exempt from 
withholding under section 1472(a) and (c). Paragraph (c)(1)(iv) of 
Sec.  1.1472-1 expands the statutory exception to include a government 
of a U.S. territory. Paragraph (c)(1)(v) provides an exception for an 
NFFE that is an active NFFE. An active NFFE is any NFFE if less than 50 
percent of its gross income for the calendar year is passive income and 
less than 50 percent of its assets are assets that produce or are held 
for the production of dividends, interest, rents and royalties (other 
than those derived in the active conduct of a trade or business), 
annuities, or other passive income. Paragraph (c)(1)(vi) clarifies that 
an entity that is the recipient and beneficial owner of a withholdable 
payment that is described in Sec.  1.1471-5(e)(5) shall not be subject 
to withholding under section 1472.
    Paragraph (c)(2) provides that payments to a WP and a WT are not 
subject to withholding under section 1472(a). This is because a WP or 
WT must generally assume primary withholding responsibilities with 
respect to reportable amounts under chapter 3 on behalf of their 
partners, owners, or beneficiaries, respectively, pursuant to their 
withholding agreements with the IRS under section 1441. Because WP and 
WT agreements are expected to be modified to take into account 
withholding obligations under chapter 4, it is not necessary to 
withhold under section 1472(a) on payments to such entities. Instead, 
the WP or WT will be required to assume primary chapter 4 withholding 
responsibility and to identify the chapter 4 status of its partners, 
owners, or beneficiaries to determine whether it must withhold under 
section 1471 or 1472.
D. Establishing When a Withholding Agent May Treat a Withholdable 
Payment as Made to a Payee
    Paragraphs (d)(1) through (5) of Sec.  1.1472-1 provide rules that 
clarify the coordination between Sec. Sec.  1.1472-1 and 1.1471-3. In 
general, for purposes of Sec.  1.1472-1, a withholding agent may treat 
the payee of a payment (as determined under Sec.  1.1471-3) as the 
beneficial owner of the payment, and must determine the chapter 4 
status of such payee in accordance with the rules of Sec.  1.1471-3. In 
addition, paragraph (d)(5) provides that the presumption rules under 
Sec.  1.1471-3(f) must be applied to determine the chapter 4 status of 
a payee when the withholding agent does not have valid documentation 
that it can rely upon to determine the chapter 4 status of the payee.
E. Information Reporting Requirement
    Paragraph (e) of Sec.  1.1472-1 provides information reporting 
requirements with respect to withholdable payments made to a payee and 
the income tax filing requirement of a withholding agent that withholds 
under Sec.  1.1472-1. In addition, it sets forth the information 
reporting rules with respect to substantial U.S. owners of certain 
NFFEs.

IX. Section 1.1473-1--Section 1473 Definitions

A. Withholdable Payment
    Generally, paragraph (a) of Sec.  1.1473-1 defines withholdable 
payment as any payment of U.S. source FDAP income and any gross 
proceeds from the sale or other disposition of any property which may 
produce interest or dividends from sources within the United States 
with respect to a sale or disposition occurring after December 31, 
2014. For chapter 4 purposes, the term FDAP income means fixed or 
determinable annual or periodic income as defined for purposes of 
chapter 3 (without regard to the exemptions from withholding). 
Paragraph (a)(2)(i)(B) clarifies that an exclusion from withholding 
under chapter 3 or an exclusion from taxation under section 881 does 
not exclude such amount from the definition of U.S. source FDAP for the 
purpose of determining whether a payment is a withholdable payment 
under chapter 4. In addition, paragraphs (a)(2)(vi) and (a)(3)(iii)(B) 
provide that interest accrued between payment dates is not treated as 
FDAP, but is instead treated as gross proceeds solely for purposes of 
chapter 4.
    To determine the source of income, paragraph (a)(2)(ii)(A) cross-
references the rules provided in sections 861 through 865 and other 
relevant Code provisions. However, as provided in section 1473(1)(C), 
paragraph (a)(2)(ii)(B) provides that interest described in section 
861(a)(1)(A)(i) or (ii) (bank deposit interest paid with respect to 
offshore accounts) is treated as income from sources within the United 
States for purposes of the definition of withholdable payment. Similar 
to the rule that applies for purposes of withholding under chapter 3, 
paragraph (a)(2)(ii)(A) provides that if a withholding agent cannot 
determine the source of a payment at the time the payment is made, the 
payment is treated as U.S. source.
    Generally, paragraph (a)(3) defines the term sale or other 
disposition as any sale, exchange, or other disposition that requires 
the recognition of gain or loss under section 1001 from property of a 
type that can produce interest or dividends from sources within the 
United States. Paragraph (a)(3)(i)(C) provides a special rule that 
limits gross proceeds paid by a clearing organization to the net amount 
paid or credited to an account of a member of the clearing organization 
if the clearing organization settles sales and purchases of securities 
between member organizations on a net basis. Paragraph (a)(3)(ii) 
provides rules for determining when property is of a type that can 
produce interest or dividends from sources within the United States. 
Paragraph (a)(3)(iii)(A) provides rules for determining when gross 
proceeds are paid. Paragraph (a)(3)(iii)(B) sets forth the rules for 
determining the amount of gross

[[Page 9038]]

proceeds from a sale or other disposition.
    Paragraph (a)(4) provides a list of payments that are excluded from 
the definition of withholdable payments. This list includes original 
issue discount from certain short-term obligations, income that is 
taken into account as effectively connected with the conduct of a trade 
or business in the United States, certain payments in the ordinary 
course of the withholding agent's business, gross proceeds from the 
sale of property that can produce income that is excluded from the 
definition of withholdable payment, and certain broker transactions 
that involve the sale of fractional shares. While the proposed 
regulations do not explicitly exempt payments with respect to State and 
local bonds, interest on State and local bonds is excluded from gross 
income under section 103, and such interest is thus not a withholdable 
payment. Moreover, interest that is excluded from gross income under 
section 103 is not treated as gross income from sources within the 
United States under section 861(a), and thus gross proceeds from the 
sale of bonds that give rise to interest that is excluded under section 
103 are not withholdable payments.
    Paragraph (a)(5) provides special payment rules for flow-through 
entities with respect to U.S. source FDAP income allocated to partners, 
owners, and beneficiaries in these entities that mirror the rules under 
Sec.  1.1441-5. Paragraph (a)(5) reserves on how payments of gross 
proceeds are to be allocated to such persons.
B. Substantial U.S. Owner
    Paragraph (b) provides the definition of substantial U.S. owner. 
Generally, the term substantial U.S. owner means any specified U.S. 
person (as defined in paragraph (c)) that owns, directly or indirectly, 
more than ten percent of the stock of a corporation, or with respect to 
a partnership, more than ten percent of the profits interests or 
capital interests in such partnership. For trusts, a substantial U.S. 
owner is any specified U.S. person that holds, directly or indirectly, 
more than ten percent by value of the beneficial interests in such 
trust, or with respect to a grantor trust, any specified U.S. person 
that is an owner of such grantor trust.
    Paragraphs (b)(2) and (3) set forth attribution rules to determine 
indirect ownership of stock, partnership interests, and beneficial 
trust interests. These rules are based on the rules provided in Sec.  
1.958-1 for determining stock ownership of controlled foreign 
corporations.
    Paragraph (b)(3) provides the rules for determining whether a 
specified U.S. person will be treated as directly or indirectly holding 
a beneficial interest in a foreign trust. These rules are generally 
coordinated with the rules provided in the recently published temporary 
regulations under section 6038D, regarding information reporting 
requirements of certain U.S. persons with respect to their interests in 
foreign trusts. See TD 9567, 76 FR 78560 (December 19, 2011). Paragraph 
(b)(4) provides a special rule under which a beneficiary of a trust 
will not be treated as a substantial U.S. owner if the beneficiary has 
a right only to discretionary distributions and receives, directly or 
indirectly, discretionary trust distributions that do not exceed $5,000 
in a calendar year or if the beneficiary has a right to mandatory 
distributions and the value of such beneficiary's interest does not 
exceed $50,000.
    Paragraph (b)(5) provides a special rule for certain investment 
vehicles and insurance companies that issue (or are obligated to make 
payments with respect to) cash value insurance or annuity contracts. 
This rule applies the rules of paragraph (b)(1)(i) through (iii) with a 
threshold of zero percent, rather than ten percent.
    Paragraph (b)(6) specifies that a foreign entity may determine if 
it has one or more substantial U.S. owners on either the last day of 
the foreign entity's accounting year or the date on which the foreign 
entity provides documentation to the withholding agent that maintains 
the foreign entity's account.
C. Specified U.S. Person
    Paragraph (c) provides the definition of specified U.S. person. A 
specified U.S. person is any U.S. person except as provided in 
paragraph (c). Persons excluded from the definition of specified U.S. 
person include: corporations the stock of which is regularly traded on 
an established securities market; corporations that are affiliates of 
such corporations; organizations that are exempt from tax under section 
501(a); individual retirement plans (as defined in section 
7701(a)(37)); real estate investment trusts (as defined in section 
856); regulated investment companies (as defined in section 851); 
common trust funds (as defined in section 584(a)); dealers in 
securities, commodities, or notional principal contracts (as defined in 
section 475(c) and (e)) and brokers (as defined in section 6045(c) and 
Sec.  1.6045-1(a)(1)). The United States and its wholly owned agencies 
or instrumentalities are also excluded, as are the States, the District 
of Columbia, the U.S. territories, and any political subdivision or 
wholly owned agency or instrumentality of any of the foregoing.
D. Withholding Agent
    Section 1473(4) defines a withholding agent as any person, in 
whatever capacity acting, having the control, receipt, custody, 
disposal, or payment of any withholdable payment. Paragraph (d) 
incorporates this definition and generally adopts rules similar to 
those provided in the regulations under chapter 3. Paragraph (d) 
specifically includes participating FFIs and grantor trusts in the 
definition of withholding agent. Paragraph (d)(6) provides an exception 
from withholding agent status for individuals making payments that are 
not in the ordinary course of the individual's trade or business.
E. Foreign Entity
    Paragraph (e) defines the term foreign entity as any entity that is 
not a U.S. person, including a territory entity.

X. Section 1.1474-1--Liability for Tax Withheld

    Paragraph (a) provides that a withholding agent that fails to 
deposit tax that it is required to withhold under chapter 4 is liable 
for such tax and applicable penalties and additions to tax. Paragraph 
(b) provides rules for a withholding agent's payment of withholding 
tax. Paragraph (c)(1) provides rules for the filing of income tax 
returns by withholding agents for years beginning with the 2014 
calendar year and prescribes the payments required to be reported on 
such returns. These rules generally mirror the rules for returns that 
are filed under chapter 3. Such returns are required to be filed on 
Form 1042, Annual Withholding Tax Return for U.S. Source Income of 
Foreign Persons, the same income tax return described in Sec.  1.1461-
1(b)(1) for withholding agents to report income paid and taxes withheld 
under chapter 3. Paragraph (c)(2) prescribes the requirements 
applicable to the filing of an amended Form 1042.
    Paragraph (d)(1) prescribes the requirements for the filing of 
information returns by withholding agents to report payments subject to 
reporting for chapter 4 purposes and the recipients required to be 
reported on those forms. The IRS anticipates that such returns will be 
filed on Forms 1042-S, Foreign Person's U.S. Source Income Subject to 
Withholding. Because many FFIs have systems designed to comply with the 
current Forms 1042 and 1042-S requirements for purposes of payments 
subject to reporting under

[[Page 9039]]

chapter 3, the IRS intends to modify the current Form 1042-S used by 
withholding agents for chapter 3 purposes to meet the additional 
reporting requirements of chapter 4 and to coordinate reporting in 
cases in which withholding under both chapters applies to a payment as 
described in Sec.  1.1474-6.
    Paragraph (d)(2) prescribes the amounts required to be reported on 
Forms 1042-S and provides for a transitional rule for reporting in 2016 
and 2017 requiring participating FFIs to report on a payee-specific 
basis FDAP income from foreign sources and ``other financial payments'' 
made in the 2015 and 2016 calendar years to nonparticipating FFIs. The 
definition of the term ``other financial payment'' is reserved, and 
comments are requested on the types of payments that should be included 
in this class of payments for purposes of this reporting requirement.
    Paragraph (d)(3) prescribes the information required to be reported 
on Form 1042-S and paragraph (d)(4) prescribes the methods for 
reporting. Paragraph (e) references the requirement for filing Forms 
1042-S on magnetic media with respect to reporting by financial 
institutions on such media even when they file under 250 returns for a 
year. These rules are provided in Sec.  301.1474-1. Paragraph (f) 
provides for the indemnification of a withholding agent against claims 
for amounts withheld pursuant to chapter 4. Paragraph (g) provides for 
the same extensions of time to file Forms 1042 and 1042-S as provided 
in Sec.  1.1461-1(g). Paragraph (h) states applicable penalties and 
additions to tax related to these requirements. Paragraph (i) describes 
the reporting requirements of a withholding agent that reports 
information with respect to one or more specified U.S. persons that 
hold an interest in an entity that the withholding agent treats as an 
owner-documented FFI.

XI. Section 1.1474-2--Adjustments for Overwithholding and 
Underwithholding of Tax

    Section 1.1474-2 provides rules for adjustments for overwithholding 
and underwithholding of tax that are substantially similar to the rules 
for chapter 3 withholding under Sec.  1.1461-2, modified to reflect the 
purposes of chapter 4. Specifically, the definition of overwithholding 
under Sec.  1.1461-2 has been revised to clarify that for purposes of 
chapter 4, overwithholding refers to an amount actually withheld that 
is in excess of both the amount required to be withheld under chapter 4 
and the actual tax liability of the beneficial owner of the payment 
that was subject to withholding under chapter 4. Furthermore, in order 
to apply the reimbursement and set-off procedure for any overwithheld 
amount under chapter 4, the withholding agent must obtain valid 
documentation from the beneficial owner or payee to identify its 
chapter 4 status and determine that withholding was not required. In 
addition, the time period for applying the reimbursement procedure 
under Sec.  1.1474-2(a)(3) differs from Sec.  1.1461-2, because a 
withholding agent may not reimburse itself by reducing any deposit of 
tax unless the reduction occurs before the earliest of the due date for 
filing the Form 1042-S for the calendar year of overwithholding, the 
date that the Form 1042-S is actually filed by the withholding agent, 
or the date Form 1042-S is furnished to the recipient.

XII. Section 1.1474-3--Withheld Tax as a Credit to the Beneficial Owner 
of Income

    Section 1.1474-3 provides rules that are substantially similar to 
the rules under Sec.  1.1462-1 relating to withheld tax as a credit to 
the beneficial owner of income. Paragraph (a) of Sec.  1.1474-3 
generally provides that the beneficial owner of the income or payment 
to which the withheld tax is attributable is allowed a credit against 
such beneficial owner's income tax liability in the amount of tax 
actually withheld under chapter 4. In addition, the beneficial owner 
shall include in gross income the entire amount of income, if any, of 
the payment subject to withholding under chapter 4, including amounts 
that are subject to withholding under the gross-up formula in Sec.  
1.1473-1(a)(2)(v). Paragraph (b) of Sec.  1.1474-3 provides that 
amounts withheld under chapter 4 are deemed to have been paid by the 
beneficial owner of the item of income subject to withholding under 
chapter 4.

XIII. Section 1.1474-4--Tax Paid Only Once

    Section 1.1474-4 provides that if the tax required to be withheld 
under chapter 4 is paid by the beneficial owner, payee, or withholding 
agent, the IRS may not collect from any other, regardless of the 
original liability for the tax. Furthermore, Sec.  1.1471-4 provides 
that the person who has an obligation to withhold under chapter 4 and 
fails to do so is not relieved from liability from interest or 
penalties for the failure to withhold.

XIV. Section 1.1474-5--Refunds or Credits

    Paragraph (a) of Sec.  1.1474-5 provides the general rule that if 
an overpayment of tax results from the withholding of tax under chapter 
4, the beneficial owner of an amount subject to withholding may claim a 
refund or credit for the overpayment of tax subject to the requirements 
and limitations described below and in accordance with the rules under 
chapter 65. For this purpose, a copy of Form 1042-S must be attached to 
the beneficial owner's income tax return consistent with the 
requirements described in Sec.  301.6402-3(e), which shall be amended 
to conform to this requirement.
    Section 1.1474-5 also provides that to the extent the overpayment 
of tax was paid by the withholding agent out of its own funds, such 
amount may be credited or refunded to the withholding agent. However, 
paragraph (a) does not permit a nonparticipating FFI that is a 
withholding agent with respect to a payment to claim a credit or 
refund. Paragraph (a)(2) also provides that a nonparticipating FFI that 
is the beneficial owner of the payment to which the withholding under 
chapter 4 is attributable is not entitled to a credit or refund except 
to the extent it is entitled to a reduced rate of withholding by reason 
of any income tax treaty obligation of the United States, and that no 
interest shall be allowed or paid with respect to such a credit or 
refund.
    Furthermore, Sec.  1.1474-5 implements section 1474(b)(3) by 
requiring a beneficial owner that is an entity, other than an entity 
that is entitled to a reduced rate of withholding by reason of any 
income tax treaty obligation of the United States, to certify to the 
IRS that the entity does not have any substantial U.S. owners or to 
identify its substantial U.S. owners or to provide documentation 
establishing that withholding was not required (for example, 
establishing an NFFE's status as an excepted NFFE).
    The Treasury Department and the IRS are considering what refund 
procedures may be appropriate with respect to tax withheld on payments 
to limited FFIs or limited branches (including QIs that are limited 
FFIs or that have limited branches), and request comments regarding the 
procedural safeguards that should be put in place to prevent abuse.

XVI. Section 1.1474-6--Coordination of Chapter 4 Withholding With Other 
Withholding Provisions

    Section 1.1474-6 coordinates withholding under chapter 4 with 
withholding under other provisions of the Code. With respect to a 
payment subject to withholding under Sec.  1.1441-2(a), paragraph 
(b)(1) provides that, to the extent withholding is applied under 
chapter 4 on a payment, a withholding

[[Page 9040]]

agent may credit the amount withheld against the withholding agent's 
liability under section 1441 (or section 1442 or 1443) on the same 
payment. Paragraph (b)(2) provides rules for purposes of designating 
the withholding as having been made under section 1441 (or section 1442 
or 1443) or chapter 4.
    Paragraph (c) provides that an amount subject to withholding under 
section 1445 is not subject to withholding under chapter 4 and 
coordinates withholding under chapter 4 with the rules provided in 
Sec.  1.1441-3(c) for distributions by qualified investment entities 
and United States real property holding corporations (USRPHCs). 
Generally, to the extent withholding under section 1441 is applicable 
to a distribution or a portion of the distribution made by a qualified 
investment entity or USRPHC, the coordination rule described in 
paragraph (b)(1) apply to such amounts. Paragraph (c) also adopts the 
intermediary reliance rule of Sec.  1.1441-3(c)(2)(ii)(C) with respect 
to determinations made by a USRPHC regarding the portion of the 
distribution that is estimated to be a dividend. Paragraph (d) 
generally provides that a withholdable payment or a foreign passthru 
payment subject to withholding under section 1446 is not subject to 
withholding under chapter 4 and reserves on the coordination of 
withholding on distributions of gross proceeds subject to tax under 
section 1446.
    Paragraph (e) reserves on the coordination of withholding under 
chapter 4 for payments subject to backup withholding under section 
3406, and the Treasury Department and the IRS seek comments on how 
these requirements should be coordinated in light of the objectives of 
chapter 4 withholding. Paragraph (f) provides an example of the 
application of the coordination rules.
    This section does not provide coordination rules for withholding 
under chapters 3 and 4 on substitute payments that are part of a chain 
of securities lending transactions using identical securities. Notice 
2010-46 outlined a proposed withholding and reporting framework to 
reduce instances of potential excessive or cascading taxation and to 
properly account for the role of financial intermediaries in securities 
lending transactions. Notice 2010-46 also provided transitional rules 
that taxpayers may rely on prior to the publication of final 
regulations. The proposed framework and the transitional rules of 
Notice 2010-46 are limited to withholding on substitute dividend 
payments under chapter 3 and do not address chapter 4 withholding. The 
Treasury Department and the IRS invite comments on issues relating to 
chapter 4 withholding in the context of the transactions described in 
Notice 2010-46.

XVII. Section 1.1474-7--Confidentiality of Information

    Section 1.1474-7 provides that information obtained to comply with 
the requirements of chapter 4 may only be used for that purpose or for 
purposes permitted under section 6103. Paragraph (a) incorporates the 
regulation under Sec.  1.3406(f)-1(a) for confidentiality of 
information. Consistent with section 1474(c)(2), paragraph (b) provides 
an exception to paragraph (a), permitting the disclosure of the 
identity of a participating FFI or deemed-compliant FFI.

XVIII. Section 301.1474-1--Required Use of Magnetic Media for Financial 
Institutions Filing Form 1042-S

    Section 301.1474-1 provides that a financial institution must file 
electronically the information returns with respect to withheld taxes 
for which the institution is liable as a withholding agent under 
section 1461 or 1474(a), as the limitation for persons required to file 
fewer than 250 returns during the tax year does not apply.
    Paragraph (b) provides that the Commissioner may grant hardship 
waivers from the requirement to file electronically, although it is 
intended that these waivers be granted only in exceptional cases. The 
Treasury Department and the IRS intend to issue published guidance 
setting forth the procedures by which a taxpayer may request a hardship 
waiver. Comments are requested regarding the waiver provision in this 
regulation.
    Paragraph (c) provides that penalties may be imposed under sections 
6723 and 6724 on a financial institution that fails to comply with this 
electronic filing requirement.

XIX. Future Guidance & Further Requests for Comments

    The Treasury Department and the IRS expect to issue future guidance 
on topics not covered in these proposed regulations. This guidance will 
take a variety of forms. For example, the IRS expects to issue a draft 
model FFI agreement and draft forms relating to chapter 4 reporting. In 
addition, future regulations will provide guidance on substantive and 
procedural issues not addressed in these proposed regulations. The 
discussion below addresses certain significant aspects of future 
guidance.
A. Registration Process Preview
1. Registering as Participating FFIs or Deemed-Compliant Entities
    The IRS will make available an online process for registering FFIs 
as participating FFIs or deemed-compliant FFIs no later than January 1, 
2013. The online process will allow each FFI to register for 
participating, limited, or registered deemed-compliant FFI status, 
enter into an FFI agreement, complete a required certification, and 
obtain an FFI-EIN, if applicable. Special registration procedures must 
be followed by FFIs that are members of an expanded affiliated group 
(FFI group). As part of the registration process, an online FFI account 
will be created by the IRS for each FFI, and it is anticipated that 
FFIs will be able to manage their account information, including making 
annual certifications, if required, electronically. The online account 
will allow the IRS and FFIs to more effectively manage and update FFI 
information to ensure that it is current.
2. Expanded Affiliated Groups
    Each member of an FFI group must designate a lead FFI (Lead FFI) to 
initiate and manage the online registration process for the FFI group. 
The Lead FFI that assumes this role must enter the system to register 
itself and, as part of that process, identify each FFI that is a member 
of the FFI group (FFI Member) that will register for participating, 
limited, or registered deemed-compliant FFI status. Each FFI member, 
including the Lead FFI, will be assigned a unique FATCA identifier 
(FATCA ID) to be used in completing the registration process and 
associating FFI group members with the FFI group. Each FFI Member must 
enter the online registration system to complete its registration as a 
participating FFI, limited FFI, or registered deemed-compliant FFI. The 
Lead FFI will be responsible for managing the FFI group information and 
will be able to add or remove members from the FFI group to reflect 
updated information. For the registration of any FFI member to be 
complete, and for its chapter 4 status as a participating, limited, or 
deemed-compliant FFI to be obtained, each FFI member must have 
completed its registration process.
    More information about the online registration process will be 
provided in future guidance and instructions to the registration form.
B. QIs, WPs, and WTs
    Apart from any period of limited FFI status, an FFI that is a QI, 
WP, or WT will be required to fulfill the chapter 4

[[Page 9041]]

reporting and withholding requirements of a participating FFI to retain 
its status under chapter 3. The IRS intends to amend each of these 
withholding agreements to incorporate the requirements of a 
participating FFI under chapter 4. The Treasury Department and the IRS 
also intend for this purpose to modify the descriptions of the QI, WP, 
and WT agreements under Sec. Sec.  1.1441-1(e)(5), 1.1441-5(c)(2), and 
1.1441-5(e)(5)(v), respectively. Additionally, the Treasury Department 
and the IRS are considering, as an alternative to external audits, 
coordinating the audit requirements for QIs, WPs, and WTs (including 
their chapter 3 requirements) with the verification procedures 
described in Sec.  1.1471-4(a)(6) applicable to other participating 
FFIs. Comments are requested on these requirements, including 
reasonably objective standards under which such entities (and other 
participating FFIs) would determine whether they have found material 
failures in their compliance with the requirements of their respective 
agreements warranting disclosure to the IRS (as referenced in Sec.  
1.1471-4(a)(6)).
C. Withholding Certificates
    The IRS anticipates that the Form W-8 series will be updated to 
request additional information from a taxpayer that would be relevant 
to establishing a taxpayer's chapter 4 status, for example, by 
including a new field for an FFI-EIN.
D. Additional Categories of Deemed-Compliant FFIs
    The Treasury Department and the IRS request comments regarding 
whether there should be additional categories of deemed-compliant FFIs 
not addressed in the proposed regulations. Consideration is being 
given, for example, to providing a category of deemed-compliant FFIs 
for entities that issue certain insurance or annuity contracts that has 
requirements that are analogous to the requirements for local FFIs.
E. Passthru Payments
    While these proposed regulations provide that withholding on 
passthru payments will begin no sooner than January 1, 2017, the 
Treasury Department and the IRS are considering ways to ease the 
compliance burdens associated with passthru payment withholding. Among 
the alternatives the Treasury Department and the IRS are considering is 
whether to allow certain FFIs to rely upon a safe harbor passthru 
percentage if the FFI does not elect to calculate its exact passthru 
percentage. In addition, the Treasury Department and the IRS are 
considering whether and to what extent to allow rounding conventions to 
limit the number of possible passthru percentages that could apply. 
Comments are requested on these and other recommendations to ease the 
compliance burden associated with foreign passthru payment withholding.
    In addition, future guidance will prevent U.S. and territory 
financial institutions from serving as ``blockers'' with respect to 
foreign passthru payment reporting and withholding. The Treasury 
Department and the IRS are aware that, because a U.S. withholding agent 
is currently required to withhold only with respect to withholdable 
payments, while a participating FFI is generally required to withhold 
on all foreign passthru payments, this creates the potential for FFIs 
to use U.S. withholding agents as ``blockers'' for foreign passthru 
payments made to nonparticipating FFIs. The Treasury Department and the 
IRS are assessing various options to address this issue, including 
expanding the definition of withholdable payments, or requiring FFIs to 
perform withholding on foreign passthru payments made to U.S. 
withholding agents acting as intermediaries. Comments are requested 
regarding possible approaches to address this issue.
F. Gross Proceeds
    Section 1.1473-1(a)(5)(vii) reserves on the issue of how a 
withholding agent that is a flow-through entity determines the amount 
of gross proceeds allocable to a partner, beneficiary, or owner in the 
entity for purposes of the withholding requirements of chapter 4. The 
Treasury Department and the IRS request additional comments regarding 
methods to determine the amount of gross proceeds in such cases that 
are administratively feasible and that do not inappropriately favor 
investment in U.S. assets through flow-through entities over direct 
investment with respect to the withholding requirements of chapter 4.
G. Grandfathered Obligations
    Section 1.1471-2(b) provides an exemption from withholding for 
certain grandfathered obligations but does not include in the 
definition of a grandfathered obligation any interest in an entity that 
is treated as equity for U.S. tax purposes, regardless of whether such 
entity holds assets that give rise to grandfathered payments. The 
Treasury Department and the IRS request comments on whether it is 
appropriate to treat as grandfathered obligations certain equity 
interests in securitization vehicles that invest solely in debt and 
similar instruments if such vehicles will liquidate within a specified 
time frame given the types of investments they hold and the extent of 
their reinvestment in other assets, and, if so, the appropriate 
limitations on such treatment to prevent abuse.

Proposed Effective/Applicability Date

    The proposed regulations generally are proposed to apply on the 
date of publication of the Treasury decision adopting these rules as 
final regulations in the Federal Register. The requirements imposed by 
individual sections of these proposed regulations are proposed to take 
effect in accordance with the dates provided in those sections, as 
described in the preamble.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. It has also 
been determined that section 553(b) of the Administrative Procedure Act 
(5 U.S.C. chapter 5) does not apply to these regulations.
    The collection of information in these proposed regulations is 
contained, inter alia, in Sec. Sec.  1.1471-2, 1.1471-3, 1.1471-4, 
1.1472-1, and 1.1474-1. The IRS intends that these information 
collection requirements will be satisfied by persons complying with 
either revised chapter 3 reporting forms, new reporting forms based on 
final chapter 4 regulatory guidance, or the terms, conditions, and 
requirements of an FFI agreement that satisfies the requirements of a 
Model FFI Agreement to be issued in an IRS Revenue Procedure. As a 
result, for purposes of the Paperwork Reduction Act, the reporting 
burden associated with the collection of information in these proposed 
regulations will be reflected in the OMB Form 83-1, Paperwork Reduction 
Act Submission, associated with a new or revised form or the Model FFI 
Agreement.
    It is hereby certified that the collection of information in this 
notice of proposed rulemaking will not have a significant economic 
impact on a substantial number of small entities within the meaning of 
section 601(6) of the Regulatory Flexibility Act (5 U.S.C. chapter 6). 
Although the Treasury Department and the IRS anticipate that a 
substantial number of domestic small entities will be affected by the 
collection of information in this notice of proposed rulemaking, both 
the Treasury

[[Page 9042]]

Department and the IRS believe that the economic impact to these 
entities resulting from this notice of proposed rulemaking's 
information collection requirements will not be significant.
    The domestic small business entities that are subject to chapter 4 
and this notice of proposed rulemaking are those domestic business 
entities that are payors of U.S. source FDAP income that are presently 
subject to the information collection and reporting rules under chapter 
3. These domestic small business entities must be familiar with chapter 
3's information collection and reporting rules and forms so as to 
determine a payee's U.S. withholding status and, based on that status, 
withhold and remit the proper amount of tax on payments of U.S. source 
FDAP income. Small domestic business entities that are payors of U.S. 
source FDAP income have developed and implemented internal reporting 
and information collection systems under which the business entity 
satisfies its chapter 3 payee identification, withholding, and tax 
remittance requirements.
    The Treasury Department and the IRS intend to revise the present 
chapter 3 reporting forms, with the revised forms being used by a payor 
of U.S. source FDAP income to satisfy the payor's obligations under 
chapters 3 and 4. As a result, this notice of proposed rulemaking's 
information collection requirements build on reporting and information 
collection systems familiar to and currently used by payors of U.S. 
source FDAP income that are domestic small business entities, thereby 
reducing the burden imposed on domestic small business entities. 
Therefore, a Regulatory Flexibility Analysis under the Regulatory 
Flexibility Act is not required. Pursuant to section 7805(f), this 
notice of proposed rulemaking has been submitted to the Chief Counsel 
for Advocacy of the Small Business Administration for comment on its 
impact on small businesses. The IRS invites the public to comment on 
this certification.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and eight 
(8) copies) or electronic comments that are submitted timely to the 
IRS. The Treasury Department and the IRS request comments on all 
aspects of the proposed regulations. All comments will be available for 
public inspection and copying.
    While taxpayers are not required to submit comments and 
recommendations in any particular format, it would facilitate their 
review if comments follow these guidelines: (1) No general summary of 
chapter 4's provisions or the contents of the FATCA Notices is 
required; (2) comments and recommendations should be ordered starting 
with comments requested in the preamble and then based on the order of 
the proposed regulations, including a reference to the regulations that 
pinpoints the narrowest relevant section, subsection, paragraph, or 
further subdivision applicable to the comment or recommendation; and 
(3) recommendations should be set off and numbered sequentially 
throughout the comment letter. It is hoped that these guidelines will 
ease the burden in producing comments and facilitate the assessment 
thereof.
    A public hearing has been scheduled for May 15, 2012, beginning at 
10 a.m. in the Auditorium, Internal Revenue Building, 1111 Constitution 
Avenue NW., Washington, DC. Due to building security procedures, 
visitors must enter at the Constitution Avenue entrance. In addition, 
all visitors must present photo identification to enter the building. 
Because of access restrictions, visitors will not be admitted beyond 
the immediate entrance area more than 30 minutes before the hearing 
starts. For information about having your name placed on the building 
access list to attend the hearing, see the FOR FURTHER INFORMATION 
CONTACT section of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit electronic or 
written comments by April 30, 2012, and an outline of the topics to be 
discussed and the time to be devoted to each topic (signed original and 
eight (8) copies) by May 1, 2012. A period of 10 minutes will be 
allotted to each person for making comments. An agenda showing the 
scheduling of the speakers will be prepared after the deadline for 
receiving outlines has passed. Copies of the agenda will be available 
free of charge at the hearing.

Drafting Information

    The principal author of the regulations under sections 1471 through 
1474 is John Sweeney, Office of Associate Chief Counsel 
(International). However, other personnel from the IRS and the Treasury 
Department participated significantly in their development.
    The principal author of Sec.  301.1474-1 is Michael E. Hara, Office 
of the Associate Chief Counsel (Procedure and Administration).

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 301

    Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income 
taxes, Penalties, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR parts 1 and 301 are proposed to be amended as 
follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 is amended by adding 
entries in numerical order to read in part as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 1.1471-1 is also issued under 26 U.S.C. 1471.
    Section 1.1471-2 is also issued under 26 U.S.C. 1471.
    Section 1.1471-3 is also issued under 26 U.S.C. 1471.
    Section 1.1471-4 is also issued under 26 U.S.C. 1471.
    Section 1.1471-5 is also issued under 26 U.S.C. 1471.
    Section 1.1471-6 is also issued under 26 U.S.C. 1471.
    Section 1.1472-1 is also issued under 26 U.S.C. 1472.
    Section 1.1473-1 is also issued under 26 U.S.C. 1473.
    Section 1.1474-1 is also issued under 26 U.S.C. 1474.
    Section 1.1474-2 is also issued under 26 U.S.C. 1474.
    Section 1.1474-3 is also issued under 26 U.S.C. 1474.
    Section 1.1474-4 is also issued under 26 U.S.C. 1474.
    Section 1.1474-5 is also issued under 26 U.S.C. 1474.
    Section 1.1474-6 is also issued under 26 U.S.C. 1474.
    Section 1.1474-7 is also issued under 26 U.S.C. 1474.
    Section 301.1474-1 is also issued under 26 U.S.C.1474 * * *

    Par. 2. Section 1.1471-0 is added to read as follows.


Sec.  1.1471-0  Outline of regulation provisions for section 1471.

    This section lists captions contained in Sec. Sec.  1.1471-1 
through 1.1471-4.


Sec.  1.1471-1  Scope of chapter 4 of the Internal Revenue Code 
provisions and definitions.

    (a) Purpose and scope of chapter 4 of the Internal Revenue Code 
regulations.
    (b) Definitions.

[[Page 9043]]

    (1) Account.
    (i) Account.
    (ii) Custodial account.
    (iii) Depository account.
    (iv) Dormant account.
    (v) U.S. account.
    (2) Account holder.
    (3) AML due diligence.
    (4) Annuity contract.
    (5) Beneficial owner.
    (6) Broker.
    (7) Chapter 3.
    (8) Chapter 4 of the Internal Revenue Code.
    (9) Chapter 4 reportable amount.
    (10) Chapter 4 status.
    (11) Complex trust.
    (12) Customer master file.
    (13) Documentary evidence.
    (14) Documentation.
    (15) EIN.
    (16) Electronically searchable information.
    (17) Entity.
    (18) Excepted FFI.
    (19) Exempt beneficial owner.
    (20) Expanded affiliated group.
    (21) FATF.
    (22) FATF-compliant.
    (23) FFI.
    (i) Deemed-compliant FFI.
    (A) Certified deemed-compliant FFI.
    (B) Registered deemed-compliant FFI.
    (ii) Limited Branch.
    (iii) Limited FFI.
    (iv) Nonparticipating FFI.
    (v) Participating FFI.
    (24) FFI agreement.
    (25) FFI-EIN.
    (26) Financial account.
    (27) Financial institution.
    (28) Flow-through entity.
    (29) Foreign entity.
    (30) Foreign passthru payment.
    (31) Grantor trust.
    (32) Gross proceeds.
    (33) Insurance company.
    (34) Intermediary.
    (i) NQI.
    (ii) QI.
    (35) Life insurance contract.
    (36) NFFE.
    (i) Active NFFE.
    (ii) Excepted NFFE.
    (iii) Passive NFFE.
    (37) NQI withholding statement
    (38) NWP.
    (39) NWT.
    (40) Offshore obligation.
    (41) Participating FFI group.
    (42) Partnership.
    (43) Passthru payment.
    (44) Payee.
    (i) U.S. payee.
    (ii) Foreign payee.
    (45) Payor.
    (46) Person.
    (i) U.S. person.
    (ii) Foreign person.
    (47) Possession of the United States.
    (48) Preexisting obligation.
    (49) Preexisting entity account.
    (50) Preexisting individual account.
    (51) QI agreement.
    (52) Recalcitrant account holder.
    (53) Relationship manager.
    (54) Simple trust.
    (55) Specified U.S. person.
    (56) Standardized industry code.
    (57) Substantial U.S. owner.
    (58) Territory entity.
    (59) Territory financial institution.
    (60) Territory NFFE.
    (61) TIN.
    (62) U.S. owned foreign entity.
    (63) U.S. financial institution.
    (64) U.S. payor.
    (65) U.S. source FDAP income.
    (66) Withholdable payment.
    (67) Withholding.
    (68) Withholding agent.
    (69) Withholding certificate.
    (i) Flow-through withholding certificate.
    (ii) Intermediary withholding certificate.
    (70) WP.
    (71) WT.
    (c) Effective/applicability date.


Sec.  1.1471-2  Requirement to deduct and withhold tax on withholdable 
payments to certain FFIs.

    (a) Requirement to withhold on payments to FFIs.
    (1) General rule of withholding.
    (2) Special withholding rules.
    (i) Requirement to withhold on payments of U.S. source FDAP to 
participating FFIs that are NQIs, NWPs, or NWTs.
    (ii) Residual withholding responsibility of intermediaries and 
flow-through entities.
    (iii) Withholding on certain payments to QIs.
    (A) QIs making an election under section 1471(b)(3).
    (B) Special rule for QIs that are not FFIs.
    (iv) Withholding obligation of a territory financial institution.
    (v) Payments of gross proceeds.
    (3) Coordination of withholding under section 1471(a) and (b).
    (4) Payments for which no withholding is required.
    (i) Exception to withholding if the withholding agent lacks 
control, custody, or knowledge.
    (A) In general.
    (B) Example.
    (ii) Transitional exception to withholding for certain payments 
made prior to January 1, 2015.
    (A) In general.
    (B) Prima facie FFIs.
    (iii) Payments to a participating FFI.
    (iv) Payments to a deemed-compliant FFI.
    (v) Payments to an exempt beneficial owner.
    (vi) Payments to a territory financial institution.
    (b) Grandfathered obligations.
    (1) Grandfathered treatment of outstanding obligations.
    (2) Definitions.
    (i) Grandfathered obligation.
    (ii) Obligation.
    (iii) Outstanding on January 1, 2013.
    (iv) Material modification.
    (3) Application to flow-through entities.
    (i) Partnerships.
    (ii) Simple trusts.
    (iii) Grantor trusts.
    (c) Effective/applicability date.


Sec.  1.1471-3  Identification of payee.

    (a) Payee defined.
    (1) In general.
    (2) Payee with respect to a financial account.
    (3) Exceptions.
    (i) Certain foreign agents or intermediaries.
    (ii) Foreign flow-through entity.
    (iii) U.S. intermediary or agent of a foreign person.
    (iv) Territory financial institution.
    (v) Disregarded entity or branch.
    (vi) U.S. branch of certain foreign banks or insurance companies.
    (vii) Foreign branch of a U.S. financial institution.
    (b) Determination of payee's status.
    (1) Determining whether a payment is received by an intermediary.
    (2) Determination of entity type.
    (3) Determination of whether the payment is made to a QI, WP, or 
WT.
    (4) Determination of whether the payee is receiving effectively 
connected income.
    (c) Rules for reliably associating a payment with a withholding 
certificate or other appropriate documentation.
    (1) In general.
    (2) Reliably associating a payment with documentation when a 
payment is made through an intermediary or flow-through entity that is 
not the payee.
    (3) Requirements for validity of certificates.
    (i) Form W-9.
    (ii) Beneficial owner withholding certificate (Form W-8BEN).
    (iii) Withholding certificate of an intermediary, flow-through 
entity, or U.S. branch (Form W-8IMY).
    (A) In general.
    (B) Withholding statement.
    (1) In general.
    (2) Special requirements for an FFI withholding statement.
    (3) Special requirements for an NFFE withholding statement.

[[Page 9044]]

    (4) Special requirements for a territory institution withholding 
statement.
    (5) Special requirements for an exempt beneficial owner withholding 
statement.
    (C) Failure to provide allocation information.
    (D) Special rules applicable to a withholding certificate of a QI 
that assumes primary withholding responsibility under chapter 3.
    (E) Special rules applicable to a withholding certificate of a QI 
that does not assume primary withholding responsibility under chapter 
3.
    (F) Special rules applicable to a withholding certificate of a 
territory financial institution that agrees to be treated as a U.S. 
person for purposes of chapter 4 of the Internal Revenue Code.
    (G) Special rules applicable to a withholding certificate of a 
territory financial institution that does not agree to be treated as a 
U.S. person for purposes of chapter 4 of the Internal Revenue Code.
    (iv) Certificate for exempt status (Form W-8EXP).
    (v) Certificate for effectively connected income (Form W-8ECI).
    (4) Requirements for written statements.
    (5) Requirements for documentary evidence.
    (6) Applicable rules for withholding certificates, written 
statements, and documentary evidence.
    (i) Who may sign the certificate or written statement.
    (ii) Period of validity.
    (A) Withholding certificates.
    (B) Written statements.
    (C) Documentary evidence.
    (D) Change of circumstances.
    (1) Defined.
    (2) Obligation to notify withholding agent of a change in 
circumstances.
    (3) Withholding agent's obligation with respect to a change in 
circumstances.
    (iii) Record retention.
    (iv) Electronic transmission of withholding certificate, written 
statement, and documentary evidence.
    (v) Acceptable substitute withholding certificate.
    (vi) Documentation to be furnished for each account unless 
exception applies.
    (vii) Reliance on a prior version of a withholding certificate.
    (7) Documentation received after the time of payment.
    (d) Documentation requirements to establish payee's chapter 4 
status.
    (1) Identification of U.S. persons.
    (2) Identification of foreign individuals.
    (i) In general.
    (ii) Transitional exceptions for payments made prior to January 1, 
2017, with respect to preexisting obligations.
    (iii) Exception for offshore obligations.
    (3) Identification of participating FFIs.
    (i) In general.
    (ii) Transitional exception for payments made prior to January 1, 
2017, with respect to preexisting obligations.
    (4) Identification of nonparticipating FFIs.
    (i) In general.
    (ii) Special documentation rules for payments made to an exempt 
beneficial owner through a nonparticipating FFI.
    (5) Identification of registered deemed-compliant FFIs.
    (i) In general.
    (ii) Transitional exception for payments made prior to January 1, 
2017, with respect to preexisting obligations.
    (6) Identification of certified deemed-compliant FFIs.
    (i) Identification of nonregistering local banks.
    (ii) Identification of retirement plans.
    (A) In general.
    (B) Exception for offshore obligations.
    (C) Exception for preexisting offshore obligations.
    (iii) Identification of non-profit organizations.
    (A) In general.
    (B) Exception for offshore obligations.
    (C) Exception for preexisting offshore obligations.
    (iv) Identification of FFIs with only low-value accounts.
    (7) Identification of owner-documented FFIs.
    (i) In general.
    (ii) Auditor's letter substitute.
    (iii) Documentation for owners of payee.
    (iv) Content of FFI owner reporting requirement.
    (v) Exception for preexisting obligations.
    (8) Identification of exempt beneficial owners.
    (i) Identification of foreign governments and governments of U.S. 
possessions.
    (A) In general.
    (B) Exception for offshore obligations.
    (C) Exception for preexisting offshore obligations.
    (ii) Identification of international organizations.
    (iii) Identification of foreign central banks of issue.
    (A) In general.
    (B) Exception for offshore obligations.
    (C) Exception for preexisting offshore obligations.
    (iv) Identification of retirement funds.
    (A) In general.
    (B) Exception for offshore obligations.
    (C) Exception for preexisting offshore obligations.
    (v) Identification of entities wholly owned by exempt beneficial 
owners.
    (9) Identification of excepted FFIs.
    (i) Identification of nonfinancial holding companies.
    (A) In general.
    (B) Exceptions for offshore obligations.
    (ii) Identification of start-up companies.
    (A) In general.
    (B) Exception for offshore obligations.
    (C) Exception for preexisting obligations.
    (iii) Identification of certain nonfinancial entities in 
liquidation or bankruptcy.
    (A) In general.
    (B) Exception for offshore obligations.
    (C) Exception for preexisting offshore obligations.
    (iv) Identification of hedging/financing centers of nonfinancial 
groups.
    (A) In general.
    (B) Exception for offshore obligations.
    (v) Identification of section 501(c) organizations.
    (A) In general
    (B) Reason to know.
    (10) Identification of territory financial institutions.
    (i) Identification of territory financial institutions that are 
beneficial owners.
    (A) In general.
    (B) Exception for preexisting offshore obligations.
    (ii) Identification of territory financial institutions acting as 
intermediaries or that are flow-through entities.
    (iii) Reason to know.
    (11) Identification of NFFEs.
    (i) Identification of NFFEs that are publicly traded corporations.
    (A) Transitional exception for payments made prior to January 1, 
2017, with respect to preexisting obligations.
    (B) Exception for offshore obligations.
    (C) Exception for preexisting offshore obligations.
    (ii) Identification of NFFE affiliates.
    (A) Transitional exception for payments made prior to January 1, 
2017, with respect to preexisting obligations.
    (B) Exception for offshore obligations.
    (C) Exception for preexisting offshore obligations.
    (iii) Identification of territory NFFEs.
    (A) Exception for offshore obligations.
    (B) Exception for preexisting offshore obligations of $1,000,000 or 
less.
    (iv) Identification of active NFFEs.
    (A) Transitional exception for payments made prior to January 1, 
2017, with respect to preexisting obligations.
    (B) Exception for offshore obligations.
    (C) Exception for preexisting offshore obligations.
    (v) Identification of excepted NFFEs described in Sec.  1.1472-
1(c)(1)(iv).
    (vi) Identification of passive NFFEs.

[[Page 9045]]

    (A) Transitional exception for payments made prior to January 1, 
2017, to preexisting obligations.
    (B) Exception for offshore obligations.
    (C) Special rule for preexisting offshore obligations.
    (D) Required owner certification for passive NFFEs.
    (1) In general.
    (2) Exception for preexisting obligations of $1,000,000 or less.
    (e) Standards of knowledge.
    (1) In general.
    (2) Notification by the IRS.
    (3) FFI-EIN.
    (i) In general.
    (ii) Special requirements applicable prior to January 2, 2016.
    (4) Reason to know.
    (i) Standards of knowledge applicable to withholding certificates.
    (A) In general.
    (B) U.S. address or telephone number.
    (1) Presumption of individual's foreign status.
    (2) Presumption of entity's foreign status.
    (C) U.S. place of birth.
    (1) Accounts opened on or after January 1, 2013.
    (2) Accounts opened prior to January 1, 2013.
    (D) Standing instructions with respect to offshore obligations.
    (ii) Standard of knowledge applicable to documentary evidence.
    (A) In general.
    (B) Establishment of foreign status.
    (C) U.S. place of birth.
    (1) Accounts opened on or after January 1, 2013.
    (2) Accounts opened prior to January 1, 2013.
    (D) Standing instructions.
    (iii) Information conflicting with payee's claim of chapter 4 
status.
    (iv) Conduit financing arrangements.
    (v) Additional guidance.
    (f) Presumptions regarding payee's status in the absence of 
documentation.
    (1) In general.
    (2) Presumptions of classification as an individual or entity.
    (3) Presumptions of U.S. or foreign status.
    (i) Payments to entities with indicia of foreign status.
    (ii) Payments to certain exempt recipients.
    (iii) Payments with respect to offshore obligations.
    (4) Presumption of chapter 4 status for a foreign entity.
    (5) Presumption of status as an intermediary.
    (6) Joint payees.
    (i) In general.
    (ii) Exception for offshore obligations.
    (7) Rebuttal of presumptions.
    (8) Effect of reliance on presumptions and of actual knowledge or 
reason to know otherwise.
    (i) In general.
    (ii) Actual knowledge or reason to know that amount of withholding 
is greater than is required under the presumptions or that reporting of 
the payment is required.
    (g) Effective/applicability date.


Sec.  1.1471-4  FFI agreement.

    (a) In general.
    (1) Withholding.
    (2) Identification and documentation of account holders.
    (3) Reporting.
    (4) Expanded affiliated group.
    (5) Waiver.
    (6) Verification.
    (7) Event of default.
    (8) Requests for additional information.
    (b) Withholding requirements under the FFI agreement.
    (1) In general.
    (2) Withholdable payments requirements.
    (3) Foreign passthru payment. [Reserved].
    (4) Dormant accounts.
    (5) Special withholding rules for U.S. branches
    (6) Special withholding rules for participating FFIs with limited 
branches and affiliates that are limited FFIs.
    (c) Due diligence for the identification of account holders under 
the FFI agreement.
    (1) Scope of paragraph.
    (2) Requirements with respect to the identification of account 
holders.
    (i) In general.
    (ii) Standards of knowledge.
    (iii) Change in circumstances.
    (iv) Record retention.
    (3) Identification procedure and documentation for entity accounts.
    (i) In general.
    (ii) Documentation exception for certain preexisting entity 
accounts.
    (A) Previously identified accounts.
    (B) Account threshold.
    (1) In general.
    (2) Aggregation of entity accounts.
    (3) Special aggregation rule applicable to relationship managers.
    (4) Election to forgo exception.
    (4) Identification procedure and documentation for individual 
accounts.
    (i) In general.
    (A) U.S. indicia.
    (B) Documentation required for U.S. indicia.
    (ii) Preexisting accounts of individual account holders documented 
as U.S. accounts.
    (iii) Exception for certain preexisting accounts of individual 
account holders other than accounts described in Sec.  1.1471-
4(c)(4)(iv).
    (A) Account threshold.
    (B) Aggregation of individual accounts.
    (C) Special aggregation rule applicable to relationship managers.
    (iv) Exception for certain cash value insurance or annuity 
contracts of individual account holders that are preexisting 
obligations.
    (A) Individuals.
    (B) Account threshold.
    (1) In general.
    (2) Aggregation of accounts.
    (3) Special aggregation rules applicable to relationship managers.
    (v) Election to forgo exception.
    (5) Currency translation.
    (6) Examples.
    (7) Alternative identification procedure for preexisting individual 
accounts that are offshore obligations.
    (i) In general.
    (ii) Electronic search.
    (8) Additional enhanced review for high-value accounts.
    (i) In general.
    (ii) Relationship manager inquiry.
    (iii) Enhanced review.
    (A) In general.
    (B) Limitations on the enhanced review.
    (iv) Exception for certain documented accounts of individual 
account holders.
    (9) Exception for preexisting accounts that a participating FFI has 
documented as held by foreign individuals for purposes of meeting its 
obligations under chapter 61 or its QI, WP, or WT agreement.
    (10) Certification of responsible officer.
    (d) Account reporting under FFI agreement.
    (1) Scope of paragraph.
    (2) Reporting requirements in general.
    (i) Accounts subject to reporting.
    (ii) Financial institution required to report an account.
    (A) In general.
    (B) Special reporting of account holders of territory financial 
institutions.
    (C) Election for branch reporting.
    (iii) Special rules for U.S. payors.
    (A) Special reporting rule for U.S. payors other than U.S. 
branches.
    (B) Special reporting rule for U.S. branches.
    (iv) Accounts maintained for owner-documented FFIs.
    (3) Reporting of accounts under section 1471(c)(1).
    (i) In general.
    (ii) Accounts held by specified U.S. persons.
    (iii) Accounts held by U.S. owned foreign entities.

[[Page 9046]]

    (iv) Branch reporting.
    (v) Form for reporting U.S. accounts under section 1471(c)(1).
    (vi) Time and manner of filing.
    (vii) Extensions in filing.
    (4) Description applicable to reporting requirements of Sec.  
1.1471-4(d)(3).
    (i) Address.
    (ii) Account number.
    (iii) Account balance or value.
    (A) In general.
    (B) Currency translation of account balance or value.
    (iv) Payments made with respect to accounts.
    (A) Depository accounts.
    (B) Custodial accounts.
    (C) Other accounts.
    (D) Transfers and closings of deposit, custodial, insurance, and 
annuity financial accounts.
    (E) Amount and characterization of payments subject to reporting.
    (F) Currency translation.
    (v) Record retention requirements.
    (5) Election to perform reporting under section 1471(c)(2).
    (i) In general.
    (ii) Information and accounts to be reported.
    (iii) Branch reporting
    (iv) Time and manner of making the election.
    (v) Revocation of election.
    (vi) Filing of information under election.
    (6) Reporting on recalcitrant account holders.
    (i) In general.
    (ii) Definition of dormant account.
    (iii) End of dormancy.
    (iv) Forms.
    (v) Time and manner of filing.
    (7) Special reporting rules with respect to the 2013 through 2015 
calendar years.
    (i) In general.
    (ii) Information to be reported.
    (A) Reporting with respect to the 2013 and 2014 calendar years.
    (B) Reporting with respect to the 2015 calendar year.
    (iii) Participating FFIs that report under Sec.  1.1471-(d)(5).
    (iv) Recalcitrant accounts.
    (v) Forms for reporting.
    (A) In general.
    (B) Special determination date and timing for reporting with 
respect to the 2013 calendar year.
    (8) Reporting requirements of QIs with respect to U.S. accounts. 
[Reserved].
    (9) Reporting requirements of WPs with respect to U.S. accounts. 
[Reserved].
    (10) Reporting requirements of WTs with respect to U.S. accounts. 
[Reserved].
    (11) Examples.
    (e) Expanded affiliated group requirements.
    (1) In general.
    (2) Limited branches
    (i) In general.
    (ii) Branch defined.
    (iii) Limited branch defined.
    (iv) Conditions for limited branch status.
    (v) Withholding requirements applicable to limited branches.
    (vi) Term of limited branch status.
    (3) Limited FFI affiliates.
    (i) In general.
    (ii) Limited FFI.
    (iii) Conditions for limited FFI status.
    (iv) Group member requirements.
    (v) Period for limited FFI status.
    (4) Special rule for QIs.
    (f) Effective/applicability date.


Sec.  1.1471-5  Definitions applicable to section 1471.

    (a) U.S. accounts.
    (1) In general.
    (2) Definition of U.S. account.
    (3) Account held by.
    (i) In general.
    (ii) Grantor trust.
    (iii) Financial accounts held by agents.
    (iv) Jointly held accounts.
    (v) Holder of account for certain insurance contracts.
    (vi) Examples.
    (4) Exceptions to U.S. account status.
    (i) Exceptions for certain individual accounts of participating 
FFIs.
    (A) Depository accounts.
    (B) $50,000 threshold.
    (C) Individual account holders.
    (ii) Aggregation requirements for exception.
    (iii) Currency translation.
    (iv) Election to forgo exception.
    (v) Examples.
    (b) Financial accounts.
    (1) In general.
    (2) Exceptions.
    (i) Certain savings accounts.
    (A) Retirement and pension accounts.
    (B) Non-retirement savings accounts.
    (C) Currency translation.
    (D) Rollovers.
    (E) Coordination with section 6038D.
    (F) Account that is tax-favored.
    (ii) Term life insurance contracts.
    (iii) Accounts held by exempt beneficial owner.
    (3) Definitions.
    (i) Depository account.
    (ii) Custodial account.
    (iii) Equity interest in certain entities.
    (iv) Regularly traded on an established securities market.
    (v) Cash value insurance contracts.
    (A) In general.
    (B) Cash value.
    (C) Amounts excluded from cash value.
    (c) U.S. owned foreign entity.
    (1) In general.
    (2) Owner-documented FFI treated as U.S. owned foreign entity.
    (d) Definition of FFI.
    (e) Definition of a financial institution.
    (1) In general.
    (2) Banking or similar business.
    (i) In general.
    (ii) Application of section 581.
    (iii) Effect of local regulation.
    (3) Holding of financial assets as a substantial portion of its 
business.
    (i) Substantial portion.
    (ii) Effect of local regulation.
    (4) In the business of investing, reinvesting, and trading.
    (5) Exclusions.
    (i) Certain nonfinancial holding companies.
    (ii) Certain start-up companies.
    (iii) Nonfinancial entities that are liquidating or emerging from 
reorganization or bankruptcy.
    (iv) Hedging/financial centers of a nonfinancial group.
    (v) Section 501(c) entities.
    (f) Deemed-compliant FFIs.
    (1) Registered deemed-compliant FFIs.
    (i) Registered deemed-compliant FFI categories.
    (A) Local FFIs.
    (B) Nonreporting members of participating FFI groups.
    (C) Qualified collective investment vehicles.
    (D) Restricted funds.
    (ii) Procedural requirements for registered deemed-compliant FFIs.
    (iii) Deemed-compliant FFI that is merged or acquired.
    (2) Certified deemed-compliant FFIs.
    (i) Nonregistering local bank.
    (ii) Retirement funds.
    (A) Requirements
    (B) Example.
    (iii) Non-profit organizations.
    (iv) FFIs with only low-value accounts.
    (3) Owner-documented FFIs.
    (i) In general.
    (ii) Requirements of owner-documented FFI status.
    (4) Definition of a restricted distributor.
    (g) Recalcitrant account holders.
    (1) Scope.
    (2) Recalcitrant account holder.
    (3) Start of recalcitrant account holder status.
    (i) Preexisting accounts identified during the procedures described 
in Sec.  1.1471-4(c) for identifying U.S. accounts.
    (A) Accounts other than high-value accounts.

[[Page 9047]]

    (B) High-value accounts.
    (C) Preexisting accounts subject to enhanced review.
    (ii) Accounts that are not preexisting accounts and accounts 
requiring name/TIN correction.
    (iii) Accounts with changes in circumstances.
    (4) End of recalcitrant account holder status.
    (h) Passthru payment.
    (1) Defined.
    (2) Foreign passthru payment. [Reserved].
    (i) Expanded affiliated group.
    (1) Scope of paragraph.
    (2) Expanded affiliated group defined.
    (i) In general.
    (ii) Partnerships and other entities..
    (j) Effective/applicability date.


Sec.  1.1471-6  Payments beneficially owned by exempt beneficial 
owners.

    (a) Purpose and scope of paragraph.
    (b) Foreign government, any political subdivision of a foreign 
government, or any wholly owned agency or instrumentality of any one or 
more of the foregoing.
    (1) Definition.
    (2) Integral part.
    (3) Controlled entity.
    (4) Inurement to the benefit of private persons.
    (5) Commercial activities.
    (c) International organizations and any wholly owned agency or 
instrumentality thereof.
    (d) Foreign central bank of issue.
    (e) Governments of U.S. possessions.
    (f) Certain retirement funds.
    (1) Requirements.
    (2) Examples.
    (g) Entities wholly owned by exempt beneficial owners.
    (h) Effective/applicability date.


Sec.  1.1472-1  Withholding on NFFEs.

    (a) Overview.
    (b) Withholdable payments made to an NFFE.
    (1) In general.
    (2) Coordination of withholding requirements under section 1472 
applicable to participating FFIs.
    (c) Exceptions.
    (1) Beneficial owner that is an excepted NFFE.
    (i) Publicly traded corporation.
    (A) Regularly traded.
    (B) Entities treated as meeting the regularly traded requirement.
    (C) Established securities market.
    (1) In general.
    (2) Foreign exchange with multiple tiers.
    (3) Discretion to determine that an exchange does not qualify as an 
established securities market.
    (4) Computation of dollar value of stock traded.
    (ii) Certain affiliated entities related to publicly traded 
corporation.
    (iii) Certain territory entities.
    (iv) Exempt beneficial owner described in Sec.  1.1471-4(b) through 
(g).
    (v) Active NFFEs.
    (vi) Excepted FFIs.
    (2) Payments to a WP or WT.
    (d) Rules for determining payee and beneficial owner.
    (1) In general.
    (2) Payments made to an NFFE that is a WP or WT.
    (3) Payments made to a partner or beneficiary of an NFFE that is an 
NWP or NWT.
    (4) Payments made to a beneficial owner that is an NFFE.
    (5) Absence of valid documentation.
    (e) Information reporting requirements.
    (1) Reporting on withholdable payments.
    (2) Reporting of substantial U.S. owners.
    (f) Effective/applicability date.


Sec.  1.1473-1  Section 1473 definitions.

    (a) Definition of withholdable payment.
    (1) In general.
    (2) U.S. source FDAP income defined.
    (i) In general.
    (A) FDAP income defined.
    (B) U.S. source.
    (ii) Determination of source of income.
    (A) In general.
    (B) Special source rule for certain interest.
    (iii) Original issue discount.
    (iv) REMIC residual interests.
    (v) Withholding liability of payee that is satisfied by withholding 
agent.
    (vi) Special rule for sales of interest bearing debt obligations.
    (vii) Payment of U.S. source FDAP income.
    (A) Amount of payment of U.S. source FDAP income.
    (B) When payment of U.S. source FDAP income is made
    (3) Gross proceeds defined.
    (i) Sale or other disposition.
    (A) In general.
    (B) Special rule for sales effected by brokers.
    (C) Special rule for gross proceeds from sales settled by clearing 
organization.
    (ii) Property of a type that can produce interest or dividends that 
are U.S. source FDAP income.
    (A) In general.
    (B) Termination of specified notional principal contract.
    (C) Registered investment company distributions.
    (iii) Payment of gross proceeds.
    (A) When gross proceeds are paid.
    (B) Amount of gross proceeds.
    (iv) Withholding requirements on gross proceeds.
    (4) Payments not treated as withholdable payments.
    (i) Certain short-term obligations.
    (ii) Effectively connected income.
    (iii) Ordinary course of business payments.
    (iv) Gross proceeds from sales of excluded property.
    (v) Fractional shares.
    (5) Special payment rules for flow-through entities, complex 
trusts, and estates.
    (i) In general.
    (ii) Partnerships.
    (iii) Simple trusts.
    (iv) Complex trusts and estates.
    (v) Grantor trusts.
    (vi) Special rule for NWP or NWT.
    (vii) Special rule for determining when gross proceeds are treated 
as paid to partner, owner, or beneficiary of a flow-through entity. 
[Reserved].
    (6) Reporting of withholdable payments.
    (7) Example.
    (b) Substantial U.S. owner.
    (1) Definition.
    (2) Direct and indirect ownership in foreign entities.
    (i) Indirect ownership of stock.
    (ii) Indirect ownership in a partnership or beneficial trust 
interest.
    (iii) Indirect ownership through U.S. persons.
    (iv) Ownership and holdings through options.
    (v) Determination of proportionate interest.
    (3) Beneficial trust interests.
    (i) Holding a beneficial interest.
    (A) In general.
    (B) Discretionary distribution.
    (ii) Valuation rules for beneficial interests in foreign trusts.
    (iii) Determining the ten percent threshold in the case of a 
beneficial interest in a foreign trust.
    (A) Discretionary beneficial interests.
    (B) Mandatory beneficial interests.
    (C) Mandatory and discretionary beneficial interests.
    (4) Exception for certain beneficial interests.
    (5) Special rule for certain investment vehicles and insurance.
    (6) Determination dates for substantial U.S. owners.
    (7) Examples.
    (c) Specified U.S. person.
    (d) Withholding agent.
    (1) In general.
    (2) Participating FFIs as withholding agents.
    (3) Grantor trusts as withholding agents.

[[Page 9048]]

    (4) Deposit and return requirements.
    (5) Multiple withholding agents.
    (6) Exception for certain individuals.
    (e) Foreign entity.
    (f) Effective/applicability date.


Sec.  1.1474-1  Liability for withheld tax.

    (a) Payment and returns of tax withheld.
    (1) In general.
    (2) Withholding agent liability.
    (3) Use of agents.
    (i) In general.
    (ii) Liability of agent of withholding agent.
    (4) Liability for failure to obtain documentation timely or to act 
in accordance with applicable presumptions.
    (i) In general.
    (ii) Withholding satisfied by another withholding agent.
    (b) Payment of withheld tax.
    (c) Income tax return.
    (1) In general.
    (2) Amended returns.
    (d) Information returns for payment reporting.
    (1) Filing requirement.
    (i) In general.
    (ii) Recipient.
    (A) Defined.
    (B) Persons that are not recipients.
    (2) Amounts subject to reporting.
    (i) In general.
    (ii) Special transitional reporting by participating FFIs.
    (A) Reporting requirements for certain payments to nonparticipating 
FFIs.
    (1) FDAP income.
    (2) Other financial payments. [Reserved].
    (B) Payments to limited branches.
    (iii) Exceptions to reporting.
    (iv) Coordination with chapter 3.
    (3) Required information.
    (4) Method of reporting.
    (i) Payments by U.S. withholding agent to recipients.
    (A) Payments to certain entities that are beneficial owners.
    (B) Payments to participating FFIs, deemed-compliant FFIs, or 
certain QIs.
    (C) Amounts paid to territory financial institutions acting as 
intermediaries.
    (D) Amounts paid to NFEEs.
    (ii) Payments made by withholding agents to certain entities that 
are not recipients.
    (A) Form 1042-S reporting of entities that provide information for 
a withholding agent to perform specific payee reporting.
    (B) Nonparticipating FFIs that act as intermediaries.
    (C) Disregarded entities.
    (iii) Reporting by nonparticipating FFIs, flow-through entities, or 
territory financial institutions that do not elect to be treated as 
U.S. persons.
    (iv) Other withholding agents.
    (e) Magnetic media reporting.
    (f) Indemnification of withholding agent.
    (g) Extensions of time to file Forms 1042 and 1042-S.
    (h) Penalties.
    (i) Reporting requirements with respect to owner-documented FFIs.
    (1) Reporting by U.S. withholding agent.
    (2) Cross reference to reporting by participating FFIs.
    (j) Effective/applicability date.


Sec.  1.1474-2  Adjustments for overwithholding or underwithholding of 
tax.

    (a) Adjustment of overwithheld tax.
    (1) In general.
    (2) Overwithholding.
    (3) Reimbursement of tax.
    i. General rule.
    ii. Record maintenance.
    (4) Set-offs.
    (5) Examples.
    (b) Withholding of additional tax when underwithholding occurs.
    (c) Effective/applicability date.


Sec.  1.1474-3  Withheld tax as credit to beneficial owner of income.

    (a) Creditable tax.
    (b) Amounts paid to persons that are not the beneficial owners.
    (c) Effective/applicability date.


Sec.  1.1474-4  Tax paid only once.

    (a) Tax paid.
    (b) Effective/applicability date.


Sec.  1.1474-5  Refunds or credits.

    (a) Refund and credit.
    (1) In general.
    (2) Limitation to refund and credit for a nonparticipating FFI.
    (3) Requirement to provide additional documentation for certain 
beneficial owners.
    (i) In general.
    (ii) Claim of reduced withholding under an income tax treaty.
    (iii) Additional documentation to be furnished to the IRS for 
certain NFFEs.
    (b) Tax repaid to payee.
    (c) Effective/applicability date.


Sec.  1.1474-6  Coordination of chapter 4 of the Internal Revenue Code 
with other withholding provisions.

    (a) In general.
    (b) Coordination of withholding for amounts subject to withholding 
under sections 1441, 1442, and 1443.
    (1) In general.
    (2) When withholding is applied.
    (c) Coordination with amounts subject to withholding under section 
1445.
    (1) In general.
    (2) Determining amount of distribution from certain domestic 
corporations subject to section 1445 or chapter 4 withholding.
    (i) Distribution from qualified investment entity.
    (ii) Distribution from a United States Real Property Holding 
Corporation.
    (d) Coordination with section 1446.
    (1) In general.
    (2) Determining amount of distribution subject to section 1446. 
[Reserved].
    (e) Coordination of withholding under section 3406. [Reserved].
    (f) Example.
    (g) Effective/applicability date.


Sec.  1.1474-7  Confidentiality of information.

    (a) Confidentiality of information.
    (b) Exception for disclosure of participating FFIs.
    (c) Effective/applicability date.
    Par. 3. Section 1.1471-1 is revised to read as follows:


Sec.  1.1471-1  Scope of chapter 4 of the Internal Revenue Code 
provisions and definitions.

    (a) Purpose and scope of chapter 4 of the Internal Revenue Code 
regulations. Sections 1.1471-1 through 1.1474-7 provide rules for 
withholding when a withholding agent makes a payment to an FFI or NFFE 
and prescribes the requirements for and definitions relevant to those 
FFIs and NFFEs to which withholding will not apply. Section 1.1471-1 
provides definitions for terms used in chapter 4 of the Internal 
Revenue Code. Section 1.1471-2 provides rules for withholding under 
section 1471(a) on payments to FFIs and provides rules for 
grandfathered obligations. Section 1.1471-3 provides rules for 
determining the payee and the documentation requirements to establish a 
payee's chapter 4 status. Section 1.1471-4 describes the requirements 
of the FFI agreement under section 1471(b) and the application of 
section 1471(b) and (c) to an expanded affiliated group of FFIs. 
Section 1.1471-5 defines terms relevant to section 1471 and to the FFI 
agreement and defines categories of FFIs that will be deemed to have 
met the requirements of section 1471(b) pursuant to section 1471(b)(2). 
Section 1.1471-6 defines classes of beneficial owners of payments that 
are exempt from withholding under chapter 4 of the Internal Revenue 
Code. Section 1.1472-1 provides rules for withholding when a 
withholding agent makes a payment to an NFFE. Section 1.1473-1 provides 
definitions of the statutory terms in section 1473. Section 1.1474-1 
provides rules relating to a withholding agent's liability for

[[Page 9049]]

withheld tax, filing of income tax and information returns, and 
depositing of tax withheld. Section 1.1474-2 provides rules relating to 
adjustments for overwithholding and underwithholding of tax. Section 
1.1474-3 provides the circumstances in which a credit is allowed to a 
beneficial owner for a withheld tax. Section 1.1474-4 provides that a 
chapter 4 withholding obligation need only be collected once. Section 
1.1474-5 contains rules relating to credits and refunds of tax 
withheld. Section 1.1474-6 provides rules coordinating withholding 
under sections 1471 and 1472 with withholding provisions under other 
sections of the Code. Section 1.1474-7 provides the confidentiality 
requirement for information obtained to comply with the requirements of 
chapter 4 of the Internal Revenue Code. Any reference in the provisions 
of sections 1471 through 1474 to an amount that is stated in U.S. 
dollars includes the foreign currency equivalent of that amount. Except 
as otherwise provided, the provisions of sections 1471 through 1474 and 
the regulations thereunder apply only for purposes of chapter 4 of the 
Internal Revenue Code. See Sec.  301.1474-1 for the requirements for 
reporting on magnetic media that apply to financial institutions making 
payments pursuant to chapter 4 of the Internal Revenue Code.
    (b) Definitions. Except as otherwise provided in this paragraph 
(b), the following definitions apply for purposes of sections 1471 
through 1474 and the regulations under those sections.
    (1) Account--(i) Account. The term account means a financial 
account as defined in Sec.  1.1471-5(b).
    (ii) Custodial account. The term custodial account has the meaning 
set forth in Sec.  1.1471-5(b)(3)(ii).
    (iii) Depository account. The term depository account has the 
meaning set forth in Sec.  1.1471-5(b)(3)(i).
    (iv) Dormant account. The term dormant account has the meaning set 
forth in Sec.  1.1471-4(d)(6)(ii).
    (v) U.S. account. The term U.S. account or United States account 
has the meaning set forth in Sec.  1.1471-5(a).
    (2) Account holder. The term account holder means the person who 
holds an account, as determined under Sec.  1.1471-5(a)(3).
    (3) AML due diligence. The term AML due diligence means the 
customer due diligence procedures of a financial institution pursuant 
to the anti-money laundering or similar requirements to which a 
financial institution, or branch thereof, is subject. This includes 
identifying the customer (including the owners of the customer), 
understanding the nature and purpose of the account, and ongoing 
monitoring.
    (4) Annuity contract. The term annuity contract means a contract 
that would be an annuity under section 72 (without regard to 
subsections (s) and (u) and section 817(h)).
    (5) Beneficial owner. Except as provided in Sec.  1.1472-1, the 
term beneficial owner has the meaning set forth in Sec.  1.1441-
1(c)(6).
    (6) Broker. The term broker means any person, U.S. or foreign, 
that, in the ordinary course of a trade or business during the calendar 
year, stands ready to effect sales to be made by others. A broker 
includes an obligor that regularly issues and retires its own debt 
obligations, a corporation that regularly redeems its own stock, and a 
clearing organization that effects sales of securities for its members. 
A broker does not include an international organization that redeems or 
retires an obligation of which it is the issuer, a stock transfer agent 
that records transfers of stock for a corporation if the nature of the 
activities of the agent is such that the agent ordinarily would not 
know the gross proceeds from sales, an escrow agent that effects no 
sales other than such transactions as are incidental to the purpose of 
escrow (such as sales to collect on collateral), or a corporation that 
issues and retires long-term debt on an irregular basis.
    (7) Chapter 3. For purposes of chapter 4 of the Internal Revenue 
Code, any reference to chapter 3 means sections 1441 through 1464 and 
the regulations thereunder, but does not include sections 1445 and 1446 
and the regulations thereunder, unless the context indicates otherwise.
    (8) Chapter 4 of the Internal Revenue Code. The term chapter 4 of 
the Internal Revenue Code means sections 1471 through 1474 and the 
regulations thereunder.
    (9) Chapter 4 reportable amount. The term chapter 4 reportable 
amount has the meaning set forth in Sec.  1.1474-1(d)(2)(i).
    (10) Chapter 4 status. The term chapter 4 status means, with 
respect to a person, the person's status as a U.S. person, a specified 
U.S. person, a foreign individual, a participating FFI, a deemed-
compliant FFI, an exempt beneficial owner, a nonparticipating FFI, a 
territory financial institution, a QI branch of a U.S. financial 
institution, an excepted NFFE, or a passive NFFE.
    (11) Complex trust. A complex trust is a trust that is not a simple 
trust or a grantor trust.
    (12) Customer master file. A customer master file includes the 
primary files of a participating FFI or deemed-compliant FFI for 
maintaining account holder information, such as information used for 
contacting account holders and for satisfying AML due diligence.
    (13) Documentary evidence. The term documentary evidence means 
documents, other than a withholding certificate or written statement, 
that a withholding agent is permitted to rely upon to determine the 
chapter 4 status of a payee, an account holder, or an exempt beneficial 
owner in accordance with Sec.  1.1471-3(c)(5).
    (14) Documentation. The term documentation means withholding 
certificates, written statements, documentary evidence, and other 
documents that may be relevant in determining the status of a person 
for the purpose of a reporting or withholding requirement under chapter 
4 of the Internal Revenue Code, including any document containing a 
determination of the account holder's citizenship or residency for tax 
or AML due diligence purposes or an account holder's claim of 
citizenship or residency for tax or AML due diligence purposes.
    (15) EIN. The term EIN means an employer identification number 
(also known as a Federal tax identification number) described in Sec.  
301.6109-1(a)(1)(i).
    (16) Electronically searchable information. The term electronically 
searchable information means information that an FFI maintains in its 
tax reporting files, customer master files, or similar files, that is 
stored in the form of an electronic database against which standard 
queries in programming languages, such as Structured Query Language, 
may be used. Information, data, or files are not electronically 
searchable merely because they are stored in an image retrieval system 
(such as portable document format (.pdf) or scanned documents).
    (17) Entity. The term entity means any person other than an 
individual.
    (18) Excepted FFI. The term excepted FFI means an entity that is 
excluded from the definition of an FFI, pursuant to Sec.  1.1471-
5(e)(5), and is not subject to withholding under section 1472, pursuant 
to Sec.  1.1472-1(c)(1)(vi).
    (19) Exempt beneficial owner. The term exempt beneficial owner 
means any person described in Sec.  1.1471-6(b) through (g).
    (20) Expanded affiliated group. The term expanded affiliated group 
has the meaning set forth in Sec.  1.1471-5(i)(2).
    (21) FATF. The term FATF means the Financial Action Task Force, 
which is an inter-governmental body that develops and promotes 
international

[[Page 9050]]

policies to combat money laundering and terrorist financing.
    (22) FATF-compliant. The term FATF-compliant means the relevant 
jurisdiction--
    (i) Is not subject to a FATF call on its members and other 
jurisdictions to apply counter-measures to protect the international 
financial system from the on-going and substantial money laundering and 
terrorist financing (ML/TF) risks emanating from the jurisdiction;
    (ii) Is not a jurisdiction with strategic AML/CFT deficiencies that 
has not made sufficient progress in addressing the deficiencies; and
    (iii) Is not a jurisdiction with strategic AML/CFT deficiencies 
irrespective of whether the jurisdiction has agreed upon an action plan 
with the FATF.
    (23) FFI. The term FFI or foreign financial institution has the 
meaning set forth in Sec.  1.1471-5(d).
    (i) Deemed-compliant FFI. The term deemed-compliant FFI means an 
FFI that is treated, pursuant to section 1471(b)(2) and Sec.  1.1471-
5(f), as meeting the requirements of section 1471(b).
    (A) Certified deemed-compliant FFI. The term certified deemed-
compliant FFI means an FFI described in Sec.  1.1471-5(f)(2).
    (B) Registered deemed-compliant FFI. The term registered deemed-
compliant FFI means an FFI described in Sec.  1.1471-5(f)(1).
    (ii) Limited branch. The term limited branch has the meaning set 
forth in Sec.  1.1471-4(e)(2)(iii).
    (iii) Limited FFI. The term limited FFI has the meaning set forth 
in Sec.  1.1471-4(e)(3)(ii).
    (iv) Nonparticipating FFI. The term nonparticipating FFI means an 
FFI other than a participating FFI, a deemed-compliant FFI, or an 
exempt beneficial owner.
    (v) Participating FFI. The term participating FFI means an FFI with 
respect to which an FFI agreement is in full force and effect.
    (24) FFI agreement. The term FFI agreement means an agreement that 
is described in Sec.  1.1471-4(a). An FFI agreement includes a QI 
agreement, a withholding partnership agreement, and a withholding trust 
agreement, that is entered into by an FFI and that has an effective 
date or renewal date on or after July 1, 2013.
    (25) FFI-EIN. The term FFI-EIN means an EIN issued to a 
participating FFI or registered deemed-compliant FFI, including an EIN 
issued to a participating FFI that is a QI, WP, or WT.
    (26) Financial account. The term financial account has the meaning 
set forth in Sec.  1.1471-5(b).
    (27) Financial institution. The term financial institution has the 
meaning set forth in Sec.  1.1471-5(e).
    (28) Flow-through entity. The term flow-through entity means a 
partnership, simple trust, or grantor trust, as determined under U.S. 
tax principles.
    (29) Foreign entity. The term foreign entity has the meaning set 
forth in Sec.  1.1473-1(e).
    (30) Foreign passthru payment. The term foreign passthru payment 
has the meaning set forth in Sec.  1.1471-5(h)(2).
    (31) Grantor trust. A grantor trust is a trust with respect to 
which one or more persons are treated as owners of all or a portion of 
the trust under sections 671 through 679. If only a portion of the 
trust is treated as owned by a person, that portion is a grantor trust 
with respect to that person.
    (32) Gross proceeds. The term gross proceeds has the meaning set 
forth in Sec.  1.1473-1(a)(3).
    (33) Insurance company. The term insurance company means a company 
more than half of the business of which during the calendar year is 
issuing (or being obligated to make payments with respect to) insurance 
or annuity contracts or the reinsuring of such contracts.
    (34) Intermediary. The term intermediary has the meaning set forth 
in Sec.  1.1441-1(c)(13).
    (i) NQI. The term NQI or nonqualified intermediary has the meaning 
set forth in Sec.  1.1441-1(c)(14).
    (ii) QI. The term QI or qualified intermediary has the meaning set 
forth in Sec.  1.1441-1(e)(5)(ii).
    (35) Life insurance contract. The term life insurance contract 
means a contract that satisfies section 7702 (without regard to 
subsections (b), (c), and (d) and sections 101(f) and 817(h)).
    (36) NFFE. The term NFFE or non-financial foreign entity means a 
foreign entity that is not a financial institution, including a 
territory NFFE.
    (i) Active NFFE. The term active NFFE has the meaning set forth in 
Sec.  1.1472-1(c)(1)(v).
    (ii) Excepted NFFE. The term excepted NFFE means an NFFE that is 
described in Sec.  1.1472-1(c)(1) or (2).
    (iii) Passive NFFE. The term passive NFFE means an NFFE other than 
an excepted NFFE.
    (37) NQI withholding statement. The term NQI withholding statement 
means the statement described in Sec.  1.1441-1(e)(3)(iv).
    (38) NWP. The term NWP or nonwithholding foreign partnership means 
a foreign partnership that is not a withholding foreign partnership.
    (39) NWT. The term NWT or nonwithholding foreign trust means a 
foreign trust as defined in section 7701(a)(31)(B) that is a simple 
trust or grantor trust and is not a withholding foreign trust.
    (40) Offshore obligation. The term offshore obligation means any 
account, instrument, or contract maintained and executed at an office 
or branch of the withholding agent at any location outside of the 
United States or in any location in a possession of the United States. 
The term payment with respect to an offshore obligation means a payment 
made outside of the United States, within the meaning of Sec.  1.6049-
5(e), with respect to an offshore obligation.
    (41) Participating FFI group. The term participating FFI group 
means an expanded affiliated group, within the meaning of Sec.  1.1471-
5(i)(2), that includes one or more participating FFIs.
    (42) Partnership. The term partnership has the meaning set forth in 
Sec.  301.7701-2(c)(1).
    (43) Passthru payment. The term passthru payment has the meaning 
set forth in Sec.  1.1471-5(h).
    (44) Payee. The term payee has the meaning set forth in Sec.  
1.1471-3(a).
    (i) U.S. payee. The term U.S. payee means any payee that is a U.S. 
person.
    (ii) Foreign payee. The term foreign payee means any payee other 
than a U.S. payee.
    (45) Payor. The term payor has the meaning set forth in Sec. Sec.  
31.3406(a)-2 and 1.6049-(a)(2) and generally includes a withholding 
agent.
    (46) Person. The term person has the meaning set forth in section 
7701(a)(1) and the regulations thereunder. The term person does not 
include a wholly owned entity that is disregarded for Federal tax 
purposes as an entity separate from its owner. Notwithstanding the 
previous sentence, the term person includes, with respect to a 
withholdable payment, a foreign branch of a U.S. person that furnishes 
an intermediary withholding certificate indicating that it is a QI.
    (i) U.S. person. The term U.S. person or United States person means 
a person described in section 7701(a)(30), the United States government 
(including an agency or instrumentality thereof), a State (including an 
agency or instrumentality thereof), or the District of Columbia 
(including an agency or instrumentality thereof).
    (ii) Foreign person. The term foreign person means any person other 
than a U.S. person and includes, with respect to a withholdable 
payment, a foreign branch of a U.S. person that furnishes

[[Page 9051]]

an intermediary withholding certificate indicating that it is a QI.
    (47) Possession of the United States. The term possession of the 
United States means American Samoa, Guam, the Northern Mariana Islands, 
Puerto Rico, or the U.S. Virgin Islands.
    (48) Preexisting obligation. The term preexisting obligation means 
any account, instrument, or contract maintained or executed by the 
withholding agent as of January 1, 2013. With respect to a 
participating FFI, the term preexisting obligation means any account, 
instrument, or contract maintained or executed by the FFI prior to the 
date that the participating FFI's FFI agreement becomes effective. With 
respect to a registered deemed-compliant FFI, a preexisting obligation 
means any account, instrument, or contract maintained or executed by 
the FFI prior to the earlier of the date that the FFI registers as a 
deemed-compliant FFI or the date the FFI implements its required 
account opening procedures.
    (49) Preexisting entity account. A preexisting entity account is a 
financial account held by one or more entities that is a preexisting 
obligation.
    (50) Preexisting individual account. A preexisting individual 
account is a financial account held by one or more individuals that is 
a preexisting obligation.
    (51) QI agreement. The term QI agreement means the agreement 
described in Sec.  1.1441-1(e)(5)(iii).
    (52) Recalcitrant account holder. The term recalcitrant account 
holder has the meaning set forth in Sec.  1.1471-5(g).
    (53) Relationship manager. A relationship manager is an officer or 
other employee of an FFI who is assigned responsibility for specific 
account holders on an on-going basis (including as an officer or 
employee that is a member of an FFI's private banking department), 
advises account holders regarding their banking, investment, trust, 
fiduciary, estate planning, or philanthropic needs, and recommends, 
makes referrals to, or arranges for the provision of financial 
products, services, or other assistance by internal or external 
providers to meet those needs. Notwithstanding the previous sentence, a 
person is only a relationship manager with respect to an account that 
has a balance or value of more than $1,000,000, taking into account the 
aggregation rules described in Sec.  1.1471-4(c)(3)(ii) and 
(c)(4)(iii).
    (54) Simple trust. The term simple trust means a trust that meets 
the requirements of section 651(a)(1) and (2).
    (55) Specified U.S. person. The term specified U.S. person or 
specified United States person has the meaning set forth in Sec.  
1.1473-1(c).
    (56) Standardized industry code. The term standardized industry 
code means a code that is part of a coding system used by the 
withholding agent to classify account holders by business type for 
purposes other than U.S. tax purposes that was implemented by the 
withholding agent by the later of January 1, 2012, or six months after 
the date the withholding agent was formed or organized.
    (57) Substantial U.S. owner. The term substantial U.S. owner or 
substantial United States owner has the meaning set forth in Sec.  
1.1473-1(b).
    (58) Territory entity. The term territory entity means any entity 
that is incorporated or organized under the laws of any possession of 
the United States.
    (59) Territory financial institution. The term territory financial 
institution means a financial institution that is incorporated or 
organized under the laws of any possession of the United States, not 
including a territory entity that is described in Sec.  1.1471-
5(e)(1)(iii) that is not described in Sec.  1.1471-5(e)(1)(i), (ii) or 
(iv).
    (60) Territory NFFE. The term territory NFFE means a territory 
entity that is not a financial institution, including a territory 
entity that is described in Sec.  1.1471-5(e)(1)(iii) and not described 
in Sec.  1.1471-5(e)(1)(i), (ii) or (iv).
    (61) TIN. The term TIN means the tax identifying number assigned to 
a person under section 6109.
    (62) U.S. owned foreign entity. The term U.S. owned foreign entity 
or United States owned foreign entity has the meaning set forth in 
Sec.  1.1471-5(c).
    (63) U.S. financial institution. The term U.S. financial 
institution means a financial institution that is a U.S. person.
    (64) U.S. payor. The term U.S. payor means a U.S. payor or U.S. 
middleman as defined in Sec.  1.6049-5(c)(5).
    (65) U.S. source FDAP income. The term U.S. source FDAP income has 
the meaning set forth in Sec.  1.1473-1(a)(2).
    (66) Withholdable payment. The term withholdable payment has the 
meaning set forth in Sec.  1.1473-1(a).
    (67) Withholding. The term withholding means the deduction and 
withholding of tax at the applicable rate from a payment.
    (68) Withholding agent. The term withholding agent has the meaning 
set forth in Sec.  1.1473-1(d).
    (69) Withholding certificate. The term withholding certificate 
means a Form W-8, a Form W-9, or any other certificate that under the 
Code or regulations certifies or establishes the chapter 4 status of a 
payee or beneficial owner.
    (i) Flow-through withholding certificate. The term flow-through 
withholding certificate means a Form W-8IMY submitted by a foreign 
partnership, foreign simple trust, or foreign grantor trust.
    (ii) Intermediary withholding certificate. The term intermediary 
withholding certificate means a Form W-8IMY submitted by an 
intermediary.
    (70) WP. The term WP or withholding foreign partnership means a 
foreign partnership that has executed the agreement described in Sec.  
1.1441-5(c)(2)(ii).
    (71) WT. The term WT or withholding foreign trust means a foreign 
grantor trust or foreign simple trust that has executed the agreement 
described in Sec.  1.1441-5(e)(5)(v).
    (c) Effective/applicability date. The rules of this section apply 
on [EFFECTIVE DATE OF FINAL RULE].
    Par. 4. Section 1.1471-2 is added to read as follows:


Sec.  1.1471-2  Requirement to deduct and withhold tax on withholdable 
payments to certain FFIs.

    (a) Requirement to withhold on payments to FFIs--(1) General rule 
of withholding. Under section 1471(a), notwithstanding any exemption 
from withholding under any other provision of the Code or regulations, 
a withholding agent must withhold 30 percent of any withholdable 
payment made after December 31, 2013, to a payee that is an FFI unless 
the withholding agent can reliably associate the payment with 
documentation upon which it is permitted to rely to treat the payment 
as exempt from withholding under paragraph (a)(4) of this section, or 
the payment is made under a grandfathered obligation that is described 
in paragraph (b) of this section or constitutes gross proceeds from the 
disposition of such an obligation. Withholding under this section 
applies without regard to whether the FFI payee receives a withholdable 
payment as a beneficial owner or as an intermediary. See paragraph 
(a)(2)(iv) of this section for a description of the withholding 
requirements imposed on territory financial institutions as withholding 
agents under chapter 4 of the Internal Revenue Code. In the case of a 
withholdable payment to an NFFE, a withholding agent is required to 
determine whether withholding applies under section 1472 and Sec.  
1.1472-1. Except as otherwise provided in the regulations under chapter 
4 of the Internal Revenue Code, a withholding

[[Page 9052]]

obligation arises on the date that a payment is made, as determined 
under Sec.  1.1473-1(a).
    (2) Special withholding rules--(i) Requirement to withhold on 
payments of U.S. source FDAP to participating FFIs that are NQIs, NWPs, 
or NWTs. A withholding agent that, after December 31, 2013, makes a 
payment of U.S. source FDAP income to a participating FFI that is an 
NQI, NWP, or NWT will be required to withhold 30 percent of the payment 
unless that withholding can be reduced under this paragraph (a)(2)(i). 
A withholding agent will not be required to withhold on a payment, or 
portion of a payment, that it can reliably associate, in the manner 
described in Sec.  1.1471-3(c)(2), with a valid intermediary or flow-
through withholding certificate that meets the requirements of Sec.  
1.1471-3(d)(3) and an FFI withholding statement that meets the 
requirements of Sec.  1.1471-3(c)(3)(iii)(B)(1) and (2) and that 
establishes the portion of the payment that is allocable to a class of 
payees for which no withholding is required under chapter 4 of the 
Internal Revenue Code. Further, a withholding agent is not required to 
withhold on a payment that it can reliably associate with documentation 
indicating that the payee is a U.S. branch of a participating FFI that 
elects to be treated as a U.S. person.
    (ii) Residual withholding responsibility of intermediaries and 
flow-through entities. An intermediary or flow-through entity that 
receives a withholdable payment after December 31, 2013, will be 
required to withhold (if another withholding agent has not withheld the 
full amount required) and report such payment under chapter 4 of the 
Internal Revenue Code, except as otherwise provided in this paragraph 
(a)(2)(ii) or (a)(2)(iv) of this section. An NQI, NWP, or NWT will not 
be required to withhold or report with respect to a withholdable 
payment under chapter 4 (except to the extent such payment is required 
to be reported as made to a U.S. account pursuant to Sec.  1.1471-4(d) 
and an FFI's FFI agreement) if it has provided a valid NQI withholding 
certificate or flow-through withholding certificate, it has provided 
all of the information required by Sec.  1.1471-3(c)(3)(iii), and it 
does not know, and has no reason to know, that another withholding 
agent failed to withhold the correct amount or failed to report the 
payment correctly under Sec.  1.1474-1(d). A QI's, WP's, or WT's 
obligation to withhold and report will be determined in accordance with 
its QI withholding agreement, WP agreement, or WT agreement.
    (iii) Withholding on certain payments to QIs--(A) QIs making an 
election under section 1471(b)(3). If a participating FFI that is 
acting as a QI makes the election under section 1471(b)(3) (a section 
1471(b)(3) election) to be withheld upon, a withholding agent is 
required to withhold under this paragraph (a)(2)(iii) with respect to 
any withholdable payment or portion of a withholdable payment made to 
the participating FFI after December 31, 2013, that is U.S. source FDAP 
income subject to withholding. The withholding agent must withhold 30 
percent of the portion of such a withholdable payment that is allocable 
in the pooled information provided by the payee in the withholding 
statement described in Sec.  1.1471-3(c)(iii)(B) and (E) to 
recalcitrant account holders and nonparticipating FFIs. If no such 
allocation information is provided, the withholding agent must presume 
that the entire portion of the withholdable payment that is U.S. source 
FDAP income is made to nonparticipating FFIs. A participating FFI that 
makes a section 1471(b)(3) election to be withheld upon with respect to 
a payment may not assume primary withholding responsibility under 
chapter 3 for that payment. Conversely, a participating FFI that is a 
QI and that does not make a section 1471(b)(3) election will be 
required to assume primary withholding responsibility under chapter 3. 
The section 1471(b)(3) election is available only with respect to a 
payment of U.S. source FDAP income and only in cases in which--
    (1) The withholding agent is either a participating FFI or a U.S. 
withholding agent;
    (2) The person who receives the payment acts as a QI with respect 
to the payment;
    (3) The person who receives the payment provides the withholding 
agent with a valid intermediary withholding certificate with respect to 
the payment, at or before the time of the payment, on which it notifies 
the withholding agent that it has made the election under section 
1471(b)(3) and certifies that it is not assuming primary withholding 
responsibility under chapter 3; and
    (4) The person who receives the payment provides to the withholding 
agent the withholding statement described in Sec.  1.1471-
3(c)(3)(iii)(B).
    (B) Special rule for QIs that are not FFIs. The withholding 
requirements described in paragraph (a)(iii)(A) of this section also 
apply to a withholding agent that makes a payment of U.S. source FDAP 
income subject to withholding to a foreign branch of a U.S. financial 
institution that is a QI that does not assume primary withholding 
responsibility with respect to the payment for chapter 3 purposes. For 
purposes of the previous sentence, the person who receives the payment 
must furnish the withholding statement described in Sec.  1.1471-
3(c)(iii)(B)(2) that indicates the portion of the payment that is 
attributable to payees that are subject to withholding under chapter 4 
of the Internal Revenue Code.
    (iv) Withholding obligation of a territory financial institution. A 
territory financial institution is a withholding agent with respect to 
a withholdable payment if it falls within the definition of a 
withholding agent under Sec.  1.1473-1(d) with respect to such payment. 
A territory financial institution that is a flow-through entity or that 
acts as an intermediary with respect to a withholdable payment has an 
obligation to withhold if it agrees to be treated as a U.S. person with 
respect to that payment for both chapter 4 of the Internal Revenue Code 
purposes and under Sec.  1.1441-1(b)(2)(iv)(A). A territory financial 
institution that is a flow-through entity or that acts as an 
intermediary with respect to a withholdable payment is not required to 
withhold under paragraph (a)(1) of this section, however, if it has 
provided the withholding agent that is a U.S. person or a participating 
FFI with all of the documentation described in Sec.  1.1471-
3(c)(3)(iii) (in which it has not agreed to be treated as a U.S. person 
with respect to the payment), and it does not know, or have reason to 
know, that another withholding agent failed to withhold the correct 
amount or failed to report the payment correctly under Sec.  1.1474-
1(d).
    (v) Payments of gross proceeds. A withholding agent must withhold 
as required under paragraph (a)(1) of this section in the case of a 
withholdable payment consisting of gross proceeds (as defined under 
Sec.  1.1473-1(a)(3)). When multiple withholding agents that are 
brokers are involved in effecting a sale, each broker must determine 
whether it is required to withhold on its payment of gross proceeds by 
reference to the chapter 4 status of its payee, unless the payment is 
otherwise exempt from withholding. With respect to a ``delivery versus 
payment'' or ``cash on delivery'' transaction or other similar account 
or transaction, each broker that pays the gross proceeds is a 
withholding agent with respect to the payment.
    (3) Coordination of withholding under section 1471(a) and (b). A 
participating FFI that complies with the withholding requirements of 
section 1471(b), as described in Sec.  1.1471-4(b) and its FFI 
agreement, is deemed to satisfy its

[[Page 9053]]

withholding obligations under sections 1471(a) and 1472(a), and this 
section.
    (4) Payments for which no withholding is required. A withholding 
agent that has determined the payee of a withholdable payment to be a 
foreign entity in accordance with the documentation requirements and 
other rules provided in Sec.  1.1471-3 must determine whether the 
payment is exempt from withholding and whether any special withholding 
requirements apply with respect to the payment. Paragraphs (a)(4)(i) 
through (vi) of this section describe circumstances in which a 
withholdable payment is not subject to withholding.
    (i) Exception to withholding if the withholding agent lacks 
control, custody, or knowledge--(A) In general. The exceptions to 
withholding described in Sec.  1.1441-2(d), applicable when an 
unrelated withholding agent has no control over or custody of money or 
property owned by a payee or beneficial owner of a payment, or lacks 
knowledge of the facts giving rise to such payments, also apply for 
purposes of chapter 4 of the Internal Revenue Code.

    (B) Example.  A, an individual, owns stock in DC, a domestic 
corporation, through a custodian, Bank 1, that is a participating 
FFI. A also has a money market account at Bank 2, that is also a 
participating FFI. DC pays a dividend of $1,000 that is deposited in 
A's custodial account at Bank 1. A then directs Bank 1 to transfer 
that $1,000 to A's money market account at Bank 2. With respect to 
the payment of the dividend into A's custodial account with Bank 1, 
both DC and Bank 1 are withholding agents making a withholdable 
payment for which they have custody, control, and knowledge. See 
Sec.  1.1473-1(a)(2)(vii)(B) and (d). Therefore, both DC and Bank 1 
have an obligation to withhold on the payment unless they can 
reliably associate the payment with documentation sufficient to 
treat the respective payees as not subject to withholding under 
chapter 4 of the Internal Revenue Code. With respect to the wire 
transfer of $1,000 from A's account at Bank 1 to A's account at Bank 
2, neither Bank 1 nor Bank 2 is required to withhold with respect to 
the transfer because neither bank has knowledge of the facts that 
gave rise to the payment. Even though Bank 1 is a custodian with 
respect to A's interest in DC and has knowledge regarding the $1,000 
dividend paid to A, once Bank A credits the $1,000 dividend to A's 
account, the $1,000 becomes A's property. When A transfers the 
$1,000 to its account at Bank 2, this constitutes a separate payment 
about which Bank 1 has no knowledge regarding the type of payment 
made. Further, Bank 2 only has knowledge that it receives $1,000 to 
be credited to A's account but has no knowledge regarding the type 
of payment made. Accordingly, Bank 1 and Bank 2 have no withholding 
obligation with respect to the transfer from A's custodial account 
at Bank 1 to A's money market account at Bank 2.

    (ii) Transitional exception to withholding for certain payments 
made prior to January 1, 2015--(A) In general. For any withholdable 
payment made prior to January 1, 2015, with respect to a preexisting 
obligation for which a withholding agent does not have documentation 
indicating the payee's status as a nonparticipating FFI, the 
withholding agent will not be required to withhold under this section 
and section 1471(a) unless the payee is a prima facie FFI.
    (B) Prima facie FFIs. If the payee is a prima facie FFI, the 
withholding agent must treat the payee as a nonparticipating FFI 
beginning on January 1, 2014, until the date the withholding agent 
obtains documentation sufficient to establish a different chapter 4 
status of the payee. A prima facie FFI means any payee if--
    (1) The withholding agent has available as a part of its 
electronically searchable information a designation for the payee as a 
QI or NQI; or
    (2) For an account maintained in the United States, the payee is 
presumed to be a foreign entity, or is documented as a foreign entity 
for purposes of chapter 3 or 61, and the withholding agent has recorded 
as part of its electronically searchable information a standardized 
industry code that indicates that the payee is a financial institution. 
The following North American Industry Classification System codes 
indicate that the payee is a financial institution:
    (i) Commercial Banking (NAICS 522110)
    (ii) Savings Institutions (NAICS 522120)
    (iii) Credit Unions (NAICS 522130)
    (iv) Other Depositary Credit Intermediation (NAICS 522190)
    (v) Investment Banking and Securities Dealing (NAICS 523110)
    (vi) Securities Brokerage (NAICS 523120)
    (vii) Commodity Contracts Dealing (NAICS 523130)
    (viii) Commodity Contracts Brokerage (NAICS 523140)
    (ix) Miscellaneous Financial Investment Activities (NAICS 523999)
    (x) Open-End Investment Funds (NAICS 525910)
    (3) In addition, the following Standard Industrial Classification 
Codes indicate that the payee is a financial institution:
    (i) Commercial Banks, NEC (SIC 6029)
    (ii) Branches and Agencies of Foreign Banks (branches) (SIC 6081)
    (iii) Foreign Trade and International Banking Institutions (SIC 
6082)
    (iv) Asset-Backed Securities (SIC 6189)
    (v) Security & Commodity Brokers, Dealers, Exchanges & Services 
(SIC 6200)
    (vi) Security Brokers, Dealers & Flotation Companies (SIC 6211)
    (vii) Commodity Contracts Brokers & Dealers (SIC 6221)
    (viii) Unit Investment Trusts, Face-Amount Certificate Offices, and 
Closed-(ix) End Management Investment Offices (SIC 6726)
    (iii) Payments to a participating FFI. Except to the extent 
provided in paragraph (a)(2)(i) or (iii) of this section, a withholding 
agent is not required to withhold under this section on a withholdable 
payment made to a payee that the withholding agent can treat as a 
participating FFI in accordance with Sec.  1.1471-3(d)(3). For this 
purpose, a limited branch of a participating FFI is treated as a 
nonparticipating FFI.
    (iv) Payments to a deemed-compliant FFI. A withholding agent is not 
required to withhold under section 1471(a) and this section on a 
withholdable payment to a payee that the withholding agent can treat as 
a deemed-compliant FFI in accordance with Sec.  1.1471-3(d)(5) through 
(7).
    (v) Payments to an exempt beneficial owner. A withholding agent is 
not required to withhold under section 1471(a) and this section on a 
withholdable payment to the extent that the withholding agent can 
reliably associate the payment with documentation to determine the 
portion of the payment that is allocable to an exempt beneficial owner 
in accordance with Sec.  1.1471-3(d)(8). For example, a withholding 
agent is not required to withhold under this section on a withholdable 
payment made to a payee that is the beneficial owner of such payment 
and is an exempt beneficial owner, to a nonparticipating FFI to the 
extent that the nonparticipating FFI receives the payment as an 
intermediary on behalf of one or more of its account holders that are 
exempt beneficial owners, or to a flow-through entity to the extent 
that the flow-through entity receives the payment with respect to one 
or more of its partners, beneficiaries, or owners (as applicable) that 
are exempt beneficial owners. See Sec.  1.1471-3(d)(4)(ii) for special 
rules for a withholding agent to determine the portion of a 
withholdable payment that is beneficially owned by an exempt beneficial 
owner in the case of a payment made to a nonparticipating FFI.
    (vi) Payments to a territory financial institution. A withholding 
agent is not required to withhold under section 1471(a) and this 
section on a withholdable payment that the

[[Page 9054]]

withholding agent may treat as made to a territory financial 
institution that is the beneficial owner of the payment in accordance 
with Sec.  1.1471-3(d)(10)(i). A withholding agent is also not required 
to withhold under this section on a withholdable payment that the 
withholding agent can treat, in accordance with Sec.  1.1471-
3(d)(10)(ii), as made to a territory financial institution payee that 
is a flow-through entity or that acts as an intermediary with respect 
to the payment and that agrees to be treated as a U.S. person for 
purposes of chapters 3 and 4 with respect to the payment. A territory 
financial institution's agreement to be treated as a U.S. person for 
purposes of this section must be evidenced by a withholding certificate 
described in Sec.  1.1471-3(c)(3)(iii)(F) furnished by the territory 
financial institution to the withholding agent.
    (b) Grandfathered obligations--(1) Grandfathered treatment of 
outstanding obligations. Notwithstanding Sec. Sec.  1.1471-5(h) and 
1.1473-1(a), a withholdable payment or passthru payment does include 
any payment made under a grandfathered obligation or any gross proceeds 
from the disposition of such an obligation.
    (2) Definitions. The following definitions apply solely for 
purposes of this paragraph (b)--
    (i) Grandfathered obligation. The term grandfathered obligation 
means any obligation outstanding on January 1, 2013.
    (ii) Obligation. The term obligation means any legal agreement that 
produces or could produce a passthru payment. An obligation does not, 
however, include any legal agreement or instrument that is treated as 
equity for U.S. tax purposes or any legal agreement that lacks a stated 
expiration or term, such as a savings deposit or demand deposit. In 
addition, it does not include any brokerage agreement, custodial 
agreement, or other similar agreement to hold financial assets for the 
account of others and to make and receive payments of income and other 
amounts with respect to such assets. In addition, an obligation does 
not include a master agreement that merely sets forth general and 
standard terms and conditions that are intended to apply to a series of 
transactions between parties and that does not set forth all of the 
specific terms necessary to conclude a particular contract. An 
obligation for purposes of this paragraph (b)(2)(i) includes, for 
example--
    (A) A debt instrument as defined in section 1275(a)(1) (for 
example, a bond, guaranteed investment certificate, or term deposit);
    (B) A binding agreement to extend credit for a fixed term (for 
example, a line of credit or a revolving credit facility), provided 
that on the agreement's issue date the agreement fixes the material 
terms (including a stated maturity date) under which the credit will be 
provided;
    (C) A life insurance contract payable upon the earlier of attaining 
a stated age or death;
    (D) A term certain annuity contract; and
    (E) A derivatives transaction entered into between counterparties 
under an ISDA Master Agreement and evidenced by a confirmation.
    (iii) Outstanding on January 1, 2013. An obligation that 
constitutes indebtedness for U.S. tax purposes is outstanding on 
January 1, 2013, if it has an issue date before January 1, 2013. In all 
other cases, an obligation is outstanding on January 1, 2013, if a 
legally binding agreement establishing the obligation was executed 
between the parties to the agreement before January 1, 2013. Any 
material modification of an outstanding obligation will result in the 
obligation being treated as newly issued or executed as of the 
effective date of such modification.
    (iv) Material modification. In the case of an obligation that 
constitutes indebtedness for U.S. tax purposes, a material modification 
is any significant modification of the debt instrument as defined in 
Sec.  1.1001-3. In all other cases, whether a modification of an 
obligation is material will be determined based upon all relevant facts 
and circumstances.
    (3) Application to flow-through entities--(i) Partnerships. A 
payment made under a grandfathered obligation includes a payment made 
to a partnership with respect to such obligation, including a payment 
made with respect to a partnership's disposition of such obligation. A 
payment made under a grandfathered obligation further includes the 
income from such obligation that is includible in the gross income of a 
partner with respect to a capital or profits interest in the 
partnership and the gross proceeds allocated to a partner from the 
disposition of such obligation as determined under Sec.  1.1473-
1(a)(5)(vi).
    (ii) Simple trusts. A payment made under a grandfathered obligation 
includes a payment made to a simple trust with respect to such 
obligation, including a payment made with respect to a simple trust's 
disposition of such obligation. A payment made under a grandfathered 
obligation further includes income from such obligation that is 
includible in the income of a beneficiary and further includes a 
beneficiary's share of the gross proceeds from a disposition of such 
obligation as determined under Sec.  1.1473-1(a)(5)(vii).
    (iii) Grantor trusts. A payment made under a grandfathered 
obligation includes a payment made to a grantor trust with respect to 
such obligation, including a payment made with respect to the trust's 
disposition of such obligation. A payment made under a grandfathered 
obligation further includes income from such obligation that is 
includible in the gross income of a person that is treated as an owner 
of the trust and the gross proceeds from the disposition of such 
obligation to the extent such owner is treated as owning the portion of 
the trust that consists of the obligation.
    (c) Effective/applicability date. The rules of this section apply 
on [EFFECTIVE DATE OF FINAL RULE].
    Par. 5. Section 1.1471-3 is added to read as follows.


Sec.  1.1471-3  Identification of payee.

    (a) Payee defined--(1) In general. Except as otherwise provided in 
this paragraph (a), for purposes of chapter 4 of the Internal Revenue 
Code a payee is the person to whom a payment is made, regardless of 
whether such person is the beneficial owner of the amount.
    (2) Payee with respect to a financial account. For purposes of 
payments made to a financial account and except as otherwise provided 
in paragraph (a)(3) of this section, the payee is the holder of the 
financial account.
    (3) Exceptions--(i) Certain foreign agents or intermediaries--(A) A 
foreign person that the withholding agent may treat as acting as an 
agent or intermediary with respect to a payment in accordance with 
paragraph (b)(1) of this section is not the payee if it is--
    (1) An NFFE; or
    (2) In the case of a payment of U.S. source FDAP income, a 
participating FFI acting as an intermediary, other than a QI that has 
assumed primary withholding responsibility;
    (B) In the case of an agent or intermediary described in paragraph 
(a)(3)(i)(A) of this section, the payee is the person or persons for 
whom the agent or intermediary collects the payment. Thus, for example, 
the payee of a payment of U.S. source FDAP income that the withholding 
agent can reliably associate with a withholding certificate from a 
qualified intermediary that does not assume primary withholding 
responsibility with respect to the payment under chapter 3, or a 
payment to a participating FFI that is an NQI, is the person or persons 
for whom the QI or NQI acts.

[[Page 9055]]

    (ii) Foreign flow-through entity. (A) A foreign entity that a 
withholding agent may treat as a flow-through entity is not a payee 
with respect to a payment unless the flow-through entity is--
    (1) An FFI, other than a participating FFI receiving a payment of 
U.S. source FDAP;
    (2) An active NFFE or excepted FFI that is not acting as an agent 
or intermediary with respect to the payment;
    (3) A WP or WT that is not acting as an agent or intermediary with 
respect to the payment; or
    (4) Receiving income that is (or is deemed to be) effectively 
connected with the conduct of a trade or business in the United States, 
or receiving a payment of gross proceeds from the sale of property that 
can produce income that is excluded from the definition of a 
withholdable payment under Sec.  1.1473-1(a)(4).
    (B) A withholding agent that makes a withholdable payment to a 
flow-through entity that is not described in paragraphs 
(a)(3)(ii)(A)(1) through (3) of this section will be required to treat 
the partner, beneficiary, or owner (as applicable) as the payee 
(looking through partners, beneficiaries, and owners that are 
themselves flow-through entities that are not described in paragraphs 
(a)(3)(ii)(A)(1) through (3)).
    (iii) U.S. intermediary or agent of a foreign person. A withholding 
agent that makes a withholdable payment to a U.S. person and has actual 
knowledge that the person receiving the payment is acting as an 
intermediary or agent of a foreign person with respect to the payment 
must treat such foreign person, and not the intermediary or agent, as 
the payee of such payment. Notwithstanding the previous sentence, a 
withholding agent that makes a withholdable payment to a U.S. financial 
institution that is acting as an intermediary or agent with respect to 
the payment on behalf of one or more foreign persons may treat the U.S. 
financial institution as the payee if the withholding agent has no 
reason to know that the U.S. financial institution will not comply with 
its obligation to withhold under sections 1471 and 1472.
    (iv) Territory financial institution. A withholding agent that 
makes a withholdable payment to a territory financial institution that 
is a flow-through entity or is acting as an intermediary or agent with 
respect to the payment may treat the territory financial institution as 
the payee only if the territory financial institution has agreed (as 
evidenced by a withholding certificate described in Sec.  1.1471-
3(c)(3)(iii)(F)) to be treated as a U.S. person for purposes of 
withholding with respect to the payment for both chapter 3 and chapter 
4 of the Internal Revenue Code purposes. In all other cases, the 
withholding agent must treat as the payee the partner, beneficiary, or 
owner (as applicable) of the territory financial institution that is a 
flow-through entity or the person on whose behalf the territory 
financial institution is acting.
    (v) Disregarded entity or branch. Except as otherwise provided in 
this paragraph (a)(3)(v), a withholding agent that makes a withholdable 
payment to an entity that is disregarded for U.S. Federal tax purposes 
under Sec.  301.7701-2(c)(2) as an entity separate from its single 
owner must treat the single owner as the payee. Notwithstanding the 
previous sentence, a withholding agent that makes a payment to a 
limited branch will be required to treat the payment as made to a 
nonparticipating FFI.
    (vi) U.S. branch of certain foreign banks or foreign insurance 
companies. A withholdable payment to a U.S. branch of a participating 
FFI is a payment to a U.S. person if the U.S. branch and the 
withholding agent have agreed to treat the U.S. branch as a U.S. person 
for purposes of Sec.  1.1441-1(b)(2)(iv). However, a U.S. branch that 
is treated as a U.S. person under Sec.  1.1441-1(b)(2)(iv) is not 
treated as a U.S. person for purposes of the withholding certificate it 
may provide to a withholding agent for purposes of chapter 4 of the 
Internal Revenue Code. Accordingly, a U.S. branch of a participating 
FFI must furnish a withholding certificate on a Form W-8 to certify its 
chapter 4 status (and not a Form W-9). A U.S. branch of a participating 
FFI that is treated as a U.S. person for purposes of chapter 3 may not 
make an election to be withheld upon, as described in section 
1471(b)(3) of the Code and Sec.  1.1471-2(a)(2)(iii), for purposes of 
chapter 4. See Sec.  1.1471-4(d) for rules requiring a U.S. branch of a 
participating FFI to report as a U.S. person.
    (vii) Foreign branch of a U.S. financial institution. A payment to 
a foreign branch of a U.S. person is a payment to a U.S. payee. 
However, a payment to a foreign branch of a U.S. financial institution 
will be treated as a payment to a foreign payee if the foreign branch 
is a QI. Therefore, a foreign branch that is a QI will provide the 
withholding agent with an intermediary withholding certificate and the 
withholding agent will report the payment as made to foreign branch of 
the QI on a Form 1042-S.
    (b) Determination of payee's status. Except as otherwise provided 
in this paragraph (b), a withholding agent must base its determination 
of the chapter 4 status of a payee on documentation that the 
withholding agent can reliably associate with such payment. Paragraph 
(c) of this section provides rules for when a withholding agent can 
reliably associate a payment with appropriate documentation. Paragraph 
(d) of this section provides documentation requirements applicable to 
each class of payees, including exceptions for payments made with 
respect to offshore obligations or preexisting obligations. Paragraph 
(e) provides standards for determining when a withholding agent will be 
considered to have reason to know that a claim of exemption from 
withholding is unreliable or incorrect. Paragraph (f) of this section 
provides presumptions that apply for purposes of determining a payee's 
chapter 4 status in the absence of documentation or when the 
documentation provided is unreliable or incorrect.
    (1) Determining whether a payment is received by an intermediary. A 
withholding agent may treat the person who receives a payment as an 
intermediary if it can reliably associate the payment with a valid 
intermediary withholding certificate on which the person who receives 
the payment claims to be a QI or NQI. For this purpose, a U.S. person's 
foreign branch that is a QI is treated as a foreign intermediary. A 
withholding agent that makes a payment with respect to an offshore 
obligation may also treat the person who receives a payment as an 
intermediary if the withholding agent can reliably associate the 
payment with documentation that would be sufficient to treat the person 
as an excepted FFI under paragraph (d)(9) of this section or otherwise 
as an NFFE under paragraph (d)(11) of this section if the person were 
the payee, and the person has provided written notification, whether or 
not such notification is signed, that it accepts the payment on behalf 
of another person or persons. A withholding agent may rely on the type 
of certificate furnished as determinative of whether the person who 
receives the payment is an intermediary, unless the withholding agent 
knows or has reason to know that the certificate is incorrect. For 
example, a withholding agent that receives a beneficial owner 
withholding certificate from an FFI may treat the FFI as the beneficial 
owner unless it has information in its records that would indicate 
otherwise or the certificate contains information that is not 
consistent with beneficial owner status

[[Page 9056]]

(for example, sub-account numbers or additional names). If the FFI also 
acts as an intermediary, the withholding agent may request that the FFI 
furnish two certificates, that is, a beneficial owner certificate for 
the amounts it receives as a beneficial owner, and an intermediary 
withholding certificate for the amounts it receives as an intermediary. 
A withholding agent that cannot reliably associate a payment with 
documentation sufficient to treat the person who receives the payment 
as an intermediary must follow the presumption rules set forth in 
paragraph (f)(5) of this section to determine whether it must treat the 
person who receives the payment as an intermediary.
    (2) Determination of entity type. A withholding agent may rely upon 
a person's entity classification contained in a valid Form W-8 or Form 
W-9 if the withholding agent has no reason to know that the entity 
classification is incorrect. A withholding agent that makes a payment 
with respect to an offshore obligation may also rely upon a written 
notification provided by the person who receives the payment, 
regardless of whether such notification is signed, that indicates the 
person's entity classification unless the withholding agent has reason 
to know that the entity classification indicated by the person who 
receives the payment is incorrect. A withholding agent may not rely on 
a person's claim of classification other than as a corporation if the 
person's name indicates that the person is a per se corporation 
described in Sec.  301.7701-2(b)(8) of this chapter unless the 
certificate or written statement contains a statement that the person 
is a grandfathered per se corporation described in Sec.  301.7701-
2(b)(8) of this chapter and that its grandfathered status has not been 
terminated.
    (3) Determination of whether the payment is made to a QI, WP, or 
WT. A withholding agent may treat the person who receives a payment as 
a QI, a WP, or a WT if the withholding agent can reliably associate the 
payment with a valid Form W-8IMY, as described in paragraph (c)(3)(iii) 
of this section, that indicates that the person who receives the 
payment is a QI, WP, or WT, and the form contains the person's FFI-EIN, 
in the case of a QI or a WP or WT that is an FFI, or in the case of a 
QI, WP, or WT that is not an FFI its QI-EIN, WP-EIN, or WT-EIN.
    (4) Determination of whether the payee is receiving effectively 
connected income. A withholding agent may treat a payment as made to a 
payee that is receiving income that is effectively connected to a trade 
or business in the United States if it can reliably associate the 
payment with a valid Form W-8ECI described in paragraph (c)(3)(iv) of 
this section.
    (c) Rules for reliably associating a payment with a withholding 
certificate or other appropriate documentation--(1) In general. A 
withholding agent can reliably associate a withholdable payment with 
valid documentation if, prior to the payment, it holds valid 
documentation appropriate to the payee's chapter 4 status as described 
in paragraph (d) of this section (either directly or through an agent), 
it can reliably determine how much of the payment relates to the valid 
documentation, and it does not know or have reason to know that any of 
the information, certifications, or statements in, or associated with, 
the documentation are unreliable or incorrect. Thus, a withholding 
agent cannot reliably associate a withholdable payment with valid 
documentation provided by a payee to the extent such documentation is 
unreliable or incorrect with respect to the claims made, or to the 
extent that information required to allocate all or a portion of the 
payment to each payee is unreliable or incorrect. A withholding agent 
may rely on information and certifications contained in withholding 
certificates or other documentation without having to inquire into the 
truthfulness of the information or certifications, unless it knows or 
has reason to know that the information or certifications are untrue.
    (2) Reliably associating a payment with documentation when a 
payment is made through an intermediary or flow-through entity that is 
not the payee--(i) A withholding agent that makes a payment to a 
foreign intermediary or foreign flow-through entity that is not the 
payee under paragraph (a) of this section can reliably associate the 
payment with valid documentation only if, in addition to the 
documentation described in paragraph (d) of this section that is 
relevant to the payee, the withholding agent also has obtained a valid 
Form W-8IMY, described in paragraph (c)(3)(iii) of this section from 
the intermediary or flow-through entity (and, with respect to a payment 
made through a chain of intermediaries or flow-through entities, has 
received a Form W-8IMY from any other intermediary or flow-through 
entity in that chain).
    (ii) Notwithstanding paragraph (c)(2)(i) of this section, a 
withholding agent that makes a payment with respect to an offshore 
obligation to an intermediary or flow-through entity that is an NFFE, 
may rely upon a written notification from the intermediary or flow-
through entity, regardless of whether such notification is signed, 
stating that the NFFE is a flow-through entity or is acting as an 
intermediary with respect to the payment, in lieu of the Form W-8 
described in the previous sentence. However, in such case, the NFFE 
intermediary or flow-through entity will be required to provide the 
withholding statement that generally accompanies the Form W-8IMY, 
designating the payees and the appropriate amount that should be 
allocated to each payee. If no such withholding statement is provided, 
the payment will be treated as made to a nonparticipating FFI.
    (3) Requirements for validity of certificates--(i) Form W-9. A 
valid Form W-9, or a substitute form, must meet the requirements 
prescribed in Sec.  31.3406(h)-3, including the requirement that the 
form contain the payee's name and TIN, and be signed and dated under 
penalties of perjury by the payee or a person authorized to sign for 
the payee pursuant to sections 6061 through 6063 and the regulations 
thereunder. A foreign person, including a U.S. branch of a foreign 
person that is treated as a U.S. person under Sec.  1.1441-1(b)(2)(iv), 
or a foreign branch of a U.S. financial institution that is a QI, may 
not provide a Form W-9.
    (ii) Beneficial owner withholding certificate (Form W-8BEN)--(A) A 
beneficial owner withholding certificate includes a Form W-8BEN (or a 
substitute form) and such other form as the IRS may prescribe. A 
beneficial owner withholding certificate is valid only if its validity 
period has not expired, it is signed under penalties of perjury by a 
person with authority to sign for the person whose name is on the form, 
and it contains--
    (1) The person's name, permanent residence address, and TIN (if 
required);
    (2) The country under the laws of which the person is created, 
incorporated, or governed (if a person other than an individual);
    (3) The entity classification of the person;
    (4) The chapter 4 status of the person; and
    (5) Such other information as may be required by the regulations 
under section 1471 or 1472 or by the form or the accompanying 
instructions in addition to, or in lieu of, the information described 
in this paragraph (c)(3)(ii).
    (B) For purposes of chapter 4 of the Internal Revenue Code, a 
person's permanent residence address is the address in the country 
where the person claims to be a resident for purposes of

[[Page 9057]]

that country's income tax. The address of a financial institution with 
which the person maintains an account, a post office box, or an address 
used solely for mailing purposes is not a residence address for this 
purpose unless such address is the only permanent address used by the 
person and appears as the person's registered address in the person's 
organizational documents. If the person is an individual who does not 
have a tax residence in any country, the permanent address is the place 
at which the person normally resides. If the person is an entity and 
does not have a tax residence in any country, then the permanent 
residence address is the place at which the person maintains its 
principal office. See paragraph (d) of this section for additional form 
requirements applicable to each type of chapter 4 status.
    (iii) Withholding certificate of an intermediary, flow-through 
entity, or U.S. branch (Form W-8IMY)--(A) In general. A withholding 
certificate of an intermediary, flow-through entity, or U.S. branch is 
valid for purposes of chapter 4 of the Internal Revenue Code only if it 
is furnished on a Form W-8IMY, an acceptable substitute form, or such 
other form as the IRS may prescribe, it is signed under penalties of 
perjury by a person with authority to sign for the person named on the 
form, its validity period has not expired, and it contains the 
following information, statements, and certifications--
    (1) The name and permanent residence address of the person;
    (2) The country under the laws of which the person is created, 
incorporated, or governed;
    (3) The person's chapter 4 status;
    (4) The person's entity tax classification;
    (5) An FFI-EIN, in the case of a participating FFI or a registered 
deemed-compliant FFI, or an EIN in the case of a QI, WP, or WT that is 
not an FFI;
    (6) In the case of an intermediary certificate, a certification 
that, with respect to accounts listed on the withholding statement, the 
intermediary is not acting for its own account;
    (7) With respect to a withholding certificate of a QI, a 
certification that it is acting as a QI with respect to the accounts 
listed on the withholding statement;
    (8) In the case of a participating FFI that is an NQI, an NWP, an 
NWT, a QI that makes a section 1471(b)(3) election to be withheld upon 
for purposes of chapter 4 of the Internal Revenue Code, or a QI that is 
a foreign branch of a U.S. financial institution, an FFI withholding 
statement that meets the requirements of paragraphs (c)(3)(iii)(B)(1) 
and (2) of this section;
    (9) In the case of an NFFE that is an NQI, an NWP, or an NWT, an 
NFFE withholding statement that meets the requirements of paragraphs 
(c)(3)(iii)(B)(1) and (3) of this section; and
    (10) Any other information, certifications, or statements as may be 
required by the form or accompanying instructions in addition to, or in 
lieu of, the information and certifications described in this 
paragraph.
    (B) Withholding statement--(1) In general. A withholding statement 
forms an integral part of the withholding certificate and the penalties 
of perjury statement provided on the withholding certificate apply to 
the withholding statement as well. The withholding statement may be 
provided in any manner, and in any form, to which the FFI, NFFE, or QI 
submitting the form and the withholding agent mutually agree, including 
electronically. If the withholding statement is provided 
electronically, there must be sufficient safeguards to ensure that the 
information received by the withholding agent is the information sent 
by the FFI, NFFE, or QI submitting the withholding certificate and must 
also document all occasions of user access that result in the 
submission or modification of withholding statement information. In 
addition, the electronic system must be capable of providing a hard 
copy of all withholding statements provided by the FFI, NFFE, or QI. 
The withholding statement must be updated as often as necessary for the 
withholding agent to meet its reporting and withholding obligations 
under chapter 4 of the Internal Revenue Code. A withholding agent will 
be liable for tax, interest, and penalties in accordance with Sec.  
1.1474-1 to the extent it does not follow the presumption rules of 
paragraph (f) of this section for any payment, or portion thereof, for 
which a withholding statement is required and the withholding agent 
does not have a valid withholding statement prior to making a payment.
    (2) Special requirements for an FFI withholding statement. An FFI 
withholding statement must include either pooled information that 
indicates the portion of the payment attributable to recalcitrant 
account holders and nonparticipating FFIs (or, in the case of a QI that 
is a foreign branch of a U.S. financial institution, the portion of the 
payment allocable to account holders subject to chapter 4 withholding) 
and the portion of the payment that is allocated to each class of 
payees that is not subject to withholding under chapter 4, or an 
allocation of the payment to each payee, and any other information 
reasonably necessary to enable the withholding agent to report the 
payment in accordance with the requirements described in Sec.  1.1474-
1(d) and the requirements of Form 1042-S and the accompanying 
instructions. A withholding agent may rely upon a withholding statement 
provided by the FFI for purposes of chapter 3 provided that the 
withholding statement includes all of the information required by 
paragraph (c)(3)(iii)(B) of this section and specifies the portion of 
the payment that must be withheld under each of chapters 3 and 4.
    (3) Special requirements for an NFFE withholding statement. An NFFE 
withholding statement must contain the name, address, TIN (if any), 
entity type, and chapter 4 status of each payee, the amount allocated 
to each payee, a valid withholding certificate or other appropriate 
documentation sufficient to establish the chapter 4 status of each 
payee in accordance with paragraph (d) of this section, and any other 
information reasonably necessary to enable the withholding agent to 
report the payment in accordance with the requirements described in 
Sec.  1.1474-1(d) and the requirements of Form 1042-S and the 
accompanying instructions. Notwithstanding the prior sentence, an NFFE 
is permitted to provide pooled allocation information with respect to 
payees that are treated as nonparticipating FFIs. A withholding agent 
may rely upon a withholding statement provided by the NFFE for purposes 
of chapter 3 provided that the withholding statement includes all of 
the information required by paragraph (c)(3)(iii)(B) of this section 
and specifies the portion of the payment that must be withheld under 
each of chapters 3 and 4.
    (4) Special requirements for a territory institution withholding 
statement. A territory institution withholding statement must include 
the name, address, TIN (if any), entity type, and chapter 4 status of 
each payee on behalf of which it is receiving the payment, the amount 
allocated to each payee, a valid withholding certificate or other 
documentation sufficient to establish the chapter 4 status of each 
payee in accordance with paragraph (d) of this section, and any other 
information reasonably necessary to enable the withholding agent to 
report the payment in accordance with the requirements for the Forms 
1042 and 1042-S, described in Sec.  1.1474-1(d), and the instructions 
accompanying the forms. A withholding agent may rely upon a withholding 
statement provided by the territory

[[Page 9058]]

financial institution for purposes of chapter 3 provided that the 
withholding statement includes all of the information required by 
paragraph (c)(3)(iii)(B) of this section and specifies the portion of 
the payment that must be withheld under each of chapters 3 and 4.
    (5) Special requirements for an exempt beneficial owner withholding 
statement. An exempt beneficial owner withholding statement must 
include the name, address, TIN (if any), entity type, and chapter 4 
status of each exempt beneficial owner on behalf of which the 
nonparticipating FFI is receiving the payment, the amount allocable to 
each exempt beneficial owner, a valid withholding certificate or other 
documentation sufficient to establish the chapter 4 status of each 
exempt beneficial owner in accordance with paragraph (d) of this 
section, and any other information reasonably necessary to enable the 
withholding agent to report the payment in accordance with the 
requirements described in Sec.  1.1474-1(d) and the requirements of 
Form 1042-S and the accompanying instructions. The withholding 
statement must allocate the remainder of the payment that is not 
allocated to an exempt beneficial owner to the nonparticipating FFI 
receiving the payment.
    (C) Failure to provide allocation information. A withholding 
certificate provided by an NWP, NWT, or NQI that fails to provide 
documentation or allocation information with respect to some of the 
partners of the partnership, owners or beneficiaries of the trust, or 
persons for whom the intermediary is acting will not be treated as 
invalid with respect to the persons for whom documentation and 
allocation information is properly provided. The portion of the payment 
that is not reliably associated with underlying documentation or that 
is not properly allocated will be allocated in accordance with the 
presumption rules set forth in paragraph (f) of this section. For 
example, assume a withholding certificate that is provided by an FFI 
that is an NQI includes an FFI withholding statement that indicates 
that 50 percent of the payment is allocable to a pool of payees that 
are exempt for purposes of chapter 4 of the Internal Revenue Code but 
does not allocate the remaining 50 percent of the payment. In such a 
case, the withholding agent may treat 50 percent of the payment as 
exempt from chapter 4 and the remaining 50 percent that was not 
allocated will be treated, under the presumption rules set forth in 
paragraph (f) of this section, as made to a pool of payees that are 
nonparticipating FFIs.
    (D) Special rules applicable to a withholding certificate of a QI 
that assumes primary withholding responsibility under chapter 3 of the 
Internal Revenue Code. A QI that assumes primary withholding 
responsibility under chapter 3 of the Internal Revenue Code for a 
payment may not make the election described in Sec.  1.1471-
2(a)(2)(iii) to be withheld upon with respect to the payment. Thus, 
where a QI assumes primary withholding responsibility under chapter 3 
with respect to a payment, in addition to the other requirements 
indicated in paragraph (c)(3)(iii)(A) of this section, a withholding 
agent can reliably associate the payment with a valid withholding 
certificate only when the QI has not indicated that it makes the 
section 1471(b)(3) of the Code election to be withheld upon for 
purposes of chapter 4 of the Internal Revenue Code.
    (E) Special rules applicable to a withholding certificate of a QI 
that does not assume primary withholding responsibility under chapter 
3. A QI that does not assume primary withholding responsibility under 
chapter 3 will be required to make the section 1471(b)(3) election to 
be withheld upon that is described in Sec.  1.1471-2(a)(2)(iii). Thus, 
in a case in which a QI does not assume primary withholding 
responsibility under chapter 3, a withholding agent can reliably 
associate the payment with a valid withholding certificate only when, 
in addition to the other information required by paragraph 
(c)(3)(iii)(A) of this section, the withholding certificate indicates 
that the QI elects to be withheld upon for purposes of chapter 4 of the 
Internal Revenue Code.
    (F) Special rules applicable to a withholding certificate of a 
territory financial institution that agrees to be treated as a U.S. 
person for purposes of chapter 4 of the Internal Revenue Code. A 
withholding agent may reliably associate a payment with an intermediary 
withholding certificate or flow-through withholding certificate of a 
territory financial institution that agrees to be treated as a U.S. 
person if, in addition to the other information required by paragraph 
(c)(2)(iii)(A) of this section, the certificate contains an EIN of the 
territory financial institution and a certification that the territory 
financial institution agrees to be treated as a U.S. person with 
respect to the payment for both chapter 3 and chapter 4 of the Internal 
Revenue Code purposes.
    (G) Special rules applicable to a withholding certificate of a 
territory financial institution that does not agree to be treated as a 
U.S. person for purposes of chapter 4 of the Internal Revenue Code. A 
withholding agent may reliably associate a payment with an intermediary 
withholding certificate or a flow-through withholding certificate of a 
territory financial institution that does not agree to be treated as a 
U.S. person if, in addition to the information required by paragraph 
(c)(3)(iii)(A) of this section, the certificate indicates that the 
institution has not agreed to be treated as a U.S. person and the 
institution provides a territory institution withholding statement 
described in paragraphs (c)(3)(iii)(B)(1) and (4) of this section. If 
the territory financial institution does not provide valid 
documentation with respect to all payees on behalf of which it receives 
the payment, the withholding agent may still treat the withholding 
certificate and any other documentation received as valid but must 
treat any portion of the payment allocable to undocumented payees of 
the territory financial institution as made to a nonparticipating FFI.
    (iv) Certificate for exempt status (Form W-8EXP). A Form W-8EXP is 
valid only if it contains the name, address, and chapter 4 status of 
the payee, the relevant certifications or documentation, and any other 
requirements indicated in the instructions to the form, and is signed 
under penalties of perjury by a person with authority to sign for the 
payee.
    (v) Certificate for effectively connected income (Form W-8ECI). A 
Form W-8ECI is valid only if, in addition to meeting the requirements 
in the instructions to the form, it contains the TIN of the payee, 
represents that the amounts for which the certificate is furnished are 
effectively connected with the conduct of a trade or business in the 
United States and are includable in the payee's gross income for the 
taxable year, and is signed under penalties of perjury by a person with 
authority to sign for the payee.
    (4) Requirements for written statements. A written statement 
provided by a payee with respect to an offshore obligation must contain 
a payee's certification that it meets the requirements relevant to the 
chapter 4 status claimed and must be signed by the payee under 
penalties of perjury. A written statement may be used in lieu of a 
withholding certificate only to the extent provided under this section 
and only when accompanied by

[[Page 9059]]

documentary evidence (unless provided otherwise by this section).
    (5) Requirements for documentary evidence. Documentary evidence 
with respect to a payee is only reliable if it contains sufficient 
information to support the payee's claim of chapter 4 status. 
Acceptable documentary evidence includes--
    (i) A certificate of residence issued by an appropriate tax 
official of the country in which the payee claims to be a resident that 
indicates that the payee has filed its most recent income tax return as 
a resident of that country;
    (ii) With respect to an individual, any valid identification issued 
by an authorized government body (for example, a government or agency 
thereof, or a municipality), that includes the individual's name and 
address and is typically used for identification purposes;
    (iii) With respect to an entity, any official documentation issued 
by an authorized government body (for example, a government or agency 
thereof, or a municipality) that includes the name of the entity and 
either the address of its principal office in the country (or 
possession of the United States) in which it claims to be a resident or 
the country (or possession of the United States) in which the entity 
was incorporated or organized;
    (iv) With respect to an account maintained in a jurisdiction with 
anti-money laundering rules that have been approved by the IRS in 
connection with a QI agreement (as referenced in Sec.  1.1441-
1(e)(5)(iii)), any of the documents other than a Form W-8 or W-9 
referenced in the jurisdiction's attachment to the QI agreement for 
identifying individuals or entities; and
    (v) Any financial statement, third-party credit report, bankruptcy 
filing, SEC report, or other document identified in the specific payee 
documentation requirements in paragraph (d) of this section.
    (6) Applicable rules for withholding certificates, written 
statements, and documentary evidence. The provisions in this paragraph 
(c)(6) describe standards generally applicable to withholding 
certificates on Form W-8 (or a substitute form), written statements, 
and documentary evidence furnished to establish the payee's chapter 4 
status. These provisions do not apply to Forms W-9 (or their 
substitutes). For corresponding provisions regarding the Form W-9 (or a 
substitute Form W-9), see section 3406 and the regulations thereunder.
    (i) Who may sign the certificate or written statement. A 
withholding certificate (including an acceptable substitute) or written 
statement may be signed by any person authorized to sign a declaration 
under penalties of perjury on behalf of the person whose name is on the 
certificate or written statement, as provided in sections 6061 through 
6063 and the regulations thereunder.
    (ii) Period of validity--(A) Withholding certificates. For purposes 
of determining the period of validity for a withholding certificate 
under chapter 4 of the Internal Revenue Code, the rules prescribed in 
Sec.  1.1441-1(e)(4)(ii)(A) through (C) apply, except that Sec.  
1.1441-1(e)(4)(ii)(B)(1) will not apply to a withholding certificate of 
a nonregistering local bank, an FFI with only low-value accounts, or an 
owner-documented FFI.
    (B) Written statements. Except as otherwise provided, a written 
statement is valid until the earlier of the last day of the third 
calendar year following the year in which documentary evidence is 
provided to the withholding agent or the day on which a change in 
circumstance occurs that makes the information contained in the written 
statement incorrect. However, a written statement submitted by a 
foreign government or a foreign central bank will remain valid 
indefinitely, unless and until a change in circumstances makes the 
information contained in the written statement incorrect.
    (C) Documentary evidence. As a general rule, documentary evidence 
is valid until the earlier of the last day of the third calendar year 
following the year in which the documentary evidence is provided to the 
withholding agent or the day on which a change in circumstance occurs 
that makes the information on the documentary evidence incorrect. 
However, documentary evidence that contains an expiration date will be 
valid until the end of the expiration period, regardless of whether 
that expiration date occurs before or after the last day of the third 
calendar year following the year in which the documentary evidence is 
provided to the withholding agent. In addition, documentary evidence 
that is not generally renewed or amended, such as a certificate of 
incorporation, may be treated as valid indefinitely until a change in 
circumstance occurs that makes the information on the documentary 
evidence incorrect.
    (D) Change of circumstances--(1) Defined. For purposes of this 
chapter, a person is considered to have a change in circumstances only 
if such change would affect the chapter 4 status of the person. A 
change of circumstances includes any change that results in the 
addition of information described in paragraph (e)(4) relevant to a 
person's claim of foreign status (that is, U.S. indicia) or otherwise 
conflicts with such person's claim of chapter 4 status. Unless stated 
otherwise, a change of address or telephone number is a change in 
circumstances for purposes of this paragraph (c)(6)(ii)(D) only if it 
changes to an address or telephone number in the United States. A 
change in circumstances affecting the withholding information provided 
to the withholding agent, including allocation information or 
withholding pools contained in a withholding statement or owner 
reporting statement, will terminate the validity of the withholding 
certificate with respect to the information that is no longer reliable, 
until the information is updated.
    (2) Obligation to notify withholding agent of a change in 
circumstances. If a change in circumstances makes any information on a 
certificate or other documentation incorrect, then the person whose 
name is on the certificate or other documentation must inform the 
withholding agent within 30 days of the change and furnish a new 
certificate, a new written statement, or new documentary evidence. If 
an intermediary or a flow-through entity becomes aware that a 
certificate or other appropriate documentation it has furnished to the 
person from whom it collects a payment is no longer valid because of a 
change in the circumstances of the person who issued the certificate or 
furnished the other appropriate documentation, then the intermediary or 
flow-through entity must notify the person from whom it collects the 
payment of the change of circumstances within 30 days of the date that 
it knows or has reason to know of the change in circumstances. It must 
also obtain a new withholding certificate or new appropriate 
documentation to replace the existing certificate or documentation 
whose validity has expired due to the change in circumstances.
    (3) Withholding agent's obligation with respect to a change in 
circumstances. A certificate or other documentation becomes invalid on 
the date that the withholding agent holding the certificate or 
documentation knows or has reason to know that circumstances affecting 
the correctness of the certificate or documentation have changed. 
However, a withholding agent may choose to treat a person as having the 
same chapter 4 status that it had prior to the change in circumstances 
until the earlier of 90 days from the date that the certificate or 
documentation became unreliable due to the change in circumstances or 
the date that a new

[[Page 9060]]

certificate or new documentation is obtained. A withholding agent may 
rely on a certificate without having to inquire into possible changes 
of circumstances that may affect the validity of the statement, unless 
it knows or has reason to know that circumstances have changed. A 
withholding agent may require a new certificate or additional 
documentation at any time prior to a payment, regardless of whether the 
withholding agent knows or has reason to know that any information 
stated on the certificate or documentation has changed.
    (iii) Record Retention. A withholding agent must retain each 
withholding certificate, written statement, or copy of documentary 
evidence for as long as it may be relevant to the determination of the 
withholding agent's tax liability under section 1474(a) and Sec.  
1.1474-1. A withholding agent may retain either an original, certified 
copy, or photocopy (including a microfiche, electronic scan, or similar 
means of electronic storage) of the withholding certificate, written 
statement, or documentary evidence. With respect to documentary 
evidence, the withholding agent must also note in its records the date 
on which and by whom the document was received and reviewed. Any 
documentation that is stored electronically must be made available in 
hard copy form to the IRS upon request during an examination.
    (iv) Electronic transmission of withholding certificate, written 
statement, and documentary evidence. A withholding agent may accept a 
withholding certificate (including an acceptable substitute form), a 
written statement, or other such form as the Internal Revenue Service 
shall prescribe, electronically in accordance with the requirements set 
forth in Sec.  1.1441-1(e)(4)(iv). A withholding certificate (including 
a substitute form), written statement or other such form prescribed by 
the IRS may be accepted by facsimile if the withholding agent confirms 
that the person furnishing the form is the person named on the form, 
the faxed form contains a signature of the person whose name is on the 
form, and such signature is made under penalties of perjury in the 
manner described in Sec.  1.1441-1(e)(4)(iv)(B)(3)(i). A withholding 
agent may also accept a copy of documentary evidence electronically, 
including by facsimile, if the withholding agent confirms that the 
person furnishing the documentary evidence is the person named on the 
documentary evidence, the copy does not appear to have been altered 
from its original form, and the copy is a certified copy or notarized 
copy (that is, must either be certified to be a true copy of the 
original or must contain a notarized signed statement of the person 
furnishing the document that the copy is a true and accurate 
reproduction of the original).
    (v) Acceptable substitute withholding certificate. A withholding 
agent may substitute its own form for an official Form W-8 if the 
substitute form meets the requirements of Sec.  1.1441-1(e)(4)(vi) and 
contains all of the information relevant for determining the chapter 4 
status of the person named on the form.
    (vi) Documentation to be furnished for each account unless 
exception applies. Except as otherwise provided in this paragraph 
(c)(6)(vi), a withholding agent that is a financial institution must 
obtain withholding certificates or other appropriate documentation on 
an account-by-account basis. However, the exceptions set forth in Sec.  
1.1441-1(e)(4)(ix)(A) through (C), that permit a withholding agent to 
rely on documentation held through coordinated account systems, 
families of mutual funds, and through certain U.S. brokers, apply for 
purposes of documenting accounts under chapter 4 of the Internal 
Revenue Code.
    (vii) Reliance on a prior version of a withholding certificate. 
Upon the issuance by the IRS of an updated version of a withholding 
certificate, a withholding agent may continue to accept the prior 
version of the withholding certificate for six months after the 
revision date shown on the updated withholding certificate, unless the 
IRS has issued guidance that indicates otherwise, and may continue to 
rely upon a previously signed prior version of the withholding 
certificate until its period of validity expires.
    (7) Documentation received after the time of payment. Proof that 
withholding was not required under the provisions of chapter 4 of the 
Internal Revenue Code and the regulations thereunder also may be 
established after the date of payment by the withholding agent on the 
basis of a valid withholding certificate and/or other appropriate 
documentation that was furnished after the date of payment but that was 
effective as of the date of payment. A withholding certificate 
furnished after the date of payment will be considered effective as of 
the date of the payment if the certificate contains a signed affidavit 
(either at the bottom of the form or on an attached page) that states 
that the information and representations contained on the certificate 
were accurate as of the time of the payment. A certificate obtained 
within 15 days after the date of the payment will not be considered to 
be unreliable solely because it does not contain an affidavit. However, 
in the case of a withholding certificate of an individual received more 
than a year after the date of payment, the withholding agent will be 
required to obtain, in addition to the withholding certificate and 
affidavit, documentary evidence described in paragraph (c)(5)(i) or 
(ii) of this section that supports the individual's claim of foreign 
status. In the case of a withholding certificate of an entity received 
more than a year after the date of payment, the withholding agent will 
be required to obtain, in addition to the withholding certificate and 
affidavit, documentary evidence specified in paragraph (d) of this 
section applicable to an offshore account that supports the chapter 4 
status claimed. In a case in which documentation other than a 
withholding certificate is submitted from a payee more than a year 
after the date of payment, the withholding agent will be required to 
also obtain from the payee a withholding certificate supporting the 
chapter 4 status claimed.
    (d) Documentation requirements to establish payee's chapter 4 
status. Unless the withholding agent knows or has reason to know 
otherwise, a withholding agent may rely on the provisions of this 
paragraph (d) to determine the chapter 4 status of a payee. Except as 
otherwise provided in this paragraph (d), a withholding agent is 
required to obtain a valid withholding certificate or a Form W-9 from 
the payee in order to treat the payee as having a particular chapter 4 
status. Paragraphs (d)(1) through (11) of this section prescribe any 
additional documentation requirements that must be met in order to 
treat a payee as having a specific chapter 4 status. Paragraphs (d)(1) 
through (11) of this section also indicate when it is appropriate to 
rely upon documentary evidence in lieu of a Form W-8 or W-9 and the 
type of documentary evidence necessary. In cases where documentary 
evidence alone is not sufficient to establish that a payee with respect 
to an offshore obligation has a particular chapter 4 status, the 
withholding agent may supplement the documentary evidence with a 
written statement signed by the payee (or a person with authority to 
sign for the payee) under penalties of perjury that indicates that the 
payee meets the requirements to qualify for a particular chapter 4 
status. This paragraph (d) also provides the circumstances in which 
special documentation rules are permitted with respect to preexisting 
obligations. A withholding agent may not rely on documentation 
described in this paragraph (d) if it knows or has reason

[[Page 9061]]

to know that such documentation is incorrect or unreliable as described 
in paragraph (e) of this section.
    (1) Identification of U.S. persons. A withholding agent must treat 
a payee as a U.S. person if it has a valid Form W-9 associated with the 
payee or if it can presume the payee is a U.S. person under the 
presumption rules set forth in paragraph (f) of this section.
    (2) Identification of foreign individuals--(i) In general. A 
withholding agent may treat a payee as a foreign individual if the 
withholding agent has a valid withholding certificate identifying the 
payee as a foreign individual.
    (ii) Transitional exception for payments made prior to January 1, 
2017, with respect to preexisting obligations. For payments made prior 
to January 1, 2017, with respect to a preexisting obligation, a 
withholding agent may treat a payee as a foreign individual if the 
withholding agent has a withholding certificate associated with the 
payee that meets the requirements of Sec.  1.1441-1(e)(1)(ii) 
applicable to such certificate identifying the payee as a foreign 
individual.
    (iii) Exception for offshore obligations. A withholding agent that 
makes a payment with respect to an offshore obligation may treat the 
payee as a foreign individual if it obtains a government-issued 
identification that supports the payee's claim of chapter 4 status as a 
foreign individual and none of the documentation associated with the 
payee contains U.S. indicia described in paragraph (e)(4) of this 
section.
    (3) Identification of participating FFIs--(i) In general. A 
withholding agent may treat a payee as a participating FFI only if the 
withholding agent has a valid withholding certificate identifying the 
payee as a participating FFI and the withholding certificate contains 
an FFI-EIN for the payee that is verified against the published IRS FFI 
list in the manner described in paragraph (e)(3) of this section 
(indicating when a withholding agent may rely upon an FFI-EIN). A 
withholding certificate that identifies the payee as a participating 
FFI but does not provide the payee's FFI-EIN or provides an FFI-EIN 
that does not appear on the current published IRS FFI list within 90 
calendar days after the date that the claim is made, will be treated as 
an invalid withholding certificate for purposes of chapter 4 and the 
payee will be treated as an undocumented payee beginning on such date 
until other valid documentation or a correct FFI-EIN is provided.
    (ii) Transitional exception for payments made prior to January 1, 
2017, with respect to preexisting obligations. For withholdable 
payments made prior to January 1, 2017, with respect to a preexisting 
obligation, a withholding agent may treat a payee as a participating 
FFI if the withholding agent has a withholding certificate associated 
with the payee that meets the requirements of Sec.  1.1441-1(e)(1)(ii) 
that are applicable to the certificate, identifying the payee as a 
foreign person, the payee has provided the withholding agent, either 
orally or in writing, with its FFI-EIN, and the withholding agent has 
verified the FFI-EIN in the manner described in paragraph (e)(3) of 
this section.
    (4) Identification of nonparticipating FFIs--(i) In general. A 
withholding agent is required to treat a payee as a nonparticipating 
FFI if the withholding agent can reliably associate the payment with a 
valid withholding certificate identifying the payee as a 
nonparticipating FFI, the withholding agent knows or has reason to know 
that the payee is a nonparticipating FFI, or the withholding agent is 
required to treat the payee as a nonparticipating FFI under the 
presumption rules described in paragraph (f) of this section.
    (ii) Special documentation rules for payments made to an exempt 
beneficial owner through a nonparticipating FFI. A withholding agent 
may treat a payment made to a nonparticipating FFI as beneficially 
owned by an exempt beneficial owner if the withholding agent can 
reliably associate the payment with--
    (A) A valid withholding certificate that identifies the payee as a 
nonparticipating FFI that is either acting as an intermediary or is a 
flow-through entity; and
    (B) An exempt beneficial owner withholding statement that meets the 
requirements of paragraphs (c)(3)(iii)(B)(1) and (5) of this section 
and contains the associated documentation that would be necessary to 
establish the chapter 4 status of each exempt beneficial owner in 
accordance with paragraph (d)(8) of this section if it were the payee.
    (5) Identification of registered deemed-compliant FFIs--(i) In 
general. A payee will be treated as a registered deemed-compliant FFI 
described in Sec.  1.1471-5(f)(1) only if the withholding agent has a 
valid withholding certificate identifying the payee as a registered 
deemed-compliant FFI and the withholding certificate contains an FFI-
EIN for the payee that the withholding agent verifies against the 
published IRS FFI list in the manner described in paragraph (e)(3) of 
this section. A withholding certificate that identifies the payee as a 
registered deemed-compliant FFI but does not provide an FFI-EIN or 
provides an FFI-EIN that does not appear on the current published IRS 
FFI list within 90 calendar days of the date that the claim is made 
will be treated as an invalid withholding certificate for purposes of 
chapter 4 of the Internal Revenue Code beginning on such date, and the 
payee will be treated as an undocumented payee from such date until a 
correct FFI-EIN or other valid documentation is provided.
    (ii) Transitional exception for payments made prior to January 1, 
2017, with respect to preexisting obligations. For payments made prior 
to January 1, 2017, with respect to a preexisting obligation, a 
withholding agent may treat a payee as a registered deemed-compliant 
FFI if the withholding agent has a withholding certificate associated 
with the payee that meets the requirements of Sec.  1.1441-1(e)(1)(ii) 
applicable to such certificate identifying the payee as a foreign 
person, the payee has provided the withholding agent, either orally or 
in writing, its FFI-EIN, and the withholding agent has verified the 
FFI-EIN in the manner described in paragraph (e)(3) of this section.
    (6) Identification of certified deemed-compliant FFIs--(i) 
Identification of nonregistering local banks. A withholding agent may 
treat a payee as a nonregistering local bank if the withholding agent 
can reliably associate the payment with a valid withholding certificate 
that identifies the payee as a foreign entity that is a nonregistering 
local bank, the withholding certificate contains a certification by the 
payee that it meets the requirements to qualify as a nonregistering 
local bank under Sec.  1.1471-5(f)(2)(i), and the withholding agent has 
either a current audited financial statement, or if the payee does not 
have an audited financial statement, an unaudited financial statement 
or other similar financial document for the payee that supports the 
payee's claim that it is an FFI that operates solely as a bank (within 
the meaning of section 581, determined as if the FFI were incorporated 
in the United States) and does not contradict the payee's claim that it 
is eligible for certified deemed-compliant status as a nonregistering 
local bank. A withholding agent will have reason to know that a payee 
is not a nonregistering local bank if the withholding agent has 
knowledge that the payee operates in more than one country or the 
withholding agent can

[[Page 9062]]

determine that the payee has assets in excess of $175 million.
    (ii) Identification of retirement plans--(A) In general. A 
withholding agent may treat a payee as a retirement plan described in 
Sec.  1.1471-5(f)(2)(ii) if it can associate the payment with a valid 
withholding certificate in which the payee certifies that it is a 
retirement plan meeting the requirements of Sec.  1.1471-5(f)(2)(ii) 
and the withholding agent has an organizational document associated 
with the payee that generally supports the payee's claim. An 
organizational document will generally support the payee's claim that 
it is a retirement plan if, for example, the organizational document 
indicates that the payee qualifies as a retirement plan under the laws 
of the jurisdiction in which the payee was organized, even if the 
organizational document does not specify whether the payee meets all of 
the requirements to qualify as a retirement plan under Sec.  1.1471-
5(f)(2)(ii), provided that no information in the organizational 
document contradicts the payee's claim that it qualifies as a 
retirement plan under Sec.  1.1471-5(f)(2)(ii).
    (B) Exception for offshore obligations. A withholding agent that 
makes a payment with respect to an offshore obligation may treat a 
payment as made to a retirement plan described in Sec.  1.1471-
5(f)(2)(ii) if it obtains a written statement, including a statement 
made in account opening documents, signed by the payee under penalty of 
perjury, in which the payee certifies that it is a retirement plan 
under the laws of its local jurisdiction meeting the requirements of 
Sec.  1.1471-5(f)(2)(ii) and the withholding agent has an 
organizational document associated with the payee that generally 
supports the payee's claim.
    (C) Exception for preexisting offshore obligations. A withholding 
agent that makes a payment with respect to an offshore obligation that 
is also a preexisting obligation, may treat the payee as a retirement 
plan described in Sec.  1.1471-5(f)(2)(ii) if the payee is generally 
known to be a retirement plan in the country in which the withholding 
agent is located and the withholding agent has documentary evidence 
that establishes that the payee is a foreign entity that qualifies as a 
retirement plan in the country in which the payee is organized.
    (iii) Identification of non-profit organizations--(A) In general. A 
withholding agent may treat a payee as a deemed-compliant non-profit 
organization described in Sec.  1.1471-5(f)(2)(iii) if the withholding 
agent can associate the payment with a valid withholding certificate 
that identifies the payee as a non-profit organization described in 
Sec.  1.1471-5(f)(2)(iii) and the payee has provided a letter from 
counsel concluding that the payee qualifies as a non-profit 
organization described in Sec.  1.1471-5(f)(2)(iii).
    (B) Exception for offshore obligations. A withholding agent may 
treat a payment with respect to an offshore obligation as made to a 
deemed-compliant nonprofit organization without obtaining a withholding 
certificate for the payee if the payee has provided a letter from 
counsel concluding that the payee qualifies as a non-profit 
organization described in Sec.  1.1471-5(f)(2)(iii). A withholding 
agent may also treat the payee as a deemed-compliant nonprofit 
organization if the withholding agent obtains a letter from counsel 
indicating that the payee was organized for the purposes described in 
Sec.  1.1471-5(f)(2)(iii), has an organizational document that 
establishes that the payee was organized in the same country in which 
the account is maintained by the withholding agent, is provided with a 
TIN for the payee issued by the tax authority of that country, and is 
subject to information reporting by the withholding agent as a tax-
exempt charitable organization under that country's information 
reporting laws.
    (C) Exception for preexisting offshore obligations. A withholding 
agent that makes a payment with respect to an offshore obligation that 
is also a preexisting obligation may treat the payee as an deemed-
compliant nonprofit organization described in Sec.  1.1471-5(f)(2)(iii) 
if the payee--
    (1) Provides a letter issued by the tax authority of the country in 
which the payee is organized or a letter of local counsel that 
certifies that the payee qualifies as a tax-exempt charity in its local 
jurisdiction; or
    (2) Provides an organizational document establishing that the payee 
was organized as a charitable organization in the same country in which 
the account is maintained by the withholding agent, has provided a TIN 
issued by the tax authority of that country to the payee, and is 
reported by the withholding agent as a tax-exempt charitable 
organization to the tax authority of that country.
    (iv) Identification of FFIs with only low-value accounts. A 
withholding agent may treat a payee as an FFI with only low-value 
accounts if the withholding agent can reliably associate the payment 
with a valid withholding certificate that identifies the payee as a 
foreign entity that is described in Sec.  1.1471-5(f)(2)(iv), an 
organizational document that supports the payee's claim that it is an 
entity described in Sec.  1.1471-5(e)(1)(i) and/or (ii), and a current 
audited financial statement (or if such statement is not available, an 
unaudited financial statement or similar financial document) for the 
payee and all members of its expanded affiliated group (if any) that 
supports the claim that the payee has no more than $50 million in 
assets on its balance sheet (or, in the case of a payee that is a 
member of an expanded affiliated group, that the group has $50 million 
or less in total assets on its consolidated or combined balance sheet) 
and that does not contradict the claim that the payee is an FFI with 
only low-value accounts. A withholding agent will have reason to know 
that a payee is not an FFI with only low-value accounts if the 
withholding agent has knowledge that the FFI or any member of the FFI's 
expanded affiliated group (if any) maintains any financial accounts 
with a balance or value in excess of $50,000 or the withholding agent 
can determine that the payee or the payee's expanded affiliated group 
(if any) has assets in excess of $50 million.
    (7) Identification of owner-documented FFIs--(i) In general. A 
withholding agent may treat a payee as an owner-documented FFI if it 
meets the requirements of this paragraph (d)(7). A withholding agent 
may not rely upon a withholding certificate to treat a payee as an 
owner-documented FFI, either in whole or in part, if the withholding 
certificate does not contain all of the information and associated 
documentation required by this paragraph (d)(7).
    (A) The withholding agent has a valid withholding certificate that 
identifies the payee as an owner-documented FFI that is not acting as 
an intermediary;
    (B) The withholding agent agrees to treat the payee as an owner-
documented FFI;
    (C) The payee submits on an annual basis an FFI owner reporting 
statement associated with the withholding certificate that provides all 
of the information designated in paragraph (d)(7)(iv) of this section;
    (D) The payee submits valid documentation (including any necessary 
waivers) associated with each individual, specified U.S. person, owner-
documented FFI, exempt beneficial owner, or NFFE that holds, directly 
or indirectly, an interest in the payee;
    (E) The withholding agent does not know or have reason to know that 
the payee maintains any financial account for a nonparticipating FFI or 
issues debt

[[Page 9063]]

constituting a financial account to any person in excess of $50,000; 
and
    (F) The withholding agent does not know or have reason to know that 
the payee is affiliated with any other FFI other than an FFI that is 
also treated as an owner-documented FFI by the withholding agent.
    (ii) Auditor's letter substitute. A payee may, in lieu of providing 
an FFI owner reporting statement and documentation for each owner of 
the FFI as described in paragraphs (d)(7)(i)(C) and (D) of this 
section, provide an auditor's letter, signed within one year of the 
date of the payment, from an unrelated and independent accounting firm 
or legal representative that has a location in the United States. The 
auditor's letter must certify that the firm or representative has 
reviewed the payee's documentation with respect to all of its owners in 
accordance with Sec.  1.1471-4(c), that the payee meets the 
requirements of Sec.  1.1471-5(f)(3), and that no owner that owns a 
direct or indirect interest in the payee is a nonparticipating FFI, 
specified U.S. person, or passive NFFE with any substantial U.S. 
owners. A withholding agent may rely upon an auditor's letter if it 
does not know or have reason to know that any of the information 
contained in the letter in unreliable or incorrect.
    (iii) Documentation for owners of payee. Acceptable documentation 
for an individual owning an interest in the payee means a valid 
withholding certificate, valid Form W-9 (including any necessary 
waiver), or documentary evidence establishing the foreign status of the 
individual as set forth in paragraph (d)(2) of this section. Acceptable 
documentation for a specified U.S. person means a valid Form W-9 
(including any necessary waiver). Acceptable documentation for all 
other persons owning an equity interest in the payee means 
documentation described in this paragraph (d), applicable to the 
chapter 4 status claimed by the person. The rules for reliably 
associating a payment with a withholding certificate or documentary 
evidence set forth in paragraph (c) of this section, the rules for 
payee documentation provided in this paragraph (d), and the standards 
of knowledge set forth in paragraph (e) of this section will apply to 
documentation submitted by the owners of the payee by substituting the 
phrase ``owner of the payee'' for ``payee.''
    (iv) Content of FFI owner reporting statement. The FFI owner 
reporting statement provided by an owner-documented FFI must contain 
the information required by this paragraph (d)(7)(iv) and is subject to 
the general rules applicable to all withholding statements described in 
paragraph (c)(3)(iii)(B)(1) of this section. An FFI that is a 
partnership, simple trust, or grantor trust may substitute the FFI 
owner reporting statement with an NWP withholding statement described 
in Sec.  1.1441-5(c)(3)(iv) or a foreign simple trust or foreign 
grantor trust withholding statement described in Sec.  1.1441-
5(e)(5)(iv), provided that the NWP withholding certificate or foreign 
simple trust or foreign grantor trust withholding certificate contains 
all of the information required in this paragraph (d)(7)(iv). The 
owner-documented FFI will be required to provide the withholding agent 
with an updated owner reporting statement if the withholding 
certificate expires due to a change in circumstances as required under 
paragraph (c)(6)(ii)(D) of this section.
    (A) The FFI owner reporting statement must contain the name, 
address, TIN (if any), entity tax classification, and the type of 
documentation (Form W-9, Form W-8, or other documentary evidence) 
provided to the owner-documented FFI for every person that owns an 
equity interest in the payee, and must indicate that person's chapter 4 
status.
    (B) The FFI owner reporting statement must indicate the percentage 
that each person owns of the payee.
    (C) The FFI owner reporting statement must also contain any other 
information the withholding agent reasonably requests in order to 
fulfill its obligations under chapter 4 of the Internal Revenue Code.
    (v) Exception for preexisting obligations. A withholding agent may 
treat a payment made with respect to a preexisting obligation as made 
to an owner-documented FFI without requiring that the FFI provide 
documentation for every individual, specified U.S. person, owner-
documented FFI, exempt beneficial owner, and/or NFFE that owns an 
interest in the payee if the withholding agent can associate the 
payment with a valid withholding certificate that identifies the payee 
as an FFI and the payee submits an FFI owner reporting statement 
associated with the withholding certificate that provides all of the 
information designated in paragraph (d)(7)(iv) of this section. In such 
case, the owner-documented FFI must agree to maintain and make 
available the documentation for every person that owns an interest, 
other than an interest as a creditor, in the payee upon the request of 
the withholding agent. A withholding agent may also treat a payment 
made with respect to a preexisting obligation as made to an owner-
documented FFI if the withholding agent has collected documentation 
with respect to each individual, specified U.S. person, owner-
documented FFI, exempt beneficial owner, and/or NFFE that owns a direct 
or indirect interest in the payee, other than an interest as a 
creditor, pursuant to its AML due diligence within four years of the 
date of payment and that documentation is sufficient to satisfy the AML 
due diligence requirements of the jurisdiction in which the withholding 
agent maintains the account.
    (8) Identification of exempt beneficial owners--(i) Identification 
of foreign governments and governments of U.S. possessions--(A) In 
general. A withholding agent may treat a payee as a foreign government 
or government of a U.S. possession if it can reliably associate the 
payment with a valid withholding certificate that identifies the 
beneficial owner of the payment as a foreign government. For purposes 
of this paragraph (d)(8)(i), a withholding agent may rely upon a valid 
withholding certificate that meets the requirements of Sec.  1.1441-
1(e)(1)(ii) applicable to such certificate and identifies the payee as 
a foreign government or government of a U.S. possession, even if such 
withholding certificate does not identify the payee's chapter 4 status.
    (B) Exception for offshore obligations. A withholding agent that 
makes a payment with respect to an offshore obligation may treat a 
payee as a foreign government or a government of a U.S. possession if 
the payee provides a written statement that it is a foreign government 
or government of a U.S possession, a political subdivision of a foreign 
government or government of a U.S. possession, or any wholly owned 
agency or instrumentality of any one or more of the foregoing, and that 
it does not receive the payment as an intermediary on behalf of another 
person.
    (C) Exception for preexisting offshore obligations. A withholding 
agent that makes a payment with respect to an offshore obligation that 
is also a preexisting obligation may treat the payee as a foreign 
government or government of a U.S. possession if the payee is generally 
known to the withholding agent to be or the payee's name reasonably 
indicates that it is a foreign government or government of a U.S 
possession, a political subdivision of a foreign government or 
government of a U.S. possession, or any wholly owned agency or 
instrumentality of any one or more of the foregoing, and the

[[Page 9064]]

withholding agent does not know or have reason to know that the foreign 
government is receiving the payment as an intermediary on behalf of 
another person.
    (ii) Identification of international organizations. A withholding 
agent may treat a payee as an international organization if it can 
associate the payment with a valid withholding certificate identifying 
the beneficial owner of the payment as an international organization. 
For purposes of this paragraph (d)(8)(ii), a withholding agent may rely 
upon a valid withholding certificate that meets the requirements of 
Sec.  1.1441-1(e)(1)(ii) applicable to such certificate and identifies 
the payee as an international organization, even if such withholding 
certificate does not identify the payee's chapter 4 status. A 
withholding agent may treat a payee as an international organization 
without requiring a withholding certificate if the name of the payee is 
one that is designated as an international organization by executive 
order (pursuant to 22 U.S.C. 288 through 288(f)) and other facts 
surrounding the transaction reasonably indicate that the international 
organization is not receiving the payment as an intermediary on behalf 
of another person.
    (iii) Identification of foreign central banks of issue--(A) In 
general. A withholding agent may treat a payee as a foreign central 
bank of issue if it can associate the payment with a valid withholding 
certificate that identifies the beneficial owner of the payment as a 
foreign central bank of issue. For purposes of this paragraph 
(d)(8)(iii), a withholding agent may rely upon a valid withholding 
certificate that meets the requirements of Sec.  1.1441-1(e)(1)(ii) 
applicable to such certificate and identifies the payee as a foreign 
central bank, even if such withholding certificate does not identify 
the payee's chapter 4 status.
    (B) Exception for offshore obligations. A withholding agent that 
makes a payment with respect to an offshore obligation may treat the 
payee as a foreign central bank of issue if the withholding agent has a 
written statement signed by the payee in which the payee states that it 
is a foreign central bank of issue within the meaning of Sec.  1.1471-
6(d) and the facts and circumstances surrounding the payment reasonably 
indicate that the payee is a foreign central bank of issue and either 
the payee is not receiving the payment as an intermediary on behalf of 
another person or the payee would be treated as the beneficial owner of 
the payment for purposes of Sec.  1.1471-6(d).
    (C) Exception for preexisting offshore obligations. A withholding 
agent that makes a payment with respect to an offshore obligation that 
is also a preexisting obligation may treat the payee as a foreign 
central bank of issue if the name of the payee and other facts 
surrounding the payment reasonably indicate that the payee is a foreign 
central bank of issue or the Bank for International Settlements and 
either the withholding agent has no reason to know that the payee is 
receiving the payment as an intermediary on behalf of another person or 
the payee would be treated as the beneficial owner of the payment for 
purposes of Sec.  1.1471-6(d).
    (iv) Identification of retirement funds--(A) In general. A 
withholding agent may treat a payee as a retirement fund described in 
Sec.  1.1471-6(f) if it can associate the payment with a valid 
withholding certificate in which the payee certifies that it is a 
retirement fund meeting the requirements of Sec.  1.1471-6(f) and--
    (1) The withholding certificate makes a valid claim for treaty 
benefits under the pension plan article of a treaty; or
    (2) The withholding agent has an organizational document associated 
with the payee that generally supports the payee's claim. An 
organizational document will generally support the payee's claim that 
it is a retirement fund if, for example, the organizational document 
indicates that the payee qualifies as a tax-exempt retirement fund 
under the jurisdiction in which the payee was organized, even if the 
organizational documents do not specify whether the payee meets all of 
the requirements to qualify as a retirement fund under Sec.  1.1471-
6(f), provided that no information in the organizational document 
contradicts the payee's claim that it qualifies as a retirement fund 
under Sec.  1.1471-6(f).
    (B) Exception for offshore obligations. A withholding agent that 
makes a payment with respect to an offshore obligation may treat a 
payment as made to a retirement fund described in Sec.  1.1471-6(f) if 
it obtains a written statement, including a statement made in account 
opening documents, signed by the payee under penalty of perjury, in 
which the payee certifies that it is a retirement fund under the laws 
of its local jurisdiction meeting the requirements of Sec.  1.1471-6(f) 
and the withholding agent has an organizational document associated 
with the payee that generally supports the payee's claim.
    (C) Exception for preexisting offshore obligations. A withholding 
agent that makes a payment with respect to an offshore obligation that 
is also a preexisting obligation, may treat the payee as a retirement 
fund described in Sec.  1.1471-6(f) if the payee is generally known to 
be a retirement fund in the country in which the withholding agent is 
located and the withholding agent has documentary evidence that 
establishes that the payee is a foreign entity that qualifies as a 
retirement fund in the country in which the payee is organized.
    (v) Identification of entities wholly owned by exempt beneficial 
owners. A withholding agent may treat a payee as an entity described in 
Sec.  1.1471-6(g) (referring to certain entities wholly owned by exempt 
beneficial owners other than those described in Sec.  1.1471-6(g)) if 
the withholding agent can reliably associate the payment with--
    (A) A valid withholding certificate that identifies the payee as an 
entity described in Sec.  1.1471-5(e)(1)(iii) that is the beneficial 
owner of the payment;
    (B) An owner reporting statement that contains the name, address, 
TIN (if any), entity tax classification, chapter 4 status, and a 
description of the type of documentation (Form W-8 or other documentary 
evidence) provided to the withholding agent for every person that owns 
an equity interest in the payee, that indicates the percentage that 
each such person owns of the payee, and that is subject to the general 
rules applicable to all withholding statements described in paragraph 
(c)(3)(iii)(B)(1) of this section; and
    (C) Associated documentation for every owner of the payee 
establishing, pursuant to the documentation requirements described in 
paragraph (d)(8) of this section, that every owner of the payee is an 
entity described in Sec.  1.1471-6 (without regard to whether the owner 
of the payee is a beneficial owner of the payment).
    (9) Identification of excepted FFIs--(i) Identification of 
nonfinancial holding companies--(A) In general. A withholding agent may 
treat a payee as a holding company described under Sec.  1.1471-
5(e)(5)(i) if the withholding agent has a valid withholding certificate 
identifying the payee as a foreign entity that operates as a holding 
company for a subsidiary or group of subsidiaries that primarily engage 
in a trade or business other than that of a financial institution, as 
set forth in Sec.  1.1471-5(e)(5)(i), and the withholding agent does 
not know or have reason to know that the payee or any subsidiary of 
payee is a financial institution, including a private equity fund, 
venture capital fund, leveraged buyout fund, or any investment vehicle 
described in Sec.  1.1471-5(e)(5)(i).

[[Page 9065]]

    (B) Exception for offshore obligations. A withholding agent that 
makes a payment with respect to an offshore obligation may treat a 
payee as a holding company described under Sec.  1.1471-5(e)(5)(i) if 
the withholding agent obtains:
    (1) A written statement, including a statement contained in account 
opening documents, signed by the payee under penalties of perjury, in 
which the payee certifies that it is a foreign entity operating 
primarily as a holding company for a subsidiary or group of 
subsidiaries that primarily engages in a business other than that of a 
financial institution within the meaning of Sec.  1.1471-5(e)(4), and 
that it is not a private equity fund, venture capital fund, leveraged 
buyout fund, or any investment vehicle described in Sec.  1.1471-
5(e)(5)(i); or
    (2) A copy of the payee's organizational documents (such as 
articles of incorporation) or consolidated financial statements that 
indicate that the payee is a foreign entity operating primarily as a 
holding company for a subsidiary or group of entities, each of which is 
not a financial institution, and that does not indicate that the payee 
is a private equity fund, venture capital fund, leveraged buyout fund, 
or any investment vehicle described in Sec.  1.1471-5(e)(5)(i).
    (ii) Identification of start-up companies--(A) In general. A 
withholding agent may treat a payee as a start-up company described in 
Sec.  1.1471-5(e)(5)(ii) if the withholding agent has a valid 
withholding certificate that identifies the payee as a start-up company 
that intends to operate as other than a financial institution and the 
withholding certificate provides the payee's formation date, that is 
less than 24 months prior to the date of the payment.
    (B) Exception for offshore obligations. A withholding agent that 
makes a payment with respect to an offshore obligation may treat a 
payee as a start-up company described in Sec.  1.1471-5(e)(5)(ii) if it 
obtains a written statement from the payee, including a statement 
contained in account opening documents, signed by the payee under 
penalties of perjury, in which the payee certifies that it is a foreign 
entity formed for the purpose of operating a business other than that 
of a financial institution and an organizational document associated 
with the payee that establishes that the payee was organized less than 
24 months prior to the date of the payment.
    (C) Exception for preexisting obligations. A withholding agent may 
treat a payment made with respect to a preexisting obligation as made 
to a start-up company described in Sec.  1.1471-5(e)(5)(ii) if the 
withholding agent--
    (1) Has recorded a standard industrial classification code for the 
payee that unambiguously indicates that the entity intends to be 
engaged in a business other than as a financial institution or has a 
third party credit report for the payee indicating that the payee 
intends to be engaged in a business other than as a financial 
institution; and
    (2) Has an organizational document of the payee that establishes 
that the payee is a foreign entity that was organized less than 24 
months prior to the date of the payment.
    (iii) Identification of certain nonfinancial entities in 
liquidation or bankruptcy--(A) In general. A withholding agent may 
treat a payee as an entity described in Sec.  1.1471-5(e)(5)(iii) 
(applying to certain foreign entities in liquidation or bankruptcy) if 
the withholding agent has a valid withholding certificate that 
identifies the payee as a foreign entity previously engaged in business 
as other than that of a financial institution that is liquidating or 
emerging from a reorganization or bankruptcy and the withholding agent 
has no knowledge that the payee has claimed to be such an entity for 
more than three years. A withholding agent may continue to treat a 
payee as an entity described in this paragraph for longer than three 
years if it obtains, in addition to a valid withholding certificate, 
documentary evidence such as a bankruptcy filing or other public 
document that supports the payee's claim that it remains in liquidation 
or in bankruptcy.
    (B) Exception for offshore obligations. A withholding agent that 
makes a payment with respect to an offshore obligation may treat the 
payee as an entity that satisfies the requirements of Sec.  1.1471-
5(e)(5)(iii) (applying to certain foreign entities in liquidation or 
bankruptcy) if the withholding agent has one or more types of 
documentary evidence establishing that the payee is a foreign entity in 
liquidation or bankruptcy, (for example, a copy of the bankruptcy 
filing or credit report for the payee) and indicates that prior to the 
liquidation or bankruptcy filing, the payee was engaged in a business 
other than that of a financial institution (for example, a financial 
statement or credit report for the payee). A withholding agent that 
obtains documentary evidence associated with the payee that generally 
supports the classification of the payee as an NFFE that is in 
liquidation or bankruptcy but does not unambiguously establish that the 
payee is such an entity may rely upon the documentary evidence to treat 
the payee as an entity described in Sec.  1.1471-5(e)(5)(iii) if the 
withholding agent also obtains a written statement, including a 
statement made in account opening documents, signed by the payee under 
penalties of perjury stating that the payee is a foreign entity in the 
process of liquidating its assets or reorganizing with the intent to 
continue or recommence its former business as a nonfinancial 
institution.
    (C) Exception for preexisting offshore obligations. A withholding 
agent that makes a payment with respect to an offshore obligation that 
is also a preexisting obligation may treat a payee as an entity 
described in Sec.  1.1471-5(e)(5)(iii) if the withholding agent has 
previously recorded a standard industrial classification code for the 
payee that unambiguously indicates that the payee is not a financial 
institution and has documentary evidence no more than three years old 
establishing that the payee is a foreign entity in liquidation or 
bankruptcy.
    (iv) Identification of hedging/financing centers of nonfinancial 
groups--(A) In general. A withholding agent may treat a payee as an 
entity that operates as a hedging or financing center of a nonfinancial 
group, as described in Sec.  1.1471-5(e)(5)(iv), if the withholding 
agent can associate the payment with a valid withholding certificate 
that identifies the payee as such an entity.
    (B) Exception for offshore obligations. A withholding agent that 
makes a payment with respect to an offshore obligation may treat a 
payment as made to an entity described in Sec.  1.1471-5(e)(5)(iv) if 
the withholding agent has documentary evidence (for example, a 
consolidated financial statement or company by-laws) or a third-party 
credit report associated with the payee that indicates that the payee 
is a foreign entity that operates primarily as a hedging or financing 
center for its affiliated group and establishes that the members of the 
payee's affiliated group are engaged in a business other than that of a 
financial institution.
    (v) Identification of section 501(c) organizations--(A) In general. 
A withholding agent may treat a payee as an organization described in 
section 501(c) if the withholding agent can associate the payment with 
a valid withholding certificate that identifies the payee as a section 
501(c) organization and the payee has provided--
    (1) A certification that no income or assets of the payee are 
distributed to, or applied for the benefit of, a private person or 
noncharitable entity other

[[Page 9066]]

than pursuant to the conduct of the payee's charitable activities, as a 
payment of reasonable compensation for services rendered, or as payment 
representing the fair market value of property which the payee has 
purchased; and
    (2) Either a certification that the payee has been issued a 
determination letter by the IRS that is currently in effect concluding 
that the payee is described in section 501(c) accompanied by the date 
of the letter, or a copy of an opinion from U.S. counsel certifying 
that the payee is described in section 501(c) (without regard to 
whether the payee is a foreign private foundation).
    (B) Reason to know. A withholding agent must cease to treat a 
foreign organization's claim that it is an organization described in 
section 501(c) as valid beginning on the earlier of the date on which 
such agent knows that the IRS has given notice to such foreign 
organization that it is not an organization described in section 501(c) 
or the date on which the IRS gives notice to the public that such 
foreign organization is not an organization described in section 
501(c). Further, a withholding agent will have reason to know that a 
payee is not an organization described in section 501(c) if it has 
determined, pursuant to its AML due diligence, that the payee has 
beneficial owners (as defined for purposes of the AML due diligence).
    (10) Identification of territory financial institutions--(i) 
Identification of territory financial institutions that are beneficial 
owners--(A) In general. A withholding agent may treat a payee as a 
territory financial institution if the withholding agent has a valid 
withholding certificate identifying the payee as a territory financial 
institution that beneficially owns the payment. See paragraph 
(d)(11)(iii) of this section for rules for documenting territory NFFEs.
    (B) Exception for preexisting offshore obligations. A withholding 
agent that makes a payment with respect to an offshore obligation that 
is also a preexisting obligation, may treat the payee as a territory 
financial institution if the withholding agent has no reason to know 
that the payee is not the beneficial owner of the payment and--
    (1) The withholding agent has organizational documents establishing 
that the payee was organized or incorporated under the laws of any 
possession of the United States and the withholding agent has recorded 
a standard industrial classification code for the payee that 
unambiguously designates the entity as a bank, broker, or other 
financial institution that is not primarily engaged in the business of 
investing, reinvesting, or trading, as defined in section Sec.  1.1471-
5(e)(4); or
    (2) The withholding agent has a copy of a credit report from a 
third-party data provider that is associated with the payee and that 
indicates that the payee is a bank, broker, or other financial 
institution not primarily engaged in the business of investing, 
reinvesting, or trading, as defined in section Sec.  1.1471-5(e)(4), 
and that the payee was incorporated or organized under the laws of a 
possession of the United States.
    (ii) Identification of territory financial institutions acting as 
intermediaries or that are flow-through entities. A withholding agent 
may treat a payment as made to a territory financial institution that 
is acting as an intermediary or that is a flow-through entity if the 
withholding agent has a valid intermediary withholding certificate or 
flow-through withholding certificate as described in paragraph 
(c)(3)(iii) of this section that identifies the person who receives the 
payment as a territory financial institution.
    (iii) Reason to know. A withholding agent will have reason to know 
that an entity is not a territory financial institution if the 
withholding agent has a current residence or mailing address, either in 
the entity's account files or on documentation provided by the payee, 
for the entity outside the possession in which the entity claims to be 
organized, a current telephone number for the payee that has a country 
code other than the country code for the United States or has an area 
code other than the area code(s) of the applicable possession, or 
standing instructions for the withholding agent to pay amounts from its 
account to an address or account outside the applicable possession. A 
withholding agent that has knowledge of a current address, current 
telephone number, or standing payment instructions for the entity 
outside of the applicable possession, may nevertheless treat the entity 
as a territory financial institution if it obtains documentary evidence 
that establishes that the entity was organized in the applicable 
possession or obtains a reasonable explanation from the entity, in 
writing, establishing the entity's residence in the possession.
    (11) Identification of NFFEs--(i) Identification of NFFEs that are 
publicly traded corporations. A withholding agent may treat a payee as 
an NFFE described in Sec.  1.1472-1(c)(1)(i) (applying to an entity the 
stock of which is regularly traded on an established securities market) 
if it has a beneficial owner withholding certificate that identifies 
the payee as an NFFE, certifies that the payee's stock is regularly 
traded on one or more established securities markets, as defined in 
Sec.  1.1472-1(c)(1)(i), and provides the name of an exchange upon 
which the payee's stock is traded.
    (A) Transitional exception for payments made prior to January 1, 
2017, with respect to preexisting obligations. For payments made prior 
to January 1, 2017, with respect to a preexisting obligation, a 
withholding agent may treat a payee as an NFFE described in Sec.  
1.1472-1(c)(1)(i) if the withholding agent--
    (1) Has a beneficial owner withholding certificate associated with 
the payee that meets the requirements of Sec.  1.1441-1(e)(1)(ii), 
applicable to such certificate, identifying the payee as a foreign 
corporation;
    (2) Has documentation or other information that indicates that the 
payee is listed on a public securities exchange or on a stock market 
index; and
    (3) Has either recorded a standard industrial classification code 
for the payee that unambiguously indicates that the payee is not a 
financial institution or has an organizational document, financial 
statement, or credit report for the payee that provides sufficient 
information to determine that the payee is not a financial institution.
    (B) Exception for offshore obligations. A withholding agent that 
makes a payment with respect to an offshore obligation may treat a 
payee as an NFFE described in Sec.  1.1472-1(c)(1)(i) if the 
withholding agent obtains--
    (1) A written statement, including a statement made in account 
documents, signed by the payee under penalty of perjury, that states 
that the payee is a foreign corporation not engaged in business as a 
financial institution whose stock is regularly traded on an established 
securities market;
    (2) The name of one of the exchanges upon which the payee's stock 
is traded; and
    (3) An organizational document, financial statement, or credit 
report for the payee that generally supports the classification of the 
payee as an NFFE.
    (C) Exception for preexisting offshore obligations. A withholding 
agent that makes a payment with respect to an offshore obligation that 
is also a preexisting obligation may treat the payee as a entity 
described in Sec.  1.1472-1(c)(1)(i) if the withholding agent has 
documentation or other information confirming that the payee is listed 
on a public securities exchange or on a stock market index and has 
either recorded a standard industrial classification code for the payee 
that unambiguously indicates that the payee is not a

[[Page 9067]]

financial institution or has an organizational document, financial 
statement, or credit report for the payee that provides sufficient 
information to determine that the payee is a foreign corporation that 
is not a financial institution.
    (ii) Identification of NFFE affiliates. A withholding agent may 
treat a payee as an NFFE described in Sec.  1.1472-1(c)(1)(ii) 
(applying to an affiliate of an entity the stock of which is regularly 
traded on an established exchange) if it has a beneficial owner 
withholding certificate that identifies the payee as a foreign 
corporation that is an affiliate of an entity whose stock is regularly 
traded on an established exchange and provides the name of the entity 
that is regularly traded and one of the exchanges upon which the 
entity's stock is listed.
    (A) Transitional exception for payments made prior to January 1, 
2017, with respect to preexisting obligations. For payments made prior 
to January 1, 2017, with respect to a preexisting obligation, a 
withholding agent may treat a payee as an NFFE described in Sec.  
1.1472-1(c)(1)(ii) if the withholding agent:
    (1) Has a beneficial owner withholding certificate associated with 
the payee that meets the requirements of Sec.  1.1441-1(e)(1)(ii), 
applicable to such certificate, identifying the payee as a foreign 
corporation;
    (2) Has a consolidated financial statement or a similar financial 
document confirming that the payee is an affiliate of an entity whose 
stock is listed on a public securities exchange or a stock market 
index; and
    (3) Has either recorded a standard industrial classification code 
for the payee that unambiguously indicates that the payee is not a 
financial institution or has an organizational document, financial 
statement, or credit report associated with the payee providing 
sufficient information to determine that the payee is not a financial 
institution.
    (B) Exception for offshore obligations. A withholding agent that 
makes a payment with respect to an offshore obligation may treat a 
payment as made to an NFFE described in Sec.  1.1472-1(c)(1)(ii) if the 
withholding agent obtains:
    (1) A written statement, including a statement made in account 
documents, signed by the payee under penalty of perjury, that states 
that the payee is a foreign corporation not engaged in business as a 
financial institution that is an affiliate of another nonfinancial 
entity whose stock is regularly traded on an established securities 
exchange;
    (2) The name of the payee's affiliate and one of the exchanges upon 
which the affiliate's stock is traded; and
    (3) An organizational document, financial statement, or credit 
report associated with the payee that generally supports the 
classification of the payee as an NFFE. Documentation will be 
considered to generally support the payee's status as an NFFE, for 
example, if it indicates that the payee was organized in a country 
other than the United States and provides some indication that the 
payee is engaged in a business other than that of a financial 
institution.
    (C) Exception for preexisting offshore obligations. A withholding 
agent that makes a payment with respect to an offshore obligation that 
is also a preexisting obligation may treat the payee as an NFFE 
described in Sec.  1.1472-1(c)(1)(ii) if the withholding agent:
    (1) Has a financial statement or other documentation indicating 
that the payee is a foreign corporation affiliated with an entity whose 
stock is listed on a public securities exchange or on a stock market 
index;
    (2) Has either recorded a standard industrial classification code 
for the payee that unambiguously indicates that the payee is not a 
financial institution or has an organizational document, financial 
statement, or credit report for the payee that provides sufficient 
information to determine that the payee is a foreign entity that is not 
a financial institution;
    (3) Either has no knowledge that the payee has any of the U.S. 
indicia discussed in paragraph (e) of this section or may treat the 
payee as a foreign entity under paragraph (e)(4)(i)(B)(2) of this 
section; and
    (4) Has no knowledge that the payee is not the beneficial owner of 
the payment.
    (iii) Identification of territory NFFEs. A withholding agent may 
treat a payee as an NFFE described in Sec.  1.1472-1(c)(1)(iii) 
(applying to an entity organized in a possession of the United States) 
if it has a valid beneficial owner withholding certificate that 
identifies the payee as an NFFE that was organized in a possession of 
the United States and includes a certification for chapter 4 purposes 
that all of the owners of the payee are bona fide residents of that 
possession.
    (A) Exception for offshore obligations. A withholding agent that 
makes a payment with respect to an offshore obligation may treat a 
payment as made to an NFFE described in Sec.  1.1472-1(c)(1)(iii) (that 
is, an entity organized in a possession of the United States) if it--
    (1) Has an organizational document associated with the payee 
establishing that the payee was organized in a possession of the United 
States;
    (2) Has documentary evidence establishing that the payee is wholly 
owned by one or more bona fide residents of the possession of the 
United States in which the payee is organized or a written statement 
from the payee stating that it is wholly owned by one or more bona fide 
residents of the possession of the United States in which it was 
organized; and
    (3) Has no reason to know that the payee is not the beneficial 
owner of the payment.
    (B) Exception for preexisting offshore obligations of $1,000,000 or 
less. A withholding agent that makes a payment with respect to an 
offshore obligation that is also a preexisting obligation with a 
balance or value of $1,000,000 or less at the close of the taxable year 
preceding the payment, may rely upon its review conducted for AML due 
diligence purposes to determine whether the owners of the payee are 
bona fide residents of the possession of the United States in which the 
payee is organized in lieu of obtaining a written statement or 
documentary evidence. The withholding agent relying upon this paragraph 
(d)(11)(iii)(B) must still obtain a withholding certificate or 
documentary evidence, as provided in this paragraph (d)(11)(iii), to 
establish that the payee was organized in a possession of the United 
States.
    (iv) Identification of active NFFEs. A withholding agent may treat 
a payee as an active NFFE described in Sec.  1.1472-1(c)(1)(v) if it 
has a valid withholding certificate identifying the payee as an active 
NFFE within the meaning of Sec.  1.1472-1(c)(1)(v).
    (A) Transitional exception for payments made prior to January 1, 
2017, with respect to preexisting obligations. For payments made prior 
to January 1, 2017, with respect to a preexisting obligation, a 
withholding agent may treat a payment as made to an active NFFE if the 
withholding agent has a withholding certificate that meets the 
requirements of Sec.  1.1441-1(e)(1)(ii), applicable to such 
certificate, identifying the payee as a foreign person, and the 
withholding agent has either recorded a standard industrial 
classification code for the payee that unambiguously indicates that the 
payee is engaged in an active trade or business other than that of a 
financial institution or has an organizational document, financial 
statement, or credit report for the payee that provides sufficient 
information to determine that the payee

[[Page 9068]]

is engaged in an active trade or business other than that of a 
financial institution.
    (B) Exception for offshore obligations. A withholding agent that 
makes a payment with respect to an offshore obligation may treat the 
payee as an active NFFE if the withholding agent has an organizational 
document, financial statement, or credit report associated with the 
payee providing sufficient information to determine that the payee is a 
foreign entity engaged in an active trade or business other than that 
of a financial institution and either has no knowledge that the payee 
has any of the U.S. indicia discussed in paragraph (e) of this section 
or may treat the payee as a foreign entity under paragraph 
(e)(4)(i)(B)(2) of this section. A withholding agent that obtains 
documentary evidence associated with the payee that generally supports 
the classification of the payee as an NFFE engaged in an active 
business but does not unambiguously establish that payee is such an 
entity, may rely upon the documentary evidence to treat the payee as an 
active NFFE if the withholding agent also obtains a written statement, 
which may include a statement made in account opening documents, signed 
by the payee under penalty of perjury, stating that the payee is a 
foreign entity engaged in an active business other than that of a 
financial institution.
    (C) Exception for preexisting offshore obligations. A withholding 
agent that makes a payment with respect to an offshore obligation that 
is also a preexisting obligation may treat the payee as an active NFFE 
if the withholding agent--
    (1) Either has no knowledge that the payee has any of the U.S. 
indicia discussed in paragraph (e) of this section or may treat the 
payee as a foreign entity under paragraph (e)(4)(i)(B)(2) of this 
section; and
    (2) Has either recorded a standard industrial classification code 
for the payee that unambiguously indicates that the payee is engaged in 
a trade or business other than that of a financial institution or has 
an organizational document, financial statement, or credit report for 
the payee providing sufficient information to determine that the payee 
is a engaged in an active business other than that of a financial 
institution.
    (v) Identification of excepted NFFEs described in Sec.  1.1472-
1(c)(1)(iv). For rules regarding the documentation required to identify 
an excepted NFFE described in Sec.  1.1472-1(c)(1)(iv), see paragraphs 
(d)(11)(v) of this section, as applicable.
    (vi) Identification of passive NFFEs. A withholding agent may treat 
a payment as made to a passive NFFE if it has a valid withholding 
certificate that identifies the payee as a passive NFFE.
    (A) Transitional exception for payments made prior to January 1, 
2017, with respect to preexisting obligations. For payments made prior 
to January 1, 2017, with respect to a preexisting obligation, a 
withholding agent may treat a payment as made to a passive NFFE if the 
withholding agent has a withholding certificate that meets the 
requirements of Sec.  1.1441-1(e)(1)(ii), applicable to such 
certificate, identifying the payee as a foreign person, and the 
withholding agent has either recorded a standard industrial 
classification code for the payee that unambiguously indicates that the 
payee is not a financial institution or has an organizational document, 
financial statement, or credit report for the payee that provides 
sufficient information to determine that the payee is not a financial 
institution.
    (B) Exception for offshore obligations. A withholding agent that 
makes a payment with respect to an offshore obligation may treat the 
payment as made to an NFFE if the withholding agent has an 
organizational document, financial statement, or credit report for the 
payee providing sufficient information to determine that the payee is a 
foreign entity that is not a financial institution. A withholding agent 
that obtains documentary evidence associated with the payee that 
generally supports the classification of the payee as an NFFE but does 
not unambiguously establish that payee is such an entity, may rely upon 
the documentary evidence to treat the payee as an NFFE if the 
withholding agent also obtains a written statement, including a 
statement made in account opening documents, signed by the payee under 
penalty of perjury, stating that the payee is a foreign entity that is 
not a financial institution.
    (C) Special rule for preexisting offshore obligations. A 
withholding agent that makes a payment with respect to an offshore 
obligation that is also a preexisting obligation may treat the payee as 
an NFFE if the withholding agent either has no knowledge that the payee 
has any of the U.S. indicia discussed in paragraph (e) of this section 
or may treat the payee as a foreign entity under paragraph 
(e)(4)(i)(B)(2) of this section and has either recorded a standard 
industrial classification code for the payee that unambiguously 
indicates that the payee is not a financial institution or has an 
organizational document, financial statement, or credit report for the 
payee providing sufficient information to determine that the payee is 
not a financial institution.
    (D) Required owner certification for passive NFFEs--(1) In general. 
Unless it is a WP or WT, a passive NFFE will be required to provide 
either a written certification that it does not have any substantial 
U.S. owners or the name, address, and TIN of each substantial U.S. 
owner of the NFFE. A territory NFFE that is a passive NFFE and is not a 
WP or WT will be required to provide the certification or information 
described in the previous sentence but only with respect to substantial 
U.S. owners of the NFFE that are not bona fide residents of the 
possession in which the NFFE was organized.
    (2) Exception for preexisting obligations of $1,000,000 or less. A 
withholding agent that makes a payment with respect to a preexisting 
obligation with a balance or value of $1,000,000 or less at the close 
of the taxable year preceding the payment, may rely upon its review 
conducted for AML due diligence purposes to identify any substantial 
U.S. owners of the payee in lieu of the certification or information 
required in paragraph (d)(11)(vi)(D)(1) of this section if the 
withholding agent is subject, with respect to such account, to the laws 
of a jurisdiction that is FATF-compliant.
    (e) Standards of knowledge--(1) In general. The standards of 
knowledge discussed in this section apply for purposes of determining 
the chapter 4 status of payees, beneficial owners, and persons who own 
an interest in an owner-documented FFI. A withholding agent shall be 
liable for tax, interest, and penalties to the extent provided under 
section 1474 and the regulations under that section if it fails to 
withhold the correct amount despite knowing or having reason to know 
the amount required to be withheld. A withholding agent that cannot 
reliably associate the payment with documentation and fails to act in 
accordance with the presumption rules set forth in paragraph (f) of 
this section may also be liable for tax, interest, and penalties. See 
paragraph (e)(4) in this section for the specific standards of 
knowledge applicable to a payee's or beneficial owner's specific claims 
of chapter 4 status.
    (2) Notification by the IRS. A withholding agent that has received 
notification by the IRS that a claim of status as a U.S. person, a 
participating FFI, a deemed-compliant FFI, or other entity entitled to 
a reduced rate of withholding under section 1471 or 1472, is incorrect 
knows that such a claim is incorrect beginning on the date

[[Page 9069]]

that is 30 calendar days after the date the notice is received.
    (3) FFI-EIN--(i) In general. A withholding agent that has received 
a payee's claim of status as a participating FFI or registered deemed-
compliant FFI has reason to know that such payee is not such a 
financial institution if the payee's name and FFI-EIN do not appear on 
the most recent published IRS FFI list within 90 calendar days of the 
date that the claim is made. A payee whose registration with the IRS as 
a participating FFI or a registered deemed-compliant FFI is in process 
but has not yet received an FFI-EIN may provide a withholding agent 
with a Form W-8 claiming the chapter 4 status it applied for and 
writing ``applied for'' in the box for the FFI-EIN. In such case, the 
FFI will have 90 calendar days from the date of its claim to provide 
the withholding agent with its FFI-EIN and the withholding agent will 
have 90 calendar days from the date it receives the FFI-EIN to verify 
the accuracy of the FFI-EIN against the published IRS FFI list before 
it has reason to know that the payee is not a participating FFI or 
registered deemed-compliant FFI. If an FFI is removed from the list of 
participating FFIs and registered deemed-compliant FFIs published on 
the IRS database, the withholding agent knows that such FFI is not a 
participating FFI or registered deemed-compliant FFI on the earlier of 
the date that the withholding agent discovers that the FFI has been 
removed from the list or the date that is one year from the date the 
FFI's name was actually removed from the list.
    (ii) Special requirements applicable prior to January 1, 2016. 
Prior to January 1, 2016, a withholding agent that has received a 
payee's claim of status as a participating FFI or registered deemed-
compliant FFI has reason to know that such payee is not such a 
financial institution even if the payee's name and FFI-EIN appear on 
the most recent published IRS FFI list, if the current published IRS 
FFI list indicates that branches of the payee located in the same 
country as the branch that submitted the withholding certificate, are 
limited branches. Prior to January 1, 2016, a withholding agent will 
also have reason to know that the branch submitting the withholding 
certificate is a limited branch if the withholding certificate or other 
documentation for the branch contains an address in a country for which 
the FFI is shown, on the current IRS FFI list, to have limited 
branches. For purposes of withholding under chapter 4 of the Internal 
Revenue Code, a withholding agent is required to treat a limited branch 
as a nonparticipating FFI.
    (4) Reason to know. A withholding agent shall be considered to have 
reason to know that a claim of chapter 4 status is unreliable or 
incorrect if its knowledge of relevant facts or statements contained in 
the withholding certificates or other documentation is such that a 
reasonably prudent person in the position of the withholding agent 
would question the claims made. For accounts opened on or after January 
1, 2013, a withholding agent will also be considered to have reason to 
know that a claim of chapter 4 status is unreliable or incorrect if any 
information contained in its account opening files or other customer 
account files, including documentation collected for AML due diligence 
purposes, conflicts with the payee's claim of chapter 4 status.
    (i) Standards of knowledge applicable to withholding certificates--
(A) In general. A withholding agent has reason to know that a 
withholding certificate provided by a payee or beneficial owner is 
unreliable or incorrect if the withholding certificate is incomplete 
with respect to any item on the certificate that is relevant to the 
claims made by the payee, the withholding certificate contains any 
information that is inconsistent with the payee's claim, the 
withholding agent has other account information that is inconsistent 
with the payee's claim, or the withholding certificate lacks 
information necessary to establish entitlement to an exemption from 
withholding for chapter 4 purposes. A withholding agent that relies on 
an agent to review and maintain a withholding certificate is considered 
to know or have reason to know the facts within the knowledge of the 
agent. Paragraphs (e)(4)(i)(B) through (D) of this section do not apply 
to a withholding certificate provided by a participating FFI or a 
registered deemed-compliant FFI if the certificate contains an FFI-EIN 
for the FFI that the withholding agent verifies on the current 
published IRS FFI list as provided in paragraph (e)(3) of this section.
    (B) U.S. address or telephone number. A withholding agent has 
reason to know that a withholding certificate provided by a payee is 
unreliable or incorrect if the withholding certificate has a current 
permanent residence address (as defined in Sec.  1.1441-1(e)(2)(ii)) in 
the United States, the withholding certificate has a current mailing 
address in the United States, the withholding agent has a current 
residence or mailing address as part of its account information that is 
an address in the United States, or the payee notifies the withholding 
agent of a new residence or mailing address in the United States 
(whether or not provided on a withholding certificate). A withholding 
agent also has reason to know that a withholding certificate provided 
by a payee is unreliable or incorrect if the withholding agent knows 
that the payee has a current telephone number in the United States. 
Notwithstanding the foregoing, a withholding agent may rely upon a 
withholding certificate to establish the payee's status as a foreign 
person despite knowing that the payee has any of the U.S. indicia 
described in this paragraph (e)(4)(i)(B) if it may do so under the 
provisions of paragraphs (e)(4)(i)(B)(1) through (2) of this section.
    (1) Presumption of individual's foreign status. A withholding agent 
other than an FFI may treat a payee or beneficial owner that is an 
individual as a foreign person if--
    (i) The withholding agent has in its possession or obtains 
documentary evidence (that does not contain a U.S. address) that has 
been provided within the last three years, was valid at the time it was 
provided, and supports the claim of foreign status, and the payee 
provides the withholding agent with a reasonable explanation, in 
writing, supporting the account holder's foreign status; or
    (ii) The withholding agent maintains an account for the individual 
at an office of the withholding agent outside the United States, the 
withholding agent classifies the individual as a resident of the 
country in which the account is maintained, the withholding agent is 
required to report payments made to the individual annually on a tax 
information statement that is filed with the tax authority of the 
country in which the office is located as part of that country's 
resident reporting requirements, and that country has an tax 
information exchange agreement or income tax treaty in effect with the 
United States.
    (2) Presumption of entity's foreign status. A withholding agent may 
treat a payee or beneficial owner as a foreign person if the 
withholding certificate has been provided by an entity and--
    (i) The withholding agent has in its possession, or obtains, 
documentation that substantiates that the entity is actually organized 
or created under the laws of a foreign country; or
    (ii) The withholding agent maintains an account for the entity at 
an office of the withholding agent outside the United States, the 
withholding agent classifies the entity as a resident of the country in 
which the account is maintained, the withholding agent is required to 
report payments made to the

[[Page 9070]]

entity annually on a tax information statement that is filed with the 
tax authority of the country in which the office is located as part of 
that country's resident reporting requirements, and that country has an 
tax information exchange agreement or income tax treaty in effect with 
the United States.
    (C) U.S. place of birth--(1) Accounts opened on or after January 1, 
2013. For accounts opened on or after January 1, 2013, a withholding 
agent has reason to know that a withholding certificate provided by an 
individual payee or beneficial owner is unreliable or incorrect if the 
withholding agent has, either on accompanying documentation or as part 
of its account information, a place of birth for the payee in the 
United States. A withholding agent may treat the individual payee as a 
foreign person, notwithstanding the U.S. birth place, if the 
withholding agent has no knowledge that the individual has any other 
U.S. indicia described in this paragraph (e) and the withholding agent 
obtains a copy of the individual's Certificate of Loss of Nationality 
of the United States or Form I-407, Abandonment of Lawful Permanent 
Residence Status. A withholding agent may also treat the individual 
payee as a foreign person, notwithstanding the U.S. birth place, if the 
withholding agent obtains a non-U.S. passport or other government-
issued identification evidence of citizenship in a country other than 
the United States and either a copy of the individual's Certificate of 
Loss of Nationality of the United States or Form I-407, or a reasonable 
explanation of the account holder's renunciation of U.S. citizenship or 
the reason the account holder did not obtain U.S. citizenship at birth.
    (2) Accounts opened prior to January 1, 2013. For accounts opened 
prior to January 1, 2013, a withholding agent will not be required to 
conduct a search of its documentation to identify a U.S. place of birth 
associated with a payee. However, if the withholding agent, on or after 
January 1, 2013, does review documentation that contains a U.S. birth 
place for a payee that is treated as a foreign person, then the account 
will be considered to have a experienced a change of circumstance as of 
the date that the withholding agent reviewed the documentation and the 
withholding agent will be considered to have reason to know that a 
payee is a U.S. person. See paragraph (c)(6)(ii)(D) of this section for 
rules regarding the time period allowed to cure a change in 
circumstance.
    (D) Standing instructions with respect to offshore obligations. A 
withholding agent has reason to know that a withholding certificate 
provided by a payee is unreliable or incorrect if it is provided with 
respect to an offshore obligation and the payee or beneficial owner has 
standing instructions directing the withholding agent to pay amounts 
from its account to an address or an account maintained in the United 
States. The withholding agent may rely upon the withholding certificate 
to establish the payee's or beneficial owner's chapter 4 status, 
however, if the payee or beneficial owner provides documentary evidence 
that supports its foreign status.
    (ii) Standard of knowledge applicable to documentary evidence--(A) 
In general. A withholding agent shall not treat documentary evidence 
provided by a payee as valid if the documentary evidence does not 
reasonably establish the identity of the person presenting the 
documentary evidence. For example, documentary evidence is not valid if 
it is provided in person by a payee that is a natural person and the 
photograph or signature on the documentary evidence, if any, does not 
match the appearance or signature of the person presenting the 
document. A withholding agent may not rely on documentary evidence to 
reduce the rate of withholding that would otherwise apply under the 
presumption rules in paragraph (f) of this section if the documentary 
evidence contains information that is inconsistent with the payee's 
claim as to its chapter 4 status, the withholding agent has other 
account information that is inconsistent with the payee's claim, or the 
documentary evidence lacks information necessary to establish the 
payee's chapter 4 status. For example, if a payee provides a financial 
statement to support its claim of status as an NFFE whose stock is 
regularly traded on an established exchange but the financial statement 
only indicates that the payee is registered on an exchange but does not 
provide information regarding whether its stock is regularly traded, 
the withholding agent may not rely upon the financial statement to 
establish the payee's chapter 4 status unless it obtains additional 
documentation that supports the claim.
    (B) Establishment of foreign status. A withholding agent may not 
treat documentary evidence provided by a payee as valid for purposes of 
establishing the account holder's foreign status if the only mailing 
address or residence address that is available to the withholding agent 
is an address at a financial institution (unless the financial 
institution is the payee), an in-care-of address, or a P.O. box. In 
this case, the withholding agent must obtain additional documentation 
that is sufficient to establish the payee's status as a foreign person. 
Documentary evidence is unreliable or incorrect to establish a payee's 
status as a foreign person if the withholding agent has a current 
residence or mailing address (whether or not on the documentation) for 
the payee in the United States, if the payee notifies the withholding 
agent of a new address in the United States, or if the withholding 
agent has a current telephone number for the payee in the United 
States. A withholding agent may, however, rely on documentary evidence 
as establishing the payee's foreign status if it may do so under the 
provisions of this paragraph (e)(4)(ii)(B).
    (1) A withholding agent may treat a payee or other person that is 
an individual as a foreign person even if it has a mailing address, 
residence address, or telephone number for the payee in the United 
States if the withholding agent--
    (i) Has in its possession or obtains additional documentary 
evidence (that does not contain a U.S. address) supporting the claim of 
foreign status and a reasonable explanation in writing supporting the 
payee's foreign status;
    (ii) Has in its possession or obtains a valid beneficial owner 
withholding certificate on Form W-8 and the Form W-8 contains a 
permanent residence address outside the United States and a mailing 
address, if any, outside the United States (or if a mailing address is 
inside the United States the direct account holder provides a 
reasonable explanation in writing supporting the payee's claim of 
foreign status); or
    (iii) The withholding agent maintains an account for the payee at 
an office of the withholding agent outside the United States, the 
withholding agent classifies the payee as a resident of the country in 
which the account is maintained, the withholding agent is required to 
report payments made to the payee annually on a tax information 
statement that is filed with the tax authority of the country in which 
the office is located as part of that country's resident reporting 
requirements, and that country has a tax information exchange agreement 
or an income tax treaty in effect with the United States.
    (2) A withholding agent may treat a payee or beneficial owner that 
is an entity as a foreign person even if it has a mailing address, 
residence address, or telephone number for the payee or beneficial 
owner in the United States if the withholding agent--
    (i) Has in its possession, or obtains, documentation that 
substantiates that the entity is actually organized or created under 
the laws of a foreign country;

[[Page 9071]]

    (ii) Obtains a valid withholding certificate on a Form W-8 and the 
Form W-8 contains a permanent residence address outside the United 
States and a mailing address, if any, outside the United States; or
    (iii) The withholding agent maintains an account for the payee at 
an office of the withholding agent outside the United States, the 
withholding agent classifies the payee as a resident of the country in 
which the account is maintained, the withholding agent is required to 
report payments made to the payee annually on a tax information 
statement that is filed with the tax authority of the country in which 
the office is located as part of that country's resident reporting 
requirements, and that country has a tax information exchange agreement 
or an income tax treaty in effect with the United States.
    (C) U.S. place of birth--(1) Accounts opened on or after January 1, 
2013. For accounts opened on or after January 1, 2013, a withholding 
agent has reason to know that documentary evidence provided by an 
individual payee or beneficial owner to demonstrate the individual's 
status as a foreign person is unreliable or incorrect if the 
documentation contains a U.S. birth place for the payee or the 
withholding agent has, as part of its account information, a place of 
birth for the payee in the United States. A withholding agent may treat 
the individual payee as a foreign person, notwithstanding the U.S. 
birth place, if the withholding agent has no knowledge that the payee 
has any other U.S. indicia described in paragraph (e) of this section 
and the withholding agent obtains a copy of the individual's 
Certificate of Loss of Nationality of the United States or Form I-407. 
A withholding agent may also treat the individual payee as a foreign 
person, notwithstanding the U.S. birth place, if the withholding agent 
obtains a valid withholding certificate from the payee that establishes 
the payee's foreign status and either a copy of the individual's 
Certificate of Loss of Nationality of the United States or Form I-407, 
or a reasonable explanation of the account holder's renunciation of 
U.S. citizenship or the reason the account holder did not obtain U.S. 
citizenship at birth.
    (2) Accounts opened prior to January 1, 2013. For accounts opened 
prior to January 1, 2013, a withholding agent will not be required to 
conduct a search of its documentation to identify a U.S. place of birth 
associated with a payee. However, if the withholding agent, on or after 
January 1, 2013, does review documentation that contains a U.S. birth 
place for a payee that is treated as a foreign person, then the account 
will be considered to have a experienced a change of circumstance as of 
the date that the withholding agent reviewed the documentation and the 
withholding agent will be considered to have reason to know that a 
payee is a U.S. person. See paragraph (c)(6)(ii)(D) of this section for 
rules regarding the time period allowed to cure a change in 
circumstance.
    (D) Standing Instructions. Documentary evidence is unreliable or 
incorrect as an indication of a payee's status as a foreign person if 
the payee has standing instructions directing the withholding agent to 
pay amounts from its account to an address or an account maintained in 
the United States. The withholding agent may treat the direct account 
holder as a foreign person, however, if the account holder provides a 
valid withholding certificate from the payee and either documentary 
evidence that supports the payee's claim of foreign status or a 
reasonable explanation in writing that supports its claim of foreign 
status.
    (iii) Information conflicting with payee's claim of chapter 4 
status. A withholding certificate, written statement, or documentary 
evidence is unreliable or incorrect if there is information on the face 
of the documentation or in the withholding agent's account files that 
conflicts with the payee's claim regarding its chapter 4 status. For 
example, a withholding agent will have reason to know that a payee's 
claim that it is an NFFE is unreliable or incorrect if the withholding 
agent has a financial statement or credit report that indicates that 
the payee is engaged in business as a financial institution. Further, a 
withholding agent that has classified the payee as a particular 
business type in its own records, such as through a standard industrial 
classification code, will have reason to know that that the payee's 
claim of chapter 4 status is unreliable or incorrect if the claim 
conflicts with the withholding agent's internal classification. A 
withholding agent may, however, rely upon a payee's claim regarding its 
chapter 4 status if it obtains both a valid withholding certificate (or 
written statement for a payment with respect to an offshore obligation) 
and documentary evidence that support the payee's claim.
    (iv) Conduit financing arrangements. The rules set forth in Sec.  
1.1441-7(f), regarding a withholding agent's liability for failing to 
withhold in the case where the financing arrangement is a conduit 
financing arrangement, apply for purposes determining a withholding 
agent's liability for any withholding required under chapter 4 of the 
Internal Revenue Code.
    (v) Additional guidance. The IRS may prescribe other circumstances 
for which a withholding certificate or documentary evidence is 
unreliable or incorrect in addition to the circumstances described in 
paragraph (e) of this section to establish a payee's chapter 4 status.
    (f) Presumptions regarding payee's status in the absence of 
documentation--(1) In general. A withholding agent that cannot, prior 
to the payment, reliably associate (within the meaning of paragraph (c) 
of this section) a payment with valid documentation may rely on the 
presumptions of this paragraph (f) to determine the status of the payee 
as a U.S. or foreign person and the payee's other relevant 
characteristics (for example, as a participating FFI or a 
nonparticipating FFI). See paragraph (f)(8) of this section for 
consequences to a withholding agent that fails to withhold in 
accordance with the presumptions set forth in this paragraph (f) or 
that has actual knowledge or reason to know facts that are contrary to 
the presumptions set forth in this paragraph (f).
    (2) Presumptions of classification as an individual or entity. A 
withholding agent that cannot reliably associate a payment with a valid 
withholding certificate, or that has received valid documentary 
evidence, as described in paragraph (c)(5) of this section, but cannot 
determine a payee's status as an individual or an entity from the 
documentary evidence, must presume that the payee is an individual if 
the payee appears to be an individual (for example, based on the 
payee's name or other indications). If the payee does not appear to be 
an individual, then the payee shall be presumed to be an entity.
    (3) Presumptions of U.S. or foreign status. A payment that the 
withholding agent cannot reliably associate with a valid withholding 
certificate or documentary evidence is presumed to be made to a U.S. 
person, except as otherwise provided in this paragraph (f)(3).
    (i) Payments to entities with indicia of foreign status. If a 
withholding agent cannot reliably associate a payment to a payee that 
is treated as an entity with documentation from the payee, the payee is 
presumed to be a foreign person and not a U.S. person--
    (A) If the withholding agent has actual knowledge of the payee's 
EIN and that number begins with the two digits ``98'';
    (B) If the withholding agent's communications with the payee are

[[Page 9072]]

mailed to an address in a foreign country;
    (C) If the withholding agent has a telephone number for the payee 
outside of the United States; or
    (D) If the name of the payee indicates that the entity is of a type 
that is on the per se list of foreign corporations contained in Sec.  
301.7701-2(b)(8)(i).
    (ii) Payments to certain exempt recipients. If the payment is made 
to an entity that is treated as an exempt recipient under the 
provisions of Sec.  1.6049-4(c)(1)(ii)(A)(1), (F), (G), (H), (I), (M), 
(O), (P), or (Q) in the case of interest, or under similar provisions 
under chapter 61 applicable to the type of payment involved, the payee 
shall be presumed to be a foreign person.
    (iii) Payments with respect to offshore obligations. Except as 
otherwise provided in this paragraph (f)(3)(iii), a payment to an 
individual or an entity is presumed to be made to a foreign payee if 
the payment is made outside of the United States with respect to an 
offshore obligation and the withholding agent does not know or have 
reason to know that the payee is a U.S. person.
    (4) Presumption of chapter 4 status for a foreign entity. A 
withholding agent that makes a payment to a foreign entity that it 
cannot reliably associate with a valid withholding certificate or 
documentary evidence sufficient to determine the status of that entity 
for purposes of chapter 4 of the Internal Revenue Code (for example, as 
a participating FFI, nonparticipating FFI, or NFFE) must presume that 
the payee is a nonparticipating FFI.
    (5) Presumption of status as an intermediary. If a withholding 
agent cannot reliably associate a payment with documentation to treat 
the payment as made to an intermediary, then the withholding agent must 
treat the payment as made to an intermediary if the withholding agent 
has documentary evidence or other documentation that indicates, or the 
facts and circumstances of the transaction, including the name of the 
person who receives the payment or the presence of sub-account numbers, 
indicate that the person who receives the payment is a bank, broker, 
custodian, intermediary, or other agent and the withholding agent has 
no knowledge that the person receives the payment for its own account. 
Any portion of a payment that the withholding agent may treat as made 
to a foreign intermediary (whether a QI or an NQI) but that the 
withholding agent cannot treat as reliably associated with valid 
documentation under the rules of paragraph (c) of this section, is 
presumed to be made to a nonparticipating FFI. A person that the 
withholding agent may not reliably treat as a foreign intermediary 
under this paragraph (f)(5) is presumed to be a payee other than an 
intermediary.
    (6) Joint payees--(i) In general. If a withholding agent makes a 
payment to joint payees and cannot reliably associate the payment with 
valid documentation from each payee but all of the joint payees appear 
to be individuals, then the payment is presumed made to an unidentified 
U.S. person. If any joint payee does not appear, by its name and other 
information contained in the account file, to be an individual, then 
the entire payment will be treated as made to a nonparticipating FFI. 
However, if one of the joint payees provides a Form W-9 furnished in 
accordance with the procedures described in Sec. Sec.  31.3406(d)-1 
through 31.3406(d)-5 of this chapter, the payment shall be treated as 
made to that payee.
    (ii) Exception for offshore obligations. If a withholding agent 
makes a payment outside the United States with respect to an offshore 
obligation held by joint payees and cannot reliably associate a payment 
with valid documentation from each payee but all of the joint payees 
appear to be individuals, then the payment is presumed made to an 
unknown foreign individual if the withholding agent has no reason to 
know that any of the payees are U.S. persons, including knowledge of 
any U.S. indicia associated with any of the payees. If the withholding 
agent has reason to know that any payee is a U.S. person, then the 
payment must be treated as made to an unidentified U.S. person.
    (7) Rebuttal of presumptions. A payee may rebut the presumptions 
described in this paragraph (f) by providing reliable documentation to 
the withholding agent or, if applicable, to the IRS.
    (8) Effect of reliance on presumptions and of actual knowledge or 
reason to know otherwise--(i) In general. Except as otherwise provided 
in this paragraph (f)(8), a withholding agent that withholds on a 
payment under section 1471 or 1472 in accordance with the presumptions 
set forth in this paragraph (f) shall not be liable for withholding 
under this section even if it is later established that the payee has a 
chapter 4 status other than the status presumed. A withholding agent 
that fails to report and withhold in accordance with the presumptions 
described in this paragraph (f) with respect to a payment that it 
cannot reliably associate with valid documentation shall be liable for 
tax, interest, and penalties to the extent provided under section 1474 
and the regulations under that section. See Sec.  1.1474-1 for 
provisions regarding such liability if the withholding agent fails to 
withhold in accordance with the presumptions described in this 
paragraph (f).
    (ii) Actual knowledge or reason to know that amount of withholding 
is greater than is required under the presumptions or that reporting of 
the payment is required. Notwithstanding the provisions of paragraph 
(f)(8)(i) of this section, a withholding agent that knows or has reason 
to know that the status or characteristics of the payee or of the 
beneficial owner are other than what is presumed under this paragraph 
(f) may not rely on the presumptions described in this paragraph (f) to 
the extent that, if it determined the status of the payee or beneficial 
owner based on such knowledge or reason to know, it would be required 
to withhold (under this section or another withholding provision of the 
Code) an amount greater than would be the case if it relied on the 
presumptions described in this paragraph (f). In such a case, the 
withholding agent must rely on its knowledge or reason to know rather 
than on the presumptions set forth in this paragraph (f). Failure to do 
so shall result in liability for tax, interest, and penalties to the 
extent provided under section 1474.
    (g) Effective/applicability date. The rules of this section apply 
on [EFFECTIVE DATE OF FINAL RULE].
    Par. 6. Section 1.1471-4 is added to read as follows:


Sec.  1.1471-4  FFI agreement.

    (a) In general. The IRS may enter into an FFI agreement with an FFI 
in accordance with section 1471(b), pursuant to such procedures as the 
IRS may prescribe. The FFI agreement, the model for which will be set 
forth in a Revenue Procedure, will set forth the FFI's requirements 
under section 1471(b) and (c). Except as otherwise provided, the FFI 
agreement and this section will incorporate the definitions and 
requirements relevant to participating FFIs as set forth in Sec. Sec.  
1.1471-1 through 1.1474-7. Thus, for example, the FFI agreement will 
incorporate the definitions of U.S. account and financial account set 
forth in Sec.  1.1471-5(a) and (b), respectively. The FFI agreement 
will include the provisions outlined in paragraphs (1) through (8) of 
this paragraph (a).
    (1) Withholding. The FFI agreement will specify the participating 
FFI's obligation to deduct and withhold tax with respect to passthru 
payments made to recalcitrant account holders and

[[Page 9073]]

nonparticipating FFIs. Except as otherwise provided in the FFI 
agreement, a participating FFI will be required to withhold in 
accordance with paragraph (b) of this section.
    (2) Identification and documentation of account holders. The FFI 
agreement will specify a participating FFI's obligation to obtain such 
information regarding each holder of each account maintained by such 
institution as is necessary to determine which of such accounts are 
U.S. accounts, recalcitrant account holders, or accounts held by 
nonparticipating FFIs. Except as otherwise provided in the FFI 
agreement, a participating FFI will be required to perform the due 
diligence procedures for identifying and documenting account holders 
described in paragraph (c) of this section, and such procedures will 
satisfy the participating FFI's obligation to determine which of its 
accounts are U.S. accounts.
    (3) Reporting. The FFI agreement will specify the participating 
FFI's obligation to report on an annual basis with respect to U.S. 
accounts under section 1471(c) and accounts held by recalcitrant 
account holders. Except as otherwise provided in the FFI agreement, a 
participating FFI will be required to report the information described 
in paragraph (d) of this section with respect to its U.S. accounts and 
recalcitrant account holders, and to comply with filing requirements 
described in Sec.  1.1474-1(c) and (d) with respect to passthru 
payments.
    (4) Expanded affiliated group. The FFI agreement will specify how 
the requirements of section 1471(b) and (c) will apply to members of 
the expanded group of which the participating FFI is a member, as 
described in paragraph (e) of this section. The agreement will also 
provide, as described in paragraph (e), that if certain conditions are 
met, the IRS may enter into a transitional FFI agreement with an FFI or 
members of an expanded affiliated group of FFIs even though a branch of 
the FFI or a member of the expanded affiliated group is unable under 
local law to satisfy the requirements of the FFI agreement.
    (5) Waiver. The FFI agreement will specify the participating FFI's 
obligation, in any case in which foreign law would (but for a waiver) 
prevent the reporting required of the FFI pursuant to the FFI agreement 
with respect to a U.S. account, to obtain a valid and effective waiver 
of such law and, if a valid and effective waiver is not obtained within 
a reasonable period of time, to close the account.
    (6) Verification. The FFI agreement will specify a participating 
FFI's obligation to comply with specified verification procedures. The 
agreement will require that the participating FFI adopt written 
policies and procedures governing its due diligence procedures for 
identifying and documenting account holders and its withholding and 
reporting requirements under the FFI agreement. The FFI agreement will 
further require that the participating FFI conduct periodic reviews of 
its compliance with these policies and procedures and its chapter 4 
obligations. Based on the results of such reviews, a responsible 
officer of the participating FFI will periodically certify to the IRS 
the participating FFI's compliance with its obligations under the FFI 
agreement and may be required to provide certain factual information 
and to disclose material failures with respect to the participating 
FFI's compliance with any of the requirements of the FFI agreement. If 
the IRS identifies concerns about the compliance of the FFI based on 
the reporting and certifications provided by the FFI, including cases 
of suspected patterns of compliance failures, the IRS may verify the 
participating FFI's compliance with the FFI agreement through an audit, 
performed by an external auditor (external audit) approved by the IRS, 
of one or more issues selected by the IRS. The FFI agreement will not, 
however, require that the participating FFI arrange for periodic 
external audits on a predetermined basis and will not require external 
audits of a participating FFI on a random basis.
    (7) Event of default. The FFI agreement will specify the compliance 
failures and other conditions under which a participating FFI would be 
in default of the FFI agreement. The agreement will provide that a 
compliance failure will not constitute an event of default unless such 
failure occurs in more than limited circumstances when a participating 
FFI has not substantially complied with its obligations under the FFI 
agreement.
    (8) Requests for additional information. The FFI agreement will 
specify the participating FFI's obligation to comply with requests by 
the Secretary for additional information with respect to any U.S. 
account maintained by such institution. The FFI agreement will require 
that the FFI provide responses to written requests from the IRS for 
information relevant to the participating FFI's obligations under the 
FFI agreement.
    (b) Withholding requirements under the FFI agreement--(1) In 
general. A participating FFI is required to deduct and withhold a tax 
equal to 30 percent of any passthru payment that is a withholdable 
payment made by such participating FFI to a recalcitrant account holder 
or a nonparticipating FFI after December 31, 2013. A participating FFI 
must also deduct and withhold a tax equal to 30 percent of any passthru 
payment that is a withholdable payment made after December 31, 2013, to 
a participating FFI that has made an election under section 1471(b)(3) 
in accordance with Sec.  1.1471-2(a)(2)(iii)(A). Notwithstanding the 
foregoing, a participating FFI will not be required to withhold 
pursuant to this section with respect to a payment made to a 
recalcitrant account holder if so provided under an agreement between 
the IRS and a foreign government. See paragraph (b)(3) of this section 
for rules regarding when a participating FFI is required to withhold on 
any foreign passthru payment made by such participating FFI to a 
recalcitrant account holder or a nonparticipating FFI. See paragraph 
(c) of this section for the procedures for participating FFIs to 
identify the status of their account holders and payees in order to 
determine when withholding is required under this paragraph (b)(1). See 
Sec.  1.1474-1(d) for the amounts subject to reporting on Form 1042-S 
for chapter 4 purposes and the reporting requirements for passthru 
payments, including the special requirement for the 2015 and 2016 
calendar years for participating FFIs to report certain foreign 
reportable amounts made to nonparticipating FFIs.
    (2) Withholdable payment requirements. A participating FFI is a 
withholding agent for purposes of chapter 4 and thus is subject to the 
requirements of sections 1471(a) and 1472(a) with respect to 
withholdable payments. A participating FFI that complies with the 
withholding obligations of this paragraph (b) and its FFI agreement 
shall be deemed to satisfy its withholding obligations with respect to 
withholdable payments under sections 1471(a) and 1472. See Sec. Sec.  
1.1471-2(a)(3) and 1.1472-1(b)(2).
    (3) Foreign passthru payments. [Reserved].
    (4) Dormant accounts. A participating FFI that makes a passthru 
payment (including any withholdable payment) to a recalcitrant account 
holder of a dormant account and that withholds on such payment as 
described in paragraph (b)(1) of this section may, in lieu of 
depositing the tax withheld under Sec.  1.6302-2, set aside the amount 
withheld in escrow until the date that the account ceases to be a 
dormant account. In such a case, the tax withheld becomes due 90 days 
following the date that the account ceases to be a dormant

[[Page 9074]]

account if the account holder does not provide the documentation 
required under paragraph (c) of this section or becomes refundable to 
the account holder if the account holder provides the documentation 
required under paragraph (c) of this section. See paragraph (d)(6)(ii) 
of this section for the definition of dormant account.
    (5) Special withholding rules for U.S. branches. A U.S. branch of a 
participating FFI that satisfies its backup withholding obligations 
under section 3406(a) with respect to accounts held at the U.S. branch 
by account holders that are treated as U.S. non-exempt recipients under 
chapter 61 will be treated as satisfying its withholding obligation 
with respect to such accounts under section 1471(b)(1) and this 
paragraph (b). See paragraph (d)(2)(iii)(B) of this section for the 
special reporting requirements applicable to U.S. branches of 
participating FFIs.
    (6) Special withholding rules for participating FFIs with limited 
branches and affiliates that are limited FFIs. For the withholding 
requirements with respect to payments made to limited branches and 
affiliates that are limited FFIs, see paragraphs (e)(2)(v) and 
(e)(3)(iv) of this section.
    (c) Due diligence for the identification of account holders under 
the FFI agreement--(1) Scope of paragraph. This paragraph (c) describes 
the procedures that participating FFIs are to follow in determining the 
chapter 4 status of an account holder as well as identifying and 
documenting U.S. accounts (as defined in Sec.  1.1471-5(a)) and 
accounts other than U.S. accounts. Paragraph (c)(2) of this section 
provides the general rules for identification of account holders. 
Paragraph (c)(3) of this section provides the rules for documenting 
accounts held by entities. Paragraph (c)(4) of this section provides 
the general rules for documenting individual accounts and a special 
rule for documenting individual accounts that are offshore obligations. 
Paragraph (c)(4) also provides exceptions from the documentation 
requirements of this paragraph (c) for certain preexisting accounts of 
individual account holders and the account aggregation requirements 
relevant in applying these exceptions. Paragraph (c)(5) of this section 
provides the currency translation for determining the account balance 
and value for purposes of the documentation exceptions in paragraphs 
(c)(3) and (4). Paragraph (c)(6) of this section has examples regarding 
the application of the aggregation rules. Paragraph (c)(7) of this 
section provides an alternative procedure for documenting preexisting 
individual accounts that are offshore obligations. Paragraph (c)(8) of 
this section provides the identification and documentation procedure 
for preexisting accounts of individual account holders with a balance 
or value that exceeds $1,000,000. Paragraph (c)(9) of this section 
provides an exception from the electronic search and enhanced review 
requirements for accounts that a participating FFI has already 
documented as held by foreign individuals for the purpose of meeting 
its obligations under a QI, WP, or WT agreement. Paragraph (c)(10) of 
this section provides the requirement for a responsible officer of the 
participating FFI to certify as to the completion of the identification 
and documentation procedures of this paragraph (c) within the specified 
period of time.
    (2) Requirements with respect to the identification of account 
holders--(i) In general. For purposes of this section, to determine the 
chapter 4 status of an account holder, the principles of Sec.  1.1471-
3(b) shall apply as though the participating FFI were a withholding 
agent making a withholdable payment and the account holder were the 
payee. To determine whether documentation is valid, the principles of 
Sec.  1.1471-3(c) shall apply as though the participating FFI were a 
withholding agent making a withholdable payment and the account holder 
were the payee.
    (ii) Standards of knowledge. A participating FFI may rely on 
documentation that is collected pursuant to the procedures set forth in 
this paragraph (c) or that is otherwise maintained in the participating 
FFI's files, unless the participating FFI knows or has reason to know 
that such documentation is unreliable or incorrect. Except as otherwise 
provided in paragraph (c)(4) of this section, to determine whether a 
participating FFI knows or has reason to know that the documentation 
collected or otherwise maintained with respect to the account holder is 
unreliable or incorrect, the standards of knowledge provided in Sec.  
1.1471-3(e) shall apply as though the participating FFI were a 
withholding agent making a withholdable payment (except that Sec.  
1.1471-3(e)(4)(i)(B)(1) and (ii)(B) will not apply in the case of an 
individual account holder) and the account holder were the payee.
    (iii) Change in circumstances. With respect to an account that 
meets the documentation exceptions described in paragraphs (c)(3)(ii), 
(c)(4)(ii), and (c)(4)(iii) of this section, if an account no longer 
meets the exception in a subsequent year, this will be treated as a 
change in circumstances (as defined in Sec.  1.1471-3(c)(6)(ii)(D)) and 
the participating FFI must obtain the appropriate documentation within 
the time period provided by Sec.  1.1471-5(g)(3)(iii), or will be 
required to treat such account as held by a recalcitrant account holder 
or nonparticipating FFI. For purposes of this section, a change in 
circumstances also includes any change or addition of information to 
the account holder's account or any account associated with such 
account, applying the aggregation rules, if such change or addition of 
information affects the chapter 4 status of the account holder. For 
example, if a holder of a preexisting account opens another account and 
as part of the participating FFI's account opening procedures the 
account holder provides a U.S. telephone number, the participating FFI 
has actual knowledge that the account holder has U.S. indicia, and this 
will be treated as a change in circumstance with respect to the 
preexisting account. The participating FFI must obtain the appropriate 
documentation described in paragraph (c)(4)(i)(B)(3) of this section 
within the time period provided by Sec.  1.1471-5(g)(3)(iii), or will 
be required to treat such account as held by a recalcitrant account 
holder.
    (iv) Record retention. A participating FFI must retain either an 
original, certified copy, or photocopy (including a microfiche, scan, 
or similar means of record retention) of the documentation collected to 
determine the chapter 4 status of its account holders. With respect to 
preexisting accounts, a participating FFI must retain the documentation 
collected, including requests made and responses to relationship 
manager inquiries, and all results from electronic searches, for six 
calendar years following the year in which the account identification 
procedures of this paragraph (c) were performed. Upon the request of 
the IRS, a participating FFI may be required to extend the six year 
retention period when such request is made by the IRS prior to the end 
of the six year retention period.
    (3) Identification procedure and documentation for entity 
accounts-- (i) In general. To determine the documentation requirements 
and presumption rules applicable to an account held by an entity, a 
participating FFI shall apply the principles of Sec.  1.1471-3(d) and 
(f) (as applicable to entities) as though the participating FFI were a 
withholding agent making a withholdable payment, and the account holder 
were the payee. For preexisting entity accounts, a participating FFI 
must perform the requisite identification procedures and

[[Page 9075]]

obtain the appropriate documentation within one year of the effective 
date of its FFI agreement for any account holder that is a prima facie 
FFI, as defined in Sec.  1.1471-2(a)(4)(ii)(B), and within two years of 
the effective date of its FFI agreement for all other entity accounts, 
except as otherwise provided in paragraph (c)(3)(ii) of this section.
    (ii) Documentation exception for certain preexisting entity 
accounts. Unless the participating FFI elects otherwise, a 
participating FFI is not required to document a preexisting entity 
account that is an offshore obligation as a U.S. account or an account 
held by a nonparticipating FFI if the conditions of paragraphs 
(c)(3)(ii)(A) and (B) are met. A participating FFI is also not required 
to treat such account as undocumented for withholding and reporting 
purposes. An account that meets this exception as of the effective date 
of the participating FFI's FFI agreement will be treated as meeting 
this exception until the account balance or value exceeds $1,000,000 at 
the end of any subsequent calendar year, applying the aggregations 
rules of paragraph (c)(3)(ii)(B)(2).
    (A) Previously identified accounts. The condition of this paragraph 
(c)(3)(ii)(A) is met if no holder of the account that has previously 
been documented by the FFI as a U.S. person for purposes of chapters 3 
or 61 is a specified U.S. person for purposes of this chapter.
    (B) Account threshold--(1) In general. The condition of this 
paragraph (c)(3)(ii)(B) is met if, with respect to the preexisting 
entity account and, to the extent required under paragraph 
(c)(3)(ii)(B)(2) or (3) of this section, all accounts held (in whole or 
in part) by the holder of the account, the aggregate balance or value 
of the account as of the effective date of the participating FFI's FFI 
agreement or at the end of any subsequent calendar year is $250,000 or 
less (or the equivalent in foreign currency calculated under paragraph 
(c)(5) of this section). For rules for determining the balance or value 
of accounts that apply for purposes of this paragraph (c)(3)(ii)(B), 
see paragraph (d)(4)(iii) of this section.
    (2) Aggregation of entity accounts. For purposes of determining the 
aggregate balance or value of accounts held by an entity in applying 
the exception in this paragraph (c)(3)(ii), an FFI will be required to 
take into account all accounts held by entities that are maintained by 
the FFI, or members of its expanded affiliated group, to the extent 
that the FFI's computerized systems link the accounts by reference to a 
data element such as client number or taxpayer identification number 
(including an EIN) and allow account balances to be aggregated.
    (3) Special aggregation rule applicable to relationship managers. 
For purposes of determining the aggregate balance or value of accounts 
held by an entity in applying the exception in this paragraph 
(c)(3)(ii), an FFI shall also be required to aggregate all accounts 
(including any accounts held by individuals) that a relationship 
manager knows or has reason to know are directly or indirectly owned, 
controlled, or established (other than in a fiduciary capacity) by the 
same person.
    (4) Election to forgo exception. A participating FFI may elect to 
disregard the exception described in paragraphs (c)(3)(ii) of this 
section by documenting an account pursuant to the rules provided in 
this paragraph (c) and by treating any undocumented account as an 
account held by a nonparticipating FFI.
    (4) Identification procedure and documentation for individual 
accounts--(i) In general. Except as otherwise provided in this 
paragraph (c), a participating FFI is required to collect a Form W-9 or 
W-8 from each individual account holder in order to identify its U.S. 
accounts (as defined in Sec.  1.1471-5(a)) and accounts other than U.S. 
accounts. For an individual account that is an offshore obligation, 
however, the requirement of the preceding sentence to obtain a Form W-8 
to establish each individual account holder's foreign status shall not 
apply if the participating FFI obtains documentary evidence that meets 
the requirements of Sec.  1.1471-3(c)(5) (as applicable to 
individuals). Except as otherwise provided in this paragraph (c), a 
participating FFI is also required to review all information collected 
with respect to the opening or maintenance of each account, including 
documentation collected as part of the participating FFI's account 
opening procedures and documentation collected for other regulatory 
purposes to determine if an account holder has U.S. indicia. For 
example, if an account holder provides a passport as part of the 
participating FFI's account opening procedures, the participating FFI 
is required to review the passport to check for a U.S. place of birth. 
However, a participating FFI is not required to treat a passport as 
containing a U.S. place of birth unless the passport unambiguously 
indicates the country or state in which the individual was born. See 
Sec.  1.1471-5(g)(3) to determine the period of time by which a 
participating FFI must perform the account identification procedures 
and obtain the appropriate documentation described in this paragraph 
(c) before it must treat the account holder as a recalcitrant account 
holder.
    (A) U.S. Indicia. For purposes of the account identification 
procedures described in this paragraph (c), an account holder is 
treated as having U.S. indicia if the information required to be 
reviewed by the FFI with respect to the account includes any of the 
following:
    (1) Identification of an account holder as a U.S. resident or 
citizen;
    (2) U.S. place of birth;
    (3) U.S. resident address or U.S. mailing address (including a U.S. 
post office box);
    (4) U.S. telephone number;
    (5) Standing instructions to transfer funds to an account 
maintained in the United States;
    (6) Power of attorney or signatory authority granted to a person 
with a U.S. address; or
    (7) An ``in-care-of'' address or ``hold mail'' address that is the 
sole address the FFI has identified for the account holder.
    (B) Documentation required for U.S. indicia. For all accounts 
holders having one or more of the U.S. indicia described in paragraph 
(c)(4)(i)(A) of this section, a participating FFI is required to obtain 
the documentation described in paragraphs (c)(4)(i)(B)(1) through (5), 
applicable to the type of U.S. indicia, to establish whether the 
account is a U.S. account.
    (1) If the account holder is identified as a U.S. resident or 
citizen, the participating FFI must request a Form W-9 and a valid and 
effective waiver as described in section 1471(b)(1)(F)(i), if 
necessary, from the account holder.
    (2) If the account holder information unambiguously indicates a 
U.S. place of birth, the participating FFI must request either a Form 
W-9 and a valid and effective waiver described in section 
1471(b)(1)(F)(i), if necessary, or a Form W-8BEN and a non-U.S. 
passport or other government-issued identification evidencing 
citizenship in a country other than the United States. In addition, to 
establish the foreign status of any account holder with a U.S. place of 
birth, the participating FFI must obtain a copy of the individual's 
Certificate of Loss of Nationality of the United States or Form I-407, 
or a reasonable explanation of the account holder's renunciation of 
U.S. citizenship or the reason the account holder did not obtain U.S. 
citizenship at birth.
    (3) If the account holder information contains a U.S. address, U.S. 
mailing address, or telephone number in the United States, the 
participating FFI must request either a Form W-9 (and a

[[Page 9076]]

valid and effective waiver described in section 1471(b)(1)(F)(i), if 
necessary), or a Form W-8BEN and a non-U.S. passport or other 
government-issued identification evidencing citizenship in a country 
other than the United States.
    (4) If the account holder information contains standing 
instructions to transfer funds to an account maintained in the United 
States, the participating FFI must request either a Form W-9 and a 
valid and effective waiver described in section 1471(b)(1)(F)(i), if 
necessary, or a Form W-8BEN and documentary evidence, as described in 
Sec.  1.1471-3(c)(5), establishing foreign status.
    (5) If the account holder information contains a power of attorney 
or signatory authority granted to a person with a U.S. address or has 
an ``in care of'' address or ``hold mail'' address that is the sole 
address identified for the account holder, the participating FFI must 
request either a Form W-9 and a valid and effective waiver described in 
section 1471(b)(1)(F)(i), if necessary, a Form W-8, or documentary 
evidence, as described in Sec.  1.1471-3(c)(5), establishing foreign 
status.
    (ii) Preexisting accounts of individual account holders documented 
as U.S. accounts. If a participating FFI has documented an individual 
account holder as a U.S. person for purposes of chapter 3 or 61 and 
such account holder is a specified U.S. person, the account holder's 
account will be treated as a U.S. account for chapter 4 purposes. 
Notwithstanding the previous sentence, a participating FFI is not 
required to treat a preexisting account or account other than a 
preexisting account held by an individual account holder as a U.S. 
account if such account is a depository account that meets the 
exception to U.S. account status described in Sec.  1.1471-5(a)(4)(i) 
(applying to depository accounts with a value or balance of $50,000 or 
less), unless the participating FFI elects otherwise. An account that 
no longer meets the exception from U.S. account status described in 
Sec.  1.1471-5(a)(4)(i) because the balance or value of the account 
exceeds $50,000 may qualify for the documentation exception described 
in paragraph (c)(4)(iii) of this section.
    (iii) Exception for certain preexisting accounts of individual 
account holders other than accounts described in Sec.  1.1471-
4(c)(4)(iv). Unless the participating FFI elects otherwise, a 
participating FFI is not required to document a preexisting individual 
account as a U.S. account or an account held by a recalcitrant account 
holder if the account is not an account described in paragraph 
(c)(4)(iv) of this section, the account threshold in paragraph 
(c)(4)(iii)(A) is met, and no holder of the account has been documented 
by the FFI as a U.S. person for purposes of chapter 3 or 61 that is a 
specified U.S. person. An account that meets this exception as of the 
effective date of the participating FFI's FFI agreement will be treated 
as meeting this exception until the account balance or value exceeds 
$1,000,000 at the end of any subsequent calendar year.
    (A) Account threshold. The conditions of this paragraph 
(c)(4)(iii)(A) are met if, with respect to the account (including for 
this purpose accounts aggregated under paragraphs (c)(4)(iii)(B) and 
(C) of this section), the aggregate balance or value of the account as 
of the effective date of the participating FFI's FFI agreement is 
$50,000 or less (or the equivalent in foreign currency calculated under 
paragraph (c)(5) of this section). For rules for determining the 
balance or value of financial accounts that apply for purposes of this 
paragraph (c)(4)(iii), see paragraph (d)(4)(iii)(A) of this section. An 
account that meets this exception as of the effective date of the 
participating FFI's FFI agreement will be treated as meeting this 
exception until the account balance or value exceeds $1,000,000 at the 
end of any subsequent calendar year.
    (B) Aggregation of individual accounts. For purposes of determining 
the aggregate balance or value of accounts held by a person, other than 
accounts described in paragraph (c)(4)(iv), in applying the exception 
in this paragraph (c)(4)(iii), an FFI will be required to aggregate all 
accounts maintained by the FFI, or members of its expanded affiliated 
group, but only to the extent that the FFI's computerized systems link 
the accounts by reference to a data element such as client number or 
taxpayer identification number, and allow account balances to be 
aggregated. Each holder of a jointly held account will be attributed 
the entire balance of the jointly held account for purposes of applying 
the aggregation requirements described in this paragraph.
    (C) Special aggregation rule applicable to relationship managers. 
For purposes of determining the aggregate balance or value of accounts 
held by a person in applying the exception in this paragraph 
(c)(4)(iii), an FFI shall also be required, in the case of any accounts 
that a relationship manager knows or has reason to know are directly or 
indirectly owned, controlled, or established (other than in a fiduciary 
capacity) by the same person, to aggregate all such accounts.
    (iv) Exception for certain cash value insurance or annuity 
contracts of individual account holders that are preexisting 
obligations. Unless the participating FFI elects otherwise, a 
participating FFI is not required to document a preexisting individual 
account that is an account described in Sec.  1.1471-5(b)(1)(iv) as a 
U.S. account or an account held by a recalcitrant account holder if the 
conditions of paragraphs (c)(4)(iv)(A) and (B) of this section are met. 
An account that meets this exception as of the effective date of the 
participating FFI's FFI agreement will be treated as meeting this 
exception until the account balance or value exceeds $1,000,000 at the 
end of any subsequent calendar year.
    (A) Individuals. The condition of this paragraph (A) is met if each 
holder of such account is an individual.
    (B) Account threshold--(1) In general. The condition of this 
paragraph (c)(4)(iv)(B) is met if, with respect the account (including 
for this purpose accounts aggregated under paragraphs (c)(4)(iv)(B)(2) 
and (3) of this section), the aggregate value of the account as of the 
effective date of the participating FFI's FFI agreement is $250,000 or 
less (or the equivalent in foreign currency calculated under paragraph 
(c)(5) of this section). For rules for determining the value of an 
account that apply for purposes of this paragraph (c)(4)(iv) see 
paragraph (d)(4)(iii)(A) of this section.
    (2) Aggregation of accounts. For purposes of determining the 
aggregate value of accounts described in Sec.  1.1471-5(b)(1)(iv) held 
by an individual in applying the exception in this paragraph 
(c)(4)(iv), an FFI will be required to aggregate all accounts described 
in paragraph Sec.  1.1471-5(b)(1)(iv) maintained by the FFI, or members 
of its expanded affiliated group, but only to the extent that the FFI's 
computerized systems link the accounts by reference to a data element 
such as client number or taxpayer identification number, and allow 
account values to be aggregated. Each holder of a jointly held account 
will be attributed the entire balance of the jointly held account for 
purposes of applying the aggregation requirements described in this 
paragraph.
    (3) Special aggregation rule applicable to relationship managers. 
For purposes of determining the aggregate value of accounts described 
in Sec.  1.1471-5(b)(1)(iv) held by a person in applying the exception 
in this paragraph (c)(4)(iv), an FFI shall also be required to 
aggregate all accounts described in Sec.  1.1471-5(b)(1)(iv) held by 
such person that a relationship manager, has the ability to aggregate.
    (v) Election to forgo exception. A participating FFI may elect to 
disregard the exceptions described in paragraphs

[[Page 9077]]

(c)(4)(iii) and (iv) of this section by documenting an account pursuant 
to the rules provided in this paragraph (c) and by treating any 
undocumented account as an account held by a recalcitrant account 
holder pursuant to the rules provided in Sec.  1.1471-5(g).
    (5) Currency translation. To the extent that an account is 
denominated in a currency other than the U.S. dollar, the participating 
FFI must convert the dollar threshold amounts described in paragraphs 
(c)(3)(ii)(B), (c)(4)(iii)(A), and (c)(4)(iv)(B) into such currency 
using a spot rate determined under Sec.  1.988-1(d). The spot rate must 
be determined as of the last day of the calendar year preceding the 
year in which the FFI is determining the threshold amounts.
    (6) Examples.

    Example 1. Aggregation rules applicable to preexisting equity 
interests that are accounts held by an individual account holder. U, 
a U.S. resident individual, holds 100 shares of common stock of 
FFI1, an FFI described in section 1471(d)(5)(C). On the effective 
date of FFI1's FFI agreement, the common stock held by U is worth 
$45,000. U also holds shares of preferred stock of FFI1. Neither 
FFI1's common stock nor FFI1's preferred stock is regularly traded 
on an established securities market. On the effective date of FFI1's 
FFI agreement, the preferred stock shares are worth $35,000. U also 
holds debt instruments issued by FFI1 that are not regularly traded 
on an established securities market. On the effective date of CB's 
FFI agreement, the FFI1 debt instruments are worth $15,000. U's 
common and preferred equity interests are associated with U and with 
one another by reference to U's taxpayer identification number in 
FFI1's computerized information management system. However, U's debt 
instruments are not associated with U's equity interests in FFI1's 
computerized information management system. None of these accounts 
are managed by a relationship manager. Previously, FFI1 was not 
required to and did not obtain a Form W-9 from U for purposes of 
chapter 3 or 61. U's FFI1 debt interests are eligible for the 
paragraph (c)(4)(iii) documentation exception because that account 
does not exceed the $50,000 threshold described in paragraph 
(c)(4)(iii)(A) of this section, taking into account the aggregation 
rule described in paragraph (c)(4)(iii)(B). However, U's common and 
preferred equity interests are not eligible for the paragraph 
(c)(4)(iii) documentation exception because the accounts exceed the 
$50,000 threshold described in paragraph (c)(4)(iii)(A) of this 
section, taking into account the aggregation rules described in 
paragraph (c)(4)(iii)(B).
    Example 2. Aggregation rules for owners of entity accounts. In 
Year 1, U, a U.S. resident individual, maintains a depository 
account that is a preexisting account in CB, a commercial bank. The 
balance in U's depository account on the effective date of CB's FFI 
agreement is $20,000. U also owns 100% of Entity X which maintains a 
depository account that is a preexisting account in CB and 50% of 
Entity Y which maintains a depository account that is a preexisting 
account in CB. The balance in Entity X's account on the effective 
date of CB's FFI agreement is $130,000 and the balance in Entity Y's 
account on the effective date of CB's FFI agreement is $110,000. All 
three accounts are associated with one another in CB's computerized 
information management system by reference to U's tax identification 
number. None of the accounts are managed by a relationship manager. 
Previously, FFI1 was not required to and did not obtain a Form W-9 
from U for purposes of chapter 3 or 61. U's depository account would 
qualify for the paragraph (c)(4)(i) exception to U.S. account status 
because it does not exceed the $50,000 threshold, taking into 
account the aggregation rule described in Sec.  1.1471-
5(a)(4)(i)(B)(2). Entity X's account and Entity Y's account qualify 
for the paragraph (c)(3)(ii) documentation exception because the 
accounts do not exceed the $250,000 threshold described in paragraph 
(c)(3)(ii)(B)(1) taking into account the aggregation rule described 
in paragraph (c)(3)(ii)(B)(2).

    (7) Alternative identification procedure for preexisting individual 
accounts that are offshore obligations--(i) In general. Except as 
otherwise provided under paragraph (c)(8) of this section and in lieu 
of reviewing all information collected with respect to an account 
holder, a participating FFI may instead rely on the procedures 
described in this paragraph (c)(7) with respect to a preexisting 
individual account that is an offshore obligation. A participating FFI 
that follows the procedures described in this paragraph (c)(7) with 
respect to its preexisting individual accounts will not be attributed 
knowledge with respect to information contained in any account files 
that the participating FFI did not review and was not required to 
review under this paragraph (c)(7). Thus, for example, if a 
participating FFI was only required to perform an electronic search 
with respect to a preexisting individual account and no U.S. indicia 
was located in the results of the electronic search, the participating 
FFI would not have reason to know that the individual was a U.S. 
person, even if the participating FFI had on file (but was not required 
to and did not review) a copy of the individual's passport which 
indicates that the individual was born in the United States. 
Additionally, solely for purposes of this paragraph (c)(7), a 
participating FFI will be treated as having obtained the documentary 
evidence set forth in paragraphs (c)(4)(i)(B)(2) through (5) of this 
section if the participating FFI retains a record in its files noting 
that the documentary evidence has been examined, including the type of 
document and the name of the employee that reviewed the document.
    (ii) Electronic search. Among the preexisting individual accounts 
described in paragraph (c)(7)(i) of this section that were not 
previously documented as U.S. accounts, a participating FFI must 
determine whether the electronically searchable information, as defined 
in Sec.  1.1471-1(b)(15), associated with an account and maintained by 
the participating FFI includes U.S. indicia, as defined in paragraph 
(c)(4)(i)(A) of this section, and if so, the FFI must obtain the 
appropriate documentation relevant to the type of U.S. indicia as set 
forth in paragraphs (c)(4)(i)(B)(1) through (5) of this section. For 
purposes of this paragraph (c)(7)(ii), an FFI will not be required to 
treat an account holder as having U.S. indicia solely because the only 
address it has for the account holder in its electronically searchable 
information is an in-care-of address outside of the United States. 
Except as otherwise provided in this paragraph (c)(7)(ii), a 
participating FFI must complete the electronic search described in this 
paragraph (c)(7)(ii) with respect to its preexisting individual 
accounts not previously identified as U.S. accounts and obtain the 
appropriate documentation within two years of the effective date of its 
FFI agreement, or will be required to treat such accounts as held by 
recalcitrant account holders under Sec.  1.1471-5(g)(3)(i)(A). For all 
preexisting individual accounts that are treated as high-value 
accounts, as described in paragraph (c)(8)(i) of this section, a 
participating FFI must complete the electronic search described in this 
paragraph (c)(7)(ii), in addition to the enhanced review for high-value 
accounts described in paragraph (c)(8)(i) of this section, and obtain 
the appropriate documentation within the applicable time period 
provided in Sec.  1.1471-5(g)(3)(i)(B) or (C), or will be required to 
treat such accounts as held by recalcitrant account holders.
    (8) Additional enhanced review for high-value accounts--(i) In 
general. All preexisting individual accounts not identified as U.S. 
accounts under paragraph (c)(4)(ii) or (c)(7)(ii) of this section and 
that have a balance or value that exceeds $1,000,000 at the end of the 
calendar year preceding the effective date of the participating FFI's 
FFI agreement, or at the end of any subsequent calendar year, will be 
treated as a high-value account subject to the additional enhanced 
review requirements described in this paragraph (c)(8). For purposes of 
determining the balance or value of an

[[Page 9078]]

account, a participating FFI must apply the aggregation rules of 
paragraphs (c)(4)(iii)(B) and (C) of this section. If a participating 
FFI applied the enhanced review procedures of paragraphs (c)(8)(iii)(A) 
and (B) of this section to an account in a previous year, the 
participating FFI will not be required to re-apply such procedures to 
such account in a subsequent year.
    (ii) Relationship manager inquiry. With respect to all high-value 
accounts described in paragraph (c)(8)(i) of this section, a 
participating FFI must identify all accounts to which a relationship 
manager is assigned (including any accounts aggregated with such 
account) and for which the relationship manager has actual knowledge 
that the account holder is a U.S. person. In such case, the 
participating FFI must obtain from the account holder a Form W-9, and a 
valid and effective waiver as described in section 1471(b)(1)(F)(i), if 
necessary. A participating FFI must identify such accounts and obtain 
the appropriate documentation within one year of the effective date of 
its FFI agreement, or will be required to treat the holder of such 
account as a recalcitrant account holder as provided in Sec.  1.1471-
5(g)(3)(i)(B). In order to meet its obligations under the FFI 
agreement, a participating FFI is also required to implement procedures 
to ensure that a relationship manager identifies any change in 
circumstances of an account. For example, if a relationship manager is 
notified that the account holder has a new mailing address in the 
United States, the participating FFI will be required to treat the new 
address as a change in circumstances and will be required to obtain the 
appropriate documentation from the account holder as described in 
paragraph (c)(4)(i)(B)(3) of this section.
    (iii) Enhanced review--(A) In general. For all high-value accounts 
described in paragraph (c)(8)(i) that were not identified as U.S. 
accounts in paragraph (c)(8)(ii) of this section, a participating FFI 
must perform a review of the current customer master file and the 
documents described in paragraphs (c)(8)(iii)(B)(1) through (5) that 
are associated with the account and were obtained by the participating 
FFI within the last five years. If a participating FFI discovers that 
an account holder has U.S. indicia as described in paragraph 
(c)(4)(i)(A) with respect to the account, the participating FFI is to 
obtain the appropriate documentation described in paragraphs 
(c)(4)(i)(B)(1) through (5) of this section to establish whether the 
account is a U.S. account within the period of time provided under 
Sec.  1.1471-5(g)(3)(i)(C). The documents to be reviewed by the 
participating FFI are the records contained in the current customer 
master file and to the extent not contained in the current customer 
master file--
    (1) The most recent documentary evidence that satisfies the 
requirements of Sec.  1.1471-3(c)(5);
    (2) The most recent account opening contract or documentation;
    (3) The most recent documentation obtained by the participating FFI 
for purposes of AML due diligence or for other regulatory purposes;
    (4) Any power of attorney or signature authority forms currently in 
effect; and
    (5) Any standing instructions to transfer funds currently in 
effect.
    (B) Limitations on the enhanced review. A participating FFI is 
required to perform an enhanced review of its files only to the extent 
the information described in paragraphs (c)(8)(iii)(B)(1) through (6) 
is not available in the FFI's electronically searchable information. 
The information described in the preceding sentence is--
    (1) The account holder's nationality and/or residence status;
    (2) The account holder's current residence address and mailing 
address;
    (3) The account holder's current telephone number(s);
    (4) Whether there are standing instructions to transfer funds in 
the account to an account at another branch of the participating FFI or 
another financial institution;
    (5) Whether there is a current ``in care of'' address or ``hold 
mail'' address for the account holder if no other residence or mailing 
address is found for the account; and
    (6) Whether there is any power of attorney or signatory authority 
for the account.
    (iv) Exception for certain documented accounts of individual 
account holders. A participating FFI is not required to perform the 
enhanced review provided in paragraph (c)(8)(iii) of this section with 
respect to any account with respect to which the participating FFI has 
obtained a Form W-8BEN and documentary evidence that satisfies the 
requirements of Sec.  1.1471-3(c)(5) and establishes the foreign status 
of the account holder. The participating FFI is required, however, to 
perform the relationship manager inquiry described in paragraph 
(c)(8)(ii) of this section if the account is a high-value account 
described in paragraph (c)(8)(i) of this section.
    (9) Exception for preexisting individual accounts that a 
participating FFI has documented as held by foreign individuals for 
purposes of meeting its obligations under chapter 61 or its QI, WP, or 
WT agreement. A participating FFI that has previously obtained 
documentation from an account holder to establish the account holder's 
status as a foreign individual in order to meet its obligations under 
its QI, WP, or WT agreement with the IRS, or to fulfill its reporting 
obligations as a U.S. payor under chapter 61 of the Code, is not 
required to perform the electronic search described in paragraph 
(c)(7)(ii) of this section or the enhanced review described in 
paragraph (c)(8)(iii) of this section for such account. The 
participating FFI is required, however, to perform the relationship 
manager inquiry described in paragraph (c)(8)(ii) of this section if 
the account is a high-value account described in paragraph (c)(8)(i) of 
this section.
    (10) Certifications of responsible officer. In order for a 
participating FFI to meet its obligations under the FFI agreement with 
respect to its identification procedures for financial accounts that 
are preexisting obligations, a responsible officer of the participating 
FFI must certify to the IRS within one year of the effective date of 
its FFI agreement that the participating FFI has completed the review 
of all high-value accounts to the extent described in paragraphs 
(c)(8)(ii) and (iii) of this section and to the best of the responsible 
officer's knowledge, after conducting a reasonable inquiry, the 
participating FFI did not have any formal or informal practices or 
procedures in place from August 6, 2011, through the date of such 
certification to assist account holders in the avoidance of chapter 4 
of the Internal Revenue Code. Practices or procedures that assist 
account holders in the avoidance of chapter 4 include, for example, 
instructing account holders to split up accounts to avoid 
classification as a high-value account. Additionally, a responsible 
officer of the participating FFI must certify to the IRS within two 
years of the effective date of its FFI agreement that it has completed 
the account identification procedures and documentation requirements of 
this paragraph (c) for all financial accounts that are preexisting 
obligations or, if it has not obtained the documentation required to be 
obtained under this paragraph (c) with respect to an account, treats 
such account in accordance with the requirements of its FFI agreement.
    (d) Account reporting under FFI agreement--(1) Scope of paragraph. 
This paragraph (d) provides rules addressing the information reporting 
requirements applicable to participating FFIs with respect to U.S. 
accounts (as

[[Page 9079]]

defined in Sec.  1.1471-5(a)(2)) and recalcitrant account holders (as 
defined in Sec.  1.1471-5(g)). Paragraph (d)(2) of this section 
describes the accounts subject to reporting under this paragraph (d), 
and specifies the participating FFI that is responsible for reporting 
an account or account holder. Paragraph (d)(3) of this section 
describes the information required to be reported and the manner of 
reporting by a participating FFI under section 1471(c)(1) with respect 
to a U.S. account. Paragraph (d)(4) of this section provides 
definitions of terms applicable to paragraph (d)(3). Paragraph (d)(5) 
of this section describes the conditions for a participating FFI to 
elect to report its U.S. accounts under section 1471(c)(2) and the 
information required to be reported under such election. Paragraph 
(d)(6) of this section provides rules for a participating FFI to report 
its recalcitrant account holders. Paragraph (d)(7) of this section 
provides special reporting rules applicable to reports due in 2014, 
2015, and 2016. Paragraph (d)(8) of this section prescribes the 
reporting requirements of a qualified intermediary that is a 
participating FFI with respect to U.S. accounts. Paragraphs (d)(9) and 
(10) of this section prescribe, respectively, the reporting 
requirements of a withholding foreign partnership and a withholding 
foreign trust that is a participating FFI with respect to its U.S. 
accounts.
    (2) Reporting requirements in general--(i) Accounts subject to 
reporting. Subject to the rules of paragraph (d)(7) of this section, a 
participating FFI shall report by the time and in the manner prescribed 
in paragraph (d)(3)(vi) of this section, the information described in 
paragraph (d)(3) with respect to accounts that it is required under its 
FFI agreement and this section to treat as U.S. accounts maintained at 
any time during each calendar year that it is responsible for reporting 
under paragraph (d)(2)(ii) of this section, including accounts which 
are identified as U.S. accounts by the end of such calendar year 
pursuant to a change in circumstances occurring by the end of such year 
as described under paragraph (c)(2)(iii) of this section. 
Alternatively, a participating FFI may elect to report under paragraph 
(d)(5) of this section with respect to such accounts for each calendar 
year. With respect to accounts held by recalcitrant account holders, a 
participating FFI is required to report with respect to each calendar 
year under paragraph (d)(6) of this section and not under paragraph 
(d)(3) or (5) of this section. For separate reporting requirements of 
participating FFIs with respect to passthru payments and for 
transitional rules for participating FFIs to report certain foreign 
reportable amounts made to nonparticipating FFIs, see Sec.  1.1474-
1(d)(2)(i) and (ii).
    (ii) Financial institution required to report an account--(A) In 
general. Except as otherwise provided in paragraph (d)(2)(ii)(B) or (C) 
of this section, the participating FFI that maintains an account is 
responsible for reporting the account in accordance with the 
requirements of paragraph (d)(2)(i) of this section for each calendar 
year. A participating FFI is not required to report under paragraph 
(d)(2)(i) of this section with respect to any account it maintains for 
another participating FFI even if that other participating FFI holds 
the account as an intermediary on behalf of an account holder of such 
other FFI.
    (B) Special reporting of account holders of territory financial 
institutions. In the case of an account held by a territory financial 
institution acting as an intermediary with respect to a withholdable 
payment--
    (1) If the territory financial institution agrees to be treated as 
a U.S. person with respect to the payment under Sec.  1.1471-
3(c)(3)(iii)(F), a participating FFI is not required to report under 
paragraph (d)(2)(i) of this section with respect to the account holders 
of the territory financial institution; or
    (2) If the territory financial institution does not agree to be 
treated as a U.S. person with respect to a withholdable payment, the 
participating FFI must report with respect to each specified U.S. 
person or substantial U.S. owner of a foreign entity that is a passive 
NFFE with respect to which the territory financial institution acts as 
an intermediary and provides the participating FFI with the information 
and documentation required under Sec.  1.1471-3(c)(2)(iii)(G).
    (C) Election for branch reporting. A participating FFI may elect to 
comply with its obligation to report under paragraph (d)(3) or (d)(5) 
of this section by reporting its accounts on a branch-by-branch basis 
with respect to one or more of its branches. A participating FFI that 
makes this election shall identify each branch that will report its 
accounts separately. A branch that reports under this election shall 
file with the IRS the information required to be reported on accounts 
that it maintains in accordance with the forms and their accompanying 
instructions provided by the IRS for purposes of this election. For the 
definition of a branch that applies for purposes of this paragraph (d), 
see paragraph (e)(2)(ii) of this section.
    (iii) Special rules for U.S. payors--(A) Special reporting rule for 
U.S. payors other than U.S. branches. Participating FFIs that are U.S. 
payors (other than U.S. branches) that report the information required 
under chapter 61 with respect to account holders of accounts that the 
participating FFI is required to treat as U.S. accounts and that report 
the information described in paragraph (d)(5)(ii) of this section with 
respect to each U.S. account shall be treated as having satisfied the 
reporting requirements described in paragraph (d)(2)(i) of this section 
with respect to accounts that the participating FFI is required to 
treat as U.S. accounts.
    (B) Special reporting rules for U.S. branches. A U.S. branch of a 
participating FFI shall be treated as having satisfied the reporting 
requirements described in paragraph (d)(2)(i) of this section if it 
reports under--
    (1) Chapter 61 with respect to account holders that are U.S. non-
exempt recipients;
    (2) Chapter 61 with respect to persons subject to withholding under 
section 3406;
    (3) Section 1.1472-1(e) with respect to substantial U.S. owners of 
foreign entities that are NFFEs, and;
    (4) Section 1.1474-1(i) with respect to specified U.S. persons that 
are direct or indirect owners of owner-documented FFIs.
    (iv) Accounts maintained for owner-documented FFIs. A participating 
FFI that maintains an account held by an FFI that it has identified as 
an owner-documented FFI under Sec.  1.1471-3(d)(7) shall report the 
information described in paragraph (d)(3)(iii) or (d)(5)(ii) of this 
section with respect to each direct or indirect owner of the owner-
documented FFI that is a specified U.S. person.
    (3) Reporting of accounts under section 1471(c)(1)--(i) In general. 
The participating FFI that is responsible for reporting an account that 
it is required to treat as a U.S. account under paragraph (d)(2)(ii) of 
this section shall be required to report such account under this 
paragraph (d)(3) for each calendar year unless it elects to report its 
U.S. accounts under paragraph (d)(5) of this section.
    (ii) Accounts held by specified U.S. persons. In the case of an 
account described in paragraph (d)(3)(i) of this section that is held 
by one or more specified U.S. persons, a participating FFI is required 
to report the following information under this paragraph (d)(3)--

[[Page 9080]]

    (A) The name, address, and TIN of each account holder that is a 
specified U.S. person;
    (B) The account number;
    (C) The account balance or value of the account;
    (D) The payments made with respect to the account, as described in 
paragraph (d)(4)(iv) of this section, during the calendar year; and
    (E) Such other information as is otherwise required to be reported 
under this paragraph (d)(3) or in the form described in paragraph 
(d)(3)(v) of this section and its accompanying instructions.
    (iii) Accounts held by U.S. owned foreign entities. In the case of 
an account described in paragraph (d)(3)(i) that is held by an NFFE 
that is a U.S. owned foreign entity, a participating FFI is required to 
report under this paragraph (d)(3)(iii)--
    (A) The name, address, and TIN (if any) of the U.S. owned foreign 
entity;
    (B) The name, address and TIN of each substantial U.S. owner of 
such entity;
    (C) The account number;
    (D) The account balance or value; and
    (E) The payments made with respect to the account, as described in 
paragraph (d)(4)(iv) of this section, during the calendar year.
    (iv) Branch reporting. Except in the case of a branch that reports 
separately under paragraph (d)(2)(ii)(C) of this section, a 
participating FFI that reports the information described in paragraphs 
(d)(3)(ii) and (iii) of this section shall also report the jurisdiction 
of the branch that maintains the U.S. account being reported.
    (v) Form for reporting U.S. accounts under section 1471(c)(1). The 
information described in paragraphs (d)(3)(ii) and (iii) of this 
section shall be reported with respect to each account subject to 
reporting under paragraph (d)(3)(i) of this section maintained at any 
time during a calendar year on the form provided by the IRS for such 
purposes. This form shall be filed in accordance with its requirements 
and its accompanying instructions.
    (vi) Time and manner of filing. Except as provided in paragraph 
(d)(7)(v)(B) of this section, the form described in paragraph (d)(3)(v) 
of this section shall be filed electronically with the IRS on or before 
March 31 of the year following the end of the calendar year to which 
the form relates. See the accompanying instructions to this form for 
electronic filing instructions.
    (vii) Extensions in filing. The IRS shall grant an automatic 90-day 
extension of time in which to file the form described in paragraph 
(d)(3)(v) of this section. Form 8809, Request for Extension of Time to 
File Information Returns, (or such other form as the IRS may prescribe) 
must be used to request such extension of time and must be filed no 
later than the due date of the form described in paragraph (d)(3)(v) of 
this section. Under certain hardship conditions, the IRS may grant an 
additional 90-day extension. A request for extension due to hardship 
must contain a statement of the reasons for requesting the extension 
and such other information as the forms or instructions may require.
    (4) Descriptions applicable to reporting requirements of Sec.  
1.1471-4(d)(3)--(i) Address. The address to be reported with respect to 
an account held by a specified U.S. person is the residence address 
recorded by the participating FFI for the account holder or, if no 
residence address is associated with the account holder, the address 
for the account used for mailing or for other purposes by the 
participating FFI. In the case of an account held by a U.S. owned 
foreign entity, the addresses to be reported are the addresses of both 
the U.S. owned foreign entity and each substantial U.S. owner of such 
entity.
    (ii) Account number. The account number to be reported with respect 
to an account is the identifying number assigned by the participating 
FFI for purposes other than to satisfy the reporting requirements of 
this paragraph (d), or, if no such number is assigned to the account, a 
unique serial number or other number such participating FFI assigns to 
the financial account for purposes of reporting under paragraph (d)(3) 
of this section that distinguishes the account from other accounts 
maintained by such institution.
    (iii) Account balance or value--(A) In general. Except as otherwise 
provided in this paragraph (d)(4)(iii)(A) and subject to the reporting 
rules described in paragraph (d)(7) of this section, the participating 
FFI shall report the balance or value of the account as of the end of 
the calendar year, as determined for purposes of reporting to the 
account holder or, in the case of a U.S. account that is an interest in 
an entity described in Sec.  1.1471-5(e)(1)(iii), as determined for the 
purpose that requires the most frequent determination of value. 
Notwithstanding the previous sentence, the balance or value of the 
account is not to be reduced by any liabilities or obligations incurred 
by an account holder with respect to the account or any of the assets 
held in the account and is not to be reduced by any fees, penalties or 
other charges to which the account holder is liable for terminating, 
transferring, surrendering, liquidating, or withdrawing cash from the 
account. See Sec.  1.1473-1(b)(3) for rules regarding the valuation of 
trust interests that also apply under this paragraph (d)(4)(iii)(A) for 
reporting certain interests in trusts that are U.S. accounts.
    (B) Currency translation of account balance or value. The account 
balance or value of an account may be reported in U.S. dollars or in 
the currency in which the account is denominated. In the case of an 
account denominated in a foreign currency, if the participating FFI 
elects to report account balances or values in the currency in which 
the account is denominated, it is required to identify the currency in 
which the account is reported. If the participating FFI elects to 
report such an account in U.S. dollars, the participating FFI must 
calculate the account balance or value of the account by applying a 
spot rate determined under Sec.  1.988-1(d) to translate such balance 
or value into the U.S. dollar. The spot rate must be determined as of 
the last day of the calendar year or, if the account was closed during 
such calendar year, the closure date of the account.
    (iv) Payments made with respect to account--(A) Depository 
accounts. The payments made during a calendar year with respect to an 
account described in Sec.  1.1471-5(b)(1)(i) consist of the aggregate 
gross amount of interest paid or credited to the account during the 
year.
    (B) Custodial accounts. The payments made during a calendar year 
with respect to an account described in Sec.  1.1471-5(b)(1)(ii) 
consist of--
    (1) The aggregate gross amount of dividends paid or credited to the 
account during the calendar year;
    (2) The aggregate gross amount of interest paid or credited to the 
account during the calendar year;
    (3) The gross proceeds from the sale or redemption of property paid 
or credited to the account during the calendar year with respect to 
which the FFI acted as a custodian, broker, nominee, or otherwise as an 
agent for the account holder; and
    (4) The aggregate gross amount of all other income paid or credited 
to the account during the calendar year.
    (C) Other accounts. In the case of an account described in Sec.  
1.1471-5(b)(1)(iii) or (iv) that is a U.S. account, the payments made 
during the calendar year with respect to such account are the gross 
amounts paid or credited to the account holder during the calendar 
year, including the aggregate amount of redemption payments made to the 
account holder during the calendar year.
    (D) Transfers and closings of deposit, custodial, insurance, and 
annuity

[[Page 9081]]

financial accounts. In the case of an account closed or transferred in 
its entirety by an account holder during a calendar year that is a 
financial account described in Sec.  1.1471-5(b)(1)(i), (ii), or (iv) 
and that the participating FFI is required to treat as a U.S. account, 
the participating FFI shall report the account as closed or transferred 
and the payments made with respect to the account shall be--
    (1) the payments and income paid or credited to the account that 
are described in paragraph (d)(4)(iv)(A) or (B) of this section for the 
calendar year until the date of transfer or closure, and
    (2) the amount or value withdrawn or transferred from the account 
in connection with the closure or transfer of the account.
    (E) Amount and characterization of payments subject to reporting. 
For purposes of reporting under paragraph (d)(3) of this section, the 
amount and characterization of payments made with respect to an account 
may be determined under the same principles that the participating FFI 
uses to report information on its resident account holders to the tax 
administration of the jurisdiction in which the FFI (or branch thereof) 
is located. Thus, the amount and characterization of items of income 
described in paragraphs (d)(4)(iv)(A), (B), and (C) need not be 
determined in accordance with U.S. Federal income tax principles. If 
any of the types of payments described in paragraph (d)(4)(iv) of this 
section are not reported to the tax administration of the jurisdiction 
in which the participating FFI (or branch thereof) is located, such 
amounts may be determined in the same manner as is used by the 
participating FFI for purposes of reporting to the account holder. If 
any of the types of payments described in this paragraph (d)(4)(iv) is 
neither reported to the tax administration of the jurisdiction in which 
the FFI (or branch thereof) is located nor reported to the account 
holder for the year for which reporting is required under paragraph (d) 
of this section, such item must be determined and reported either in 
accordance with U.S. Federal tax principles or in accordance with any 
reasonable method of reporting that is consistent with the accounting 
principles generally applied by the participating FFI. Once a 
participating FFI (or branch thereof) has applied a method to determine 
such amounts, it must apply such method consistently for all account 
holders and for all subsequent years unless the Commissioner consents 
to a change in such method. Consent will be automatically granted for a 
change to rely on U.S. Federal income tax principles to determine such 
amounts.
    (F) Currency translation. Payments described in this paragraph 
(d)(4)(iv) may be reported in the currency in which the payment is 
denominated or in U.S. dollars. In the case of a payment denominated in 
a foreign currency, if the participating FFI elects to report the 
payments in the currency in which the payment is denominated, it is 
required to identify the currency in which the account is reported. If 
such a payment is reported in U.S. dollars, the participating FFI must 
calculate the amount by applying a spot rate determined under Sec.  
1.988-1(d) to translate such payment into the U.S. dollar equivalent 
amount. The spot rate must be determined as of the last day of the 
calendar year for which the account is being reported.
    (v) Record retention requirements. If a participating FFI retains 
copies of account statements with respect to holders of U.S. accounts 
in the ordinary course of its business, such statements must be 
provided to the IRS within 30 days of a request for such statement to 
the extent they have been retained under such business procedures at 
the time of the request. A participating FFI is required to retain for 
six years copies of account statements that summarize the activity in 
the account for each calendar year for which the account is required to 
be reported under paragraph (d)(3) of this section and is required to 
provide such copies to the IRS within 30 days of a request for such 
statements.
    (5) Election to perform reporting under section 1471(c)(2)--(i) In 
general. Except as otherwise provided in this paragraph (d)(5), a 
participating FFI may elect under section 1471(c)(2) and this paragraph 
(d)(5) to report with respect to payments to accounts that it is 
required to treat as U.S. accounts under sections 6041, 6042, 6045, and 
6049 as if such participating FFI were a U.S. person and each holder of 
a U.S. account that is a specified U.S. person or a U.S. owned foreign 
entity were a payee who is an individual and citizen of the United 
States. This election does not apply to cash value insurance or annuity 
contracts that are financial accounts described in Sec.  1.1471-
5(b)(1)(iv) and that would otherwise be subject to the reporting 
requirements of section 6047. If a participating FFI makes such an 
election, the FFI is required to report the information required under 
this paragraph (d)(5) with respect to each U.S. account, regardless of 
whether the account holder of such account qualifies as a recipient 
exempt from reporting by a payor or middleman under sections 6041, 
6042, 6045, or 6049, including the reporting of payments made to such 
U.S. account of amounts that are subject to reporting under any of 
these sections. A participating FFI that elects to report a U.S. 
account under the election described in this paragraph (d)(5) is not 
required to report the information described in paragraph (d)(3) with 
respect to the account.
    (ii) Information and accounts to be reported. In addition to the 
information otherwise required to be reported under sections 6041, 
6042, 6045, and 6049, including the reporting of payments made to such 
U.S. account subject to reporting under the applicable section, a 
participating FFI that elects to report under this paragraph (d)(5) 
must report with respect to each account that it is required to treat 
as a U.S. account--
    (A) In the case of an account holder that is a specified U.S. 
person:
    (1) The name, address, and TIN of the account holder; and
    (2) The account number; and
    (B) In the case of an account holder that is a U.S. owned foreign 
entity that is an NFFE--
    (1) The name, address, and TIN (if any) of such entity;
    (2) The name, address, and TIN of each substantial U.S. owner of 
such entity; and
    (3) The account number.
    (iii) Branch reporting. Except in the case of a branch that reports 
separately under paragraph (d)(2)(ii)(B) of this section, a 
participating FFI that reports the information described in paragraph 
(d)(5)(ii) of this section shall also report the jurisdiction of the 
branch that maintains the U.S. account being reported.
    (iv) Time and manner of making the election. A participating FFI 
(or one or more branches of the participating FFI) may make the 
election described in this paragraph (d)(5) in accordance with 
procedures established by the IRS for such election.
    (v) Revocation of election. A participating FFI may revoke the 
election described in paragraph (d)(5)(i) (as a whole or with regard to 
any of its branches or affiliates) by reporting the information 
described in paragraph (d)(3) on the next reporting date following the 
calendar year on which the election is revoked.
    (vi) Filing of information under election. The information required 
to be reported under the election described in this paragraph (d)(5) 
shall be filed with the IRS and issued to the account holder in the 
time and manner prescribed in sections 6041, 6042, 6045 and 6049 and in 
accordance with the forms referenced therein and their accompanying

[[Page 9082]]

instructions provided by the IRS for reporting under each of these 
sections.
    (6) Reporting on recalcitrant account holders--(i) In general. 
Except as otherwise provided under paragraph (d)(7) of this section, a 
participating FFI, as part of its reporting responsibilities under its 
FFI agreement, shall report to the IRS, for each calendar year, the 
following groups of account holders separately--
    (A) The aggregate number and aggregate value of accounts held by 
recalcitrant account holders at the end of the calendar year, other 
than accounts described in paragraph (d)(6)(i)(C), that have U.S. 
indicia as described in paragraph (c)(4)(i)(A) of this section;
    (B) The aggregate number and aggregate value of accounts held by 
recalcitrant account holders at the end of the calendar year, other 
than accounts described in paragraph (d)(6)(i)(C), that do not have 
U.S. indicia as described in paragraph (c)(4)(i)(A) of this section; 
and
    (C) The aggregate number and aggregate value of accounts held by 
recalcitrant account holders at the end of the calendar year that are 
dormant accounts.
    (ii) Definition of dormant account. A dormant account is an account 
treated as a dormant or inactive account under applicable laws or 
regulations or the normal operating procedures of the participating FFI 
that are consistently applied for all accounts maintained by such 
institution in a particular jurisdiction. If neither applicable laws or 
regulations nor the normal operating procedures of the participating 
FFI maintaining the account address dormant or inactive accounts, an 
account will be treated as a dormant account if the account holder:
    (A) Has not executed a transaction with regard to the account or 
any other account held by the account holder with the FFI in the past 
three years; and
    (B) Has not replied to queries from the FFI that maintains such 
account regarding the account or any other account held by the account 
holder with the FFI in the past six years.
    (iii) End of dormancy. An account treated as a dormant account 
under paragraph (d)(6)(ii) of this section ceases to be a dormant 
account when the account holder--
    (A) Executes a transaction in the account or any other account held 
by the account holder with the FFI; or
    (B) Replies to any query from the FFI that maintains such account 
regarding the account or any other account held by the account holder 
with the FFI; or
    (C) Ceases to be treated as a dormant account under applicable laws 
or regulations or the participating FFI's normal operating procedures.
    (iv) Forms. Reporting under paragraph (d)(6)(i) of this section 
shall be required to be made in accordance with the information 
reporting form provided by the IRS for this purpose and its 
instructions.
    (v) Time and manner of filing. The form described in paragraph 
(d)(6)(iv) of this section shall be filed electronically with the IRS 
on or before March 31 of the year following the end of the calendar 
year to which the form relates. See the accompanying instructions to 
this form for electronic filing instructions.
    (7) Special reporting rules with respect to the 2013 through 2015 
calendar years--(i) In general. A participating FFI may satisfy its 
reporting obligations with regard to accounts that it is required to 
treat as U.S. accounts maintained during 2013, 2014, and 2015 by 
reporting in accordance with paragraph (d)(7)(ii) or (iii) of this 
section.
    (ii) Information to be reported. With respect to accounts that a 
participating FFI is required to report in accordance with paragraph 
(d)(2) of this section, the participating FFI may, instead of the 
information described in paragraph (d)(3)(ii) of this section, report 
only the following information--
    (A) Reporting with respect to the 2013 and 2014 calendar years. 
With respect to accounts maintained during the 2013 and 2014 calendar 
years, the participating FFI may report only--
    (1) The name, address, and TIN of each specified U.S. person who is 
an account holder and, in the case of any account holder that is an 
NFFE that is a U.S. owned foreign entity, the name, address, and TIN 
(if any) of such entity and each substantial U.S. owner of such entity;
    (2) The account balance or value as of the end of the relevant 
calendar year, or, if the account was closed after the effective date 
of the FFI agreement, the balance or value of such account immediately 
before closure; and
    (3) The account number of the account.
    (B) Reporting with respect to the 2015 calendar year. With respect 
to the 2015 calendar year, the participating FFI may report only--
    (1) The information described in paragraph (d)(7)(ii)(A) of this 
section; and
    (2) The payments made with respect to the account except for those 
payments described in paragraph (d)(4)(iv)(B)(3) of this section.
    (iii) Participating FFIs that report under Sec.  1.1471-4(d)(5). A 
participating FFI that elects to report under paragraph (d)(5) of this 
section may report only the information described in paragraphs 
(d)(7)(ii)(A)(1) and (3) of this section for its 2013 and 2014 calendar 
years. With respect to its 2015 calendar year, a participating FFI is 
required to report all of the information required to be reported under 
paragraphs (d)(5)(i) and (ii) of this section but may exclude from such 
reporting amounts reportable under section 6045.
    (iv) Recalcitrant accounts. For each account that the participating 
FFI is required to treat as a recalcitrant account, the participating 
FFI will report such account in the manner described in paragraph 
(d)(6) of this section, except to the extent provided in paragraph 
(d)(7)(v)(B) of this section.
    (v) Forms for reporting--(A) In general. Except as provided in 
paragraph (d)(7)(v)(B) of this section, reporting under paragraph 
(d)(7)(ii) of this section shall be made on the forms described in 
paragraphs (d)(3)(v) and (d)(6)(iv) of this section, in the manner 
described in paragraphs (d)(3)(vi) and (d)(6)(v). Reporting under 
paragraph (d)(7)(iii) of this section shall be made in accordance with 
paragraph (d)(5)(vi) of this section.
    (B) Special determination date and timing for reporting with 
respect to the 2013 calendar year. A participating FFI reporting with 
respect to the 2013 calendar year shall report all accounts that it is 
required to treat as U.S. accounts or as held by a recalcitrant account 
holder as of June 30, 2014. Such reporting shall be made on the forms 
described in paragraphs (d)(3)(v) and (d)(6)(iv) of this section, and 
shall be filed with the IRS on or before September 30, 2014. However, a 
U.S. payor (including a U.S. branch) that reports in accordance with 
paragraph (d)(2)(iii) of this section may report its U.S. accounts in 
accordance with the dates otherwise applicable to reporting under 
chapter 61.
    (8) Reporting requirements of QIs with respect to U.S. accounts. 
[Reserved].
    (9) Reporting requirements of WPs with respect to U.S. accounts. 
[Reserved].
    (10) Reporting requirements of WTs with respect to U.S. accounts. 
[Reserved].
    (11) Examples. The following examples illustrate the provisions of 
this paragraph (d):

    Example 1. Financial institution required to report U.S. 
account. PFFI1, a participating FFI, issues shares of stock that are 
financial accounts under Sec.  1.1471-5(b). Such shares are held in 
custody by PFFI2, another participating FFI, on behalf of U, a 
specified U.S. person that holds an account with

[[Page 9083]]

PFFI2. The shares of PFFI1 held by PFFI2 will not be subject to 
reporting by PFFI1 if PFFI1 may treat PFFI2 as a participating FFI 
under Sec.  1.1471-3(d)(3). See paragraph (d)(2)(ii)(A) of this 
section.
    Example 2. Financial institution required to report U.S. 
account. U, a specified U.S. person, holds shares in PFFI1, a 
participating FFI that invests in other financial institutions (a 
fund of funds). The shares of PFFI1 are financial accounts under 
Sec.  1.1471-5(b)(3)(iii). PFFI1 holds shares that are also 
financial accounts under Sec.  1.1471-5(b)(3)(iii) in PFFI2, another 
participating FFI. The shares of PFFI2 held by PFFI1 are not subject 
to reporting by PFFI2, if PFFI2 may treat PFFI1 as a participating 
FFI under Sec.  1.1471-3(d)(3). See paragraph (d)(2)(ii)(A) of this 
section.
    Example 3. U.S. owned foreign entity. FC, an NFFE that is a 
passive NFFE, holds a custodial account with PFFI1, a participating 
FFI. U, a specified U.S. person, owns 3% of the only class of stock 
of FC. Q, another specified U.S. person, owns 12% of the only class 
of stock of FC. U is not a substantial U.S. owner of FC. See Sec.  
1.1473-1(b). Q is a substantial U.S. owner of FC and FC identifies 
her as such to PFFI1. PFFI1 does not elect to report under paragraph 
(d)(5) of this section. PFFI1 must complete and file the reporting 
form described in paragraph (d)(3)(v) of this section and report the 
information described in paragraph (d)(3)(iii) with respect to both 
FC and Q. See paragraph (d)(3)(ii) of this section.
    Example 4. Owner-documented FFI. DC, an FFI that is identified 
as an owner-documented FFI under Sec.  1.1471-3(d)(6), holds a 
custodial account with PFFI1, a participating FFI. U, a specified 
U.S. person, owns 3% of the only class of stock of DC. Q, another 
specified U.S. person, owns 12% of the only class of stock of DC. 
Both U and Q are treated as interest holders that are specified U.S. 
persons (see Sec.  1.1471-3(d)(6)) and DC identifies such owners to 
PFFI1 and otherwise provides to PFFI1 all of the information 
required to be reported with respect to DC's owners that are 
specified U.S. persons. PFF1 must complete and file a form described 
in paragraph (d)(3)(v) of this section with regard to U and Q. See 
paragraph (d)(3)(iii) of this section.
    Example 5. Election to perform Form 1099 reporting with regard 
to a non-financial foreign entity. Same facts as in Example 3, 
except that PFFI1 has made the election in accordance with paragraph 
(d)(5) of this section. PFFI1 must complete and file the forms 
described in paragraph (d)(5)(vi) for FC, treating FC as if it were 
an individual and citizen of the United States and shall identify Q 
as a substantial U.S. owner of FC on such form. See paragraph 
(d)(5)(ii) of this section. PFFI1 shall not complete the forms 
described in paragraph (d)(5)(vi) with regard to U and Q.
    Example 6. Election to perform Form 1099 reporting with regard 
to an owner-documented FFI. Same facts as in Example 4, except that 
PFFI1 has made the election in accordance with paragraph (d)(5) of 
this section. PFFI1 must complete and file the forms described in 
paragraph (d)(5)(vi) for U and Q.

    (e) Expanded affiliated group requirements--(1) In general. Except 
as otherwise provided in paragraphs (e)(2) and (e)(3) of this section, 
each FFI that is a member of an expanded affiliated group must obtain 
the status of either a participating FFI or registered deemed-compliant 
FFI as a condition for any member of such group to obtain the status of 
either a participating FFI or registered deemed-compliant FFI. 
Accordingly, except as otherwise provided in published guidance, each 
FFI in an expanded affiliated group must submit a registration form to 
the IRS in such manner as the IRS may prescribe requesting an FFI 
agreement or registered deemed-compliant status as a condition for any 
member to become either a participating FFI or registered deemed-
compliant FFI. Except as provided in paragraph (e)(2) of this section, 
each FFI that is a member of such group must also agree to all of the 
requirements for the status for which it applies with respect to all 
accounts maintained at all of its branches, offices, and divisions 
including, with respect to a participating FFI, the reporting of 
accounts that it is required to treat as U.S. accounts under paragraph 
(d) of this section, withholding on passthru payments under paragraph 
(b) of this section, and the closing of a U.S. account when the account 
holder does not provide within a reasonable period of time a valid and 
effective waiver of restrictions on reporting of such account.
    (2) Limited branches--(i) In general. An FFI that otherwise 
satisfies the requirements for participating FFI status as described in 
this section and the FFI agreement will be allowed to become a 
participating FFI notwithstanding that one or more of its branches 
cannot satisfy all of the requirements of the FFI agreement if--
    (A) All branches (as defined in paragraph (e)(2)(ii) of this 
section) that cannot satisfy all of the requirements of the FFI 
agreement are limited branches as described in paragraph (e)(2)(iii) of 
this section;
    (B) The FFI maintains at least one branch that can comply with all 
of the requirements of a participating FFI, even if the only branch 
that can comply is a U.S. branch; and
    (C) The FFI agrees to and complies with the conditions in paragraph 
(e)(2)(iv) of this section.
    (ii) Branch defined. For purposes of this section, a branch is a 
unit, business, or office of an FFI that is treated as a branch under 
the regulatory regime of a country or is otherwise regulated under the 
laws of such country as separate from other offices, units, or branches 
of the FFI and that maintains books and records separate from the books 
and records of other branches of the FFI. All units, businesses, or 
offices of a participating FFI in a single country shall be treated as 
a single branch for purposes of this paragraph (e)(2). An account will 
be treated as maintained by a branch for purposes of this paragraph 
(e)(2) if the rights and obligations of the account holder and the 
participating FFI with regard to such account (including any assets 
held in the account) are governed by the laws of the country of the 
branch. For purposes of this section, a branch includes units, 
businesses, and offices of an FFI located in the country in which the 
FFI is created or organized.
    (iii) Limited branch defined. A limited branch is a branch of an 
FFI that, under the laws of the jurisdiction as of February 15, 2012 
and that apply with respect to the accounts maintained by the branch, 
cannot either--
    (A) With respect to accounts that pursuant to this section and the 
FFI agreement it is required to treat as U.S. accounts, report such 
accounts to the IRS as described in paragraph (d) of this section, 
close such accounts within a reasonable period of time, or transfer 
such accounts to a branch of the FFI, a participating FFI member of the 
expanded affiliated group of the FFI, or another participating FFI that 
may so report; or
    (B) With respect to recalcitrant account holders and accounts held 
by nonparticipating FFIs, withhold with respect to each such account as 
required under paragraph (b) of this section, block each such account 
(as defined in the next sentence), close each such account within a 
reasonable period of time, or transfer each such account to another 
branch of the FFI or a participating FFI member of the expanded 
affiliated group of the FFI that is not subject to the restrictions 
described in this paragraph (e)(2)(iii)(B) with respect to such account 
holders. For purposes of this paragraph (e)(2)(iii)(B), an account is 
considered blocked when the FFI prohibits the account holder from 
effecting any transactions with respect to an account until such time 
as the account is closed, transferred, or the account holder provides 
the documentation described in paragraph (c) of this section for the 
FFI to determine the U.S. or non-U.S. status of the account.
    (iv) Conditions for limited branch status. An FFI with one or more 
limited branches must satisfy the following requirements when applying 
for participating FFI status with the IRS--

[[Page 9084]]

    (A) Identify the relevant jurisdiction of each branch for which it 
seeks limited branch status;
    (B) Agree that each such branch will identify its account holders 
under the due diligence requirements applicable to participating FFIs 
under paragraph (c) of this section, retain account holder 
documentation pertaining to those identification requirements for six 
years from the effective date of its FFI agreement, and report to the 
IRS with respect to accounts it is required to treat as U.S. accounts 
to the extent permitted under the relevant laws pertaining to the 
branch;
    (C) Agree to treat each such branch as an entity separate from its 
other branches for purposes of the withholding requirements described 
in paragraph (e)(2)(v) of this section;
    (D) Agree that each such branch will not open accounts that it is 
required to treat as U.S. accounts or accounts held by nonparticipating 
FFIs, including accounts transferred from any branch of the FFI that is 
not a limited branch or from any member of its expanded affiliated 
group; and
    (E) Agree that each limited branch will identify itself to 
withholding agents as a nonparticipating FFI (including affiliates of 
the FFI in the same expanded affiliated group that are withholding 
agents).
    (v) Withholding requirements applicable to limited branches. A 
participating FFI will be required to withhold on a withholdable 
payment when a branch of the FFI other than the limited branch receives 
the payment on behalf of a limited branch of the FFI. A branch of the 
FFI other than a limited branch will be considered to have received a 
withholdable payment on behalf of a limited branch when such other 
branch receives a withholdable payment with respect to a security or 
instrument it holds on behalf of a limited branch (or its account 
holders). A branch of an FFI other than a limited branch will also be 
considered to hold a security or instrument on behalf of a limited 
branch when it executes a transaction with a limited branch that hedges 
or otherwise provides total return exposure to another transaction 
between such other branch and a third party that gives rise to a 
withholdable payment.
    (vi) Term of limited branch status. An FFI that becomes a 
participating FFI with one or more limited branches will cease to be a 
participating FFI after December 31, 2015. A branch will cease to be a 
limited branch as of the beginning of the third calendar quarter 
following the date on which the branch is no longer prohibited from 
complying with the requirements of the FFI agreement. In such case, a 
participating FFI will retain its status as a participating FFI if it 
notifies the IRS, by the date such branch ceases to be a limited 
branch, that it will comply with the FFI agreement with respect to such 
branch.
    (3) Limited FFI affiliates--(i) In general. An FFI will be allowed 
to become either a participating FFI or a registered deemed-compliant 
FFI notwithstanding that one or more of the FFIs in the expanded 
affiliated group of which the FFI is a member cannot comply with all of 
the provisions of an FFI agreement if each such FFI is a limited FFI 
under paragraph (e)(3)(ii) of this section.
    (ii) Limited FFI. A limited FFI is a member of an expanded 
affiliated group that includes one or more participating FFIs that 
agrees to the conditions described in paragraph (e)(3)(iii) of this 
section to become a limited FFI and if under the laws of each 
jurisdiction that apply with respect to the accounts maintained by the 
affiliate, the affiliate cannot either--
    (A) With respect to accounts that pursuant to this section it is 
required to treat as U.S. accounts, report such accounts to the IRS as 
described in paragraph (d) of this section, close such accounts within 
a reasonable period of time, or transfer such accounts to an affiliate 
or other participating FFI that may so report; or
    (B) With respect to recalcitrant account holders and accounts held 
by nonparticipating FFIs, withhold with respect to each such account as 
required under paragraph (b) of this section, block each such account, 
close each such account within a reasonable period of time, or transfer 
each such account to an affiliate of the FFI that is a participating 
FFI. See paragraph (e)(2)(ii)(B) of this section for when an account is 
considered blocked.
    (iii) Conditions for limited FFI status. An FFI that seeks to 
become a limited FFI must--
    (A) Register as part of its expanded affiliated group's FFI 
agreement process for limited FFI status;
    (B) Agree as part of such registration to identify its account 
holders under the due diligence requirements applicable to 
participating FFIs under paragraph (c) of this section, retain account 
holder documentation pertaining to those identification requirements 
for six years from the effective date of its registration as a limited 
FFI, and report with respect to accounts that it is required to treat 
as U.S. accounts to the extent permitted under the relevant laws 
pertaining to the FFI;
    (C) Agree as part of such registration that it will not open 
accounts that it is required to treat as U.S. accounts or accounts held 
by nonparticipating FFIs, including accounts transferred from any 
member of its expanded affiliated group; and
    (D) Agree as part of such registration that it will identify itself 
to withholding agents as a nonparticipating FFI.
    (iv) Group member requirements. Participating and deemed-compliant 
FFIs that are members of an expanded affiliated group that includes one 
or more limited affiliates will be required to treat such limited FFIs 
as nonparticipating FFIs with respect to withholdable payments made to 
these affiliates. A participating FFI or deemed-compliant FFI will be 
considered to have made a withholdable payment to a limited FFI when 
the limited FFI receives a payment with respect to a transaction 
between the limited FFI and such FFI that is in the same expanded 
affiliated group and such transaction hedges or otherwise provides 
total return exposure to another transaction between such FFI and a 
third party that gives rise to a withholdable payment. A participating 
FFI or deemed-compliant FFI will also be considered to have made a 
withholdable payment to an affiliate that is a limited FFI if such FFI 
receives a withholdable payment with respect to a security or 
instrument held on behalf of a limited FFI.
    (v) Period for limited FFI status. A limited FFI will cease to be a 
limited FFI after December 31, 2015. An FFI will cease to be a limited 
FFI when it becomes a participating FFI or deemed-compliant FFI, or as 
of the beginning of the third calendar quarter following the date on 
which the FFI is no longer prohibited from complying with the 
requirements of the FFI agreement. In such case, participating and 
deemed-compliant FFIs that are members of the same expanded affiliated 
group will retain their status if, by the date that the FFI ceases to 
be a limited FFI, the FFI notifies the IRS that the FFI will comply 
with the FFI agreement.
    (4) Special rule for QIs. An FFI that has in effect a qualified 
intermediary agreement with the IRS will be allowed to become a limited 
FFI notwithstanding that none of the FFIs in the expanded affiliated 
group of which the FFI is a member can comply with the provisions of an 
FFI agreement if the FFI that is a qualified intermediary meets the 
conditions of a limited FFI under paragraph (e)(3)(ii) of this section.
    (f) Effective/applicability date. The rules of this section apply 
on [EFFECTIVE DATE OF FINAL RULE].

[[Page 9085]]

    Par. 7. Section 1.1471-5 is added to read as follows:


Sec.  1.1471-5  Definitions applicable to section 1471.

    (a) U.S. accounts--(1) In general. This paragraph (a) defines the 
term U.S. account and describes when a person is treated as the holder 
of a financial account. This paragraph also provides rules for 
determining when an exception to U.S. account status applies for 
certain depositary accounts and the account aggregation requirements 
relevant in applying that exception.
    (2) Definition of U.S. account. Subject to the exception described 
in paragraph (a)(4) of this section, a U.S. account is any financial 
account maintained by an FFI that is held by one or more specified U.S. 
persons or U.S. owned foreign entities. For a definition of the term 
financial account, see paragraph (b) of this section. For a definition 
of the term specified U.S. person, see Sec.  1.1473-1(c). For a 
definition of the term U.S. owned foreign entity, see paragraph (c) of 
this section. For reporting requirements of participating FFIs with 
respect to U.S. accounts, see Sec.  1.1471-4(d).
    (3) Account held by--(i) In general. Except as otherwise provided 
in this paragraph (a)(3), an account is held by the person listed or 
identified as the holder of such account with the FFI that maintains 
the account. An entity is treated as holding an account regardless of 
whether the entity is a flow-through entity. Thus, except as otherwise 
provided in paragraphs (a)(3)(ii) and (iii), if a trust (including a 
simple or grantor trust) or an estate is listed as the holder or owner 
of a financial account, the financial account shall be treated as held 
by the trust or estate itself rather than by its owners or 
beneficiaries. Similarly, except as otherwise provided in this 
paragraph (a)(3), if a partnership is listed as the holder or owner of 
a financial account, the financial account shall be treated as held by 
the partnership itself, rather than the partners in the partnership.
    (ii) Grantor trust. A trust shall not be treated as holding an 
account if a person is treated as the owner of the entire trust under 
sections 671 through 679. In that case, the account will be treated as 
held by the person who is treated as the owner of the trust under such 
sections. In the case of a person that is treated as the owner of a 
portion of the trust under sections 671 through 679--
    (A) If such person is treated as owning all the assets in the 
account under sections 671 through 679, the account will be treated as 
held by such person;
    (B) If such person is treated as owning a portion of the account or 
the assets in the account under sections 671 through 679, the account 
will be treated as held by both such person and the trust; and
    (C) If such person is not treated as owning any portion of the 
account or any of the assets in the account under sections 671 through 
679, the account will be treated as held by the trust.
    (iii) Financial accounts held by agents. A person, other than a 
financial institution, holding a financial account for the benefit or 
account of another person as an agent, custodian, nominee, signatory, 
investment advisor, or intermediary, is not treated as holding the 
account for purposes of this section, and such other person is treated 
as holding the account.
    (iv) Jointly held accounts. With respect to a jointly held account, 
each joint holder will be treated as holding the account for purposes 
of determining whether the account is a U.S. account. Thus, an account 
is a U.S. account if any of the holders is a specified U.S. person or a 
U.S. owned foreign entity and the account is not otherwise excepted 
from U.S. account status under paragraph (a)(4) of this section. In a 
case in which more than one U.S. person is a joint holder, each U.S. 
person will be treated as a holder of the account. See paragraph 
(a)(4)(ii) of this section for account aggregation rules applicable to 
jointly held accounts for purposes of determining the exception to U.S. 
account status under paragraph (a)(4)(i).
    (v) Holder of account for certain insurance contracts. For purposes 
of this section, an insurance or annuity contract that is a financial 
account as defined in paragraph (b) of this section is treated as held 
by the contract holder (that is, owner) if such person can access the 
cash value of the contract (for example, through a loan, withdrawal, or 
surrender) or change a beneficiary under the contract. However, if the 
contract holder cannot access the cash value or change a beneficiary, 
then the contract is treated as held by each beneficiary under the 
contract. Upon the maturity of the insurance or annuity contract, when 
the obligation to pay the benefit under the contract becomes fixed, the 
beneficiary is treated as the contract holder.
    (vi) Examples. The following examples illustrate the provisions of 
paragraph (a)(3) of this section:

    Example 1. Account held by agent. F, a nonresident alien, holds 
a power of attorney from U, a specified U.S. person, that authorizes 
F to open, hold, and make deposits and withdrawals with respect to a 
depository account on behalf of U. F is listed as the holder of a 
depository account at a participating FFI. However, F holds the 
account as an agent for the benefit of U. F is not ultimately 
entitled to the funds in the account. Therefore, the depository 
account is treated as held by U and such account is a U.S. account 
because it is held by a specified U.S. person.
    Example 2. Jointly held accounts. U, a specified U.S. person, 
holds a depository account in a participating FFI. The balance in 
the account at the end of the calendar year is $100,000. The account 
is jointly held with A, an individual who is a nonresident alien. 
Because one of the joint holders is a specified U.S person, the 
account is a U.S. account.
    Example 3. Jointly held accounts. U, a specified U.S. person, 
holds a depository account in a participating FFI. The balance in 
the account at the end of the calendar year is $100,000. The account 
is jointly held with Q, a specified U.S. person. The account is a 
U.S. account, and both U and Q are treated as holding a U.S. 
account.

    (4) Exceptions to U.S. account status--(i) Exception for certain 
individual accounts of participating FFIs. Unless a participating FFI 
elects under paragraph (a)(4)(iv) of this section not to have this 
paragraph (a)(4)(i) apply, the term U.S. account shall not include any 
account maintained by such financial institution during a calendar year 
if the conditions of paragraphs (a)(4)(i)(A), (B), and (C) of this 
section are met.
    (A) Depository accounts. The condition of this paragraph 
(a)(4)(i)(A) is met if the account is a depository account.
    (B) $50,000 threshold. The conditions of this paragraph 
(a)(4)(i)(B) are met if, with respect to each holder of such financial 
account, the aggregate balance or value of the financial account, and, 
to the extent required under paragraph (a)(4)(ii) of this section, all 
depository accounts held (in whole or in part) by the holder of the 
account does not exceed $50,000 as of the end of the calendar year or 
on the date the account is closed. For rules for determining the 
balance or value of financial accounts that apply for purposes of this 
paragraph (a)(4)(i), see Sec.  1.1471-4(d)(4)(iii).
    (C) Individual account holders. The condition of this paragraph 
(a)(4)(i)(C) is met if the account is held solely by one or more 
individuals.
    (ii) Aggregation requirements for exception. For purposes of 
determining whether the aggregate balance of depository accounts held 
by an individual exceeds $50,000 for purposes of applying the exception 
in this paragraph (a)(4)(i), an FFI will be required to take into 
account all depository accounts maintained by the FFI, or members of 
its expanded affiliated group, that are held (in whole or in part) by 
such individual, but only to the extent that the FFI's computerized

[[Page 9086]]

systems link the accounts by reference to a data element such as client 
number or a taxpayer identification number (including a TIN), and allow 
account balances of such accounts to be aggregated. Each holder of a 
jointly held depository account will be attributed the entire balance 
of the joint account for purposes of applying the aggregation 
requirements described in this paragraph (a)(4)(ii).
    (iii) Currency translation. To the extent that an account is 
denominated in a currency other than the U.S. dollar, the participating 
FFI must convert the dollar threshold amounts described in paragraph 
(a)(4)(i)(B) of this section into such currency using a spot rate 
determined under Sec.  1.988-1(d). The spot rate must be determined as 
of the last day of the calendar year with respect to which the FFI is 
determining the threshold amounts.
    (iv) Election to forgo exception. A participating FFI may elect to 
disregard the exception described in paragraph (a)(4)(i) of this 
section by reporting all U.S. accounts, including those accounts that 
would otherwise meet the exception described in paragraph (a)(4)(i) of 
this section.
    (v) Examples. The following examples illustrate the account 
aggregation requirements of paragraph (a)(4)(ii) of this section:

    Example 1. Aggregation rules for individual accounts. In Year 1, 
a U.S. resident individual, U, holds a depository account with CB, a 
commercial bank that is a participating FFI. The balance in U's CB 
account at the end of Year 1 is $35,000. In Year 1, U also holds a 
custodial account with CB's brokerage business. The custodial 
account has a $45,000 balance as of the end of Year 1. CB's retail 
banking and brokerage businesses share computerized information 
management systems that associate U's depository account and U's 
custodial account with U and with one another by reference to CB's 
internal identification number. The account balances of the accounts 
are automatically aggregated under such system. For purposes of 
applying the $50,000 threshold described in paragraph (a)(4)(i)(B) 
of this section, a depository account is aggregated only with other 
depository accounts. U's depository account is eligible for the 
paragraph (a)(4)(i) exception to U.S. account status, because its 
balance does not exceed $50,000.
    Example 2. Aggregation rules for individual accounts. In Year 1, 
a U.S. resident individual, U, holds a depository account with 
Branch 1 of CB, a commercial bank that is a participating FFI. The 
balance in U's CB account at the end of Year 1 is $35,000. In Year 
1, U also holds a depository account with Branch 2 of CB. The Branch 
2 account has a $45,000 balance at the end of Year 1. CB's retail 
banking businesses share computerized information management systems 
across its branches; however, U's accounts are not associated with 
one another in the shared computerized information system. Because 
the accounts are not associated in CB's system, both accounts are 
eligible for the paragraph (a)(4)(i) exception to U.S. account 
status as neither account exceeds the $50,000 threshold described in 
paragraph (a)(4)(i)(B) of this section.
    Example 3. Aggregation rules for individual accounts. Same facts 
as Example 2, except that both of U's depository accounts are 
associated with U and with one another by reference to CB's internal 
identification number. The system shows the account balances for 
both accounts, and such balances may be electronically aggregated; 
however, the system does not show a combined balance for the 
accounts. Because the balances can be aggregated under paragraph 
(a)(4)(ii) of this section, U is treated as holding financial 
accounts with CB with an aggregate balance of $80,000 for purposes 
of applying the $50,000 threshold described in paragraph 
(a)(4)(i)(B) of this section. Neither account is eligible for the 
paragraph (a)(4)(i) exception to U.S. account status, because they 
exceed, when aggregated, the $50,000 threshold described in 
paragraph (a)(4)(i)(B) of this section.
    Example 4. Aggregation rules for preexisting joint accounts. In 
Year 1, a U.S. resident individual, U, holds a depository account in 
commercial bank CB. The balance in U's CB depository account at the 
end of Year 1 is $35,000. U also holds a joint depository account 
with her sister, A, a nonresident alien for U.S. Federal income tax 
purposes, with another commercial bank, CB2. The balance in the 
joint account at the end of Year 1 is $35,000. CB and CB2 form part 
of the same expanded affiliated group and both share computerized 
information management systems. Both U's depository account in CB 
and U and A's depository account in CB2 are associated with U and 
with one another by reference to CB's internal identification 
number. Under paragraph (a)(4)(ii) U is treated as having financial 
accounts in the CB/CB2 financial institution with an aggregate 
balance of $70,000, and neither account is eligible for the 
paragraph (a)(4)(i) exception to U.S. account status because they 
exceed the $50,000 threshold described in paragraph (a)(4)(i)(B) of 
this section.

    (b) Financial accounts--(1) In general. Solely for purposes of 
chapter 4 of the Internal Revenue Code, the term financial account 
means--
    (i) Any depository account (as defined in paragraph (b)(3)(i) of 
this section) maintained by a financial institution (as defined in 
paragraph (e)(1) of this section);
    (ii) Any custodial account (as defined in paragraph (b)(3)(ii) of 
this section) maintained by a financial institution (as defined in 
paragraph (e)(1) of this section);
    (iii) Any equity or debt interest (other than interests that are 
regularly traded on an established securities market) in a financial 
institution that is described in paragraph (e)(1)(iii) of this section 
(and is not described in paragraph (e)(1)(i), (ii), or (iv) of this 
section). The term also includes any equity or debt interest (other 
than interests that are regularly traded on an established securities 
market) in a financial institution that is described in paragraphs 
(e)(1)(i), (ii), and (iv) of this section, but only if the value of the 
debt or equity interest is determined, directly or indirectly, 
primarily by reference to assets that give rise to withholdable 
payments. Any equity or debt interest that constitutes a financial 
account under this paragraph (b)(1)(iii) with respect to any financial 
institution shall be treated for purposes of section 1471 as maintained 
by such financial institution; or
    (iv) Any cash value insurance contract (as defined in paragraph 
(b)(3)(v) of this section) and any annuity contract issued or 
maintained by a financial institution (as defined in paragraph (e)(1) 
of this section).
    (2) Exceptions--(i) Certain savings accounts--(A) Retirement and 
pension accounts. A financial account does not include an account that 
satisfies the conditions of paragraph (b)(2)(i)(A)(1) or (2) of this 
section.
    (1) The account is held by a retirement or pension fund that meets 
the requirements of paragraph (f)(2)(ii) of this section.
    (2) The account is subject to government regulation as a personal 
retirement account or is registered or regulated as an account for the 
provision of retirement or pension benefits under the laws of the 
country in which the FFI that maintains the account is established or 
in which it operates, and meets the following requirements--
    (i) The account is tax-favored with regard to the jurisdiction in 
which the account is maintained;
    (ii) All of the contributions to the account are employer, 
government, or employee contributions that are limited by reference to 
earned income under the law of the jurisdiction in which the account is 
maintained; and
    (iii) Annual contributions (other than transfers from other 
accounts described in this paragraph (b)(2)(i)(A) or plans described in 
paragraph (f)(2)(ii) of this section or Sec.  1.1471-6(f)) are limited 
to $50,000 or less, and limits or penalties apply by law of the 
jurisdiction in which the account is maintained to withdrawals made 
before reaching a specified retirement age and to annual contributions 
exceeding $50,000 (other than transfers from other accounts described 
in this paragraph (b)(2)(i)(A) or plans described in paragraph 
(f)(2)(ii) of this section or Sec.  1.1471-6(f)).

[[Page 9087]]

    (B) Non-retirement savings accounts. A financial account does not 
include an account that is tax-favored with regard to the jurisdiction 
in which the account is maintained, subject to government regulation as 
a savings vehicle for purposes other than for retirement, and the 
following conditions are also satisfied--
    (1) Contributions to such account are limited by reference to 
earned income;
    (2) Annual contributions are limited to $50,000 or less under the 
law of the jurisdiction in which the account is maintained;
    (3) Limits or penalties apply on withdrawals made before specific 
criteria are met under the law of the jurisdiction in which the account 
is maintained; and
    (4) Limits or penalties apply by law of the jurisdiction in which 
the account is maintained to contributions exceeding the limit 
described in paragraph (b)(2)(i)(B)(2) of this section.
    (C) Currency translation. To the extent that an account is 
denominated in a currency other than the U.S. dollar, the participating 
FFI must convert the dollar threshold amounts described in paragraphs 
(b)(2)(i)(A)(3)(i) and (b)(2)(i)(B)(2) of this section into such 
currency using a spot rate determined under Sec.  1.988-2(d). The spot 
rate must be determined as of the last day of the calendar year 
preceding the year in which the FFI is determining whether an account 
meets such threshold amount.
    (D) Rollovers. A financial account that otherwise satisfies any of 
the requirements of this paragraph (b)(2)(i) will not fail to satisfy 
such requirements solely because such financial account may receive 
assets or funds transferred from one or more financial accounts that 
meet the requirements of any of paragraph (b)(2)(i)(A) or (B) of this 
section or from one or more retirement or pension funds that meet the 
requirements of paragraph (f)(2)(ii) of this section or Sec.  1.1471-
6(f).
    (E) Coordination with section 6038D. The exclusions provided under 
paragraph (b)(2)(i) of this section shall not apply for purposes of 
determining whether an account or other arrangement is a financial 
account for purposes of section 6038D.
    (F) Account that is tax-favored. For purposes of this paragraph 
(b)(2), an account is tax-favored if contributions to the account that 
would otherwise be subject to tax under the laws of the jurisdiction 
where the account is maintained are deductible or excluded from gross 
income of the account holder or if the taxation of investment income 
from the account is deferred under the laws of such jurisdiction, or 
both.
    (ii) Term life insurance contracts. The term financial account does 
not include a life insurance contract, other than a contract held by a 
transferee for value under section 101(a)(2) (determined without regard 
to section 101(a)(2)(A) or (B)), if equal periodic premiums are payable 
annually or more frequently during the period the contract is in 
existence, and the amount payable upon termination of the contract 
prior to the death of the insured cannot exceed the aggregate premiums 
paid for the contract, less mortality, morbidity, and expense charges 
(whether actually imposed or not) for the period or periods of the 
contract's existence.
    (iii) Account held by exempt beneficial owner. The term financial 
account does not include any financial account described in paragraph 
(b)(1) of this section that is held solely by one or more exempt 
beneficial owners described in Sec.  1.1471-6 or by nonparticipating 
FFIs holding the account as intermediaries solely on behalf of one or 
more such owners.
    (3) Definitions. The following definitions apply for purposes of 
chapter 4 of the Internal Revenue Code--
    (i) Depository account. The term depository account means--
    (A) A commercial, checking, savings, time, or thrift account, or an 
account which is evidenced by a certificate of deposit, thrift 
certificate, investment certificate, certificate of indebtedness, or 
other similar instrument; and
    (B) Any amount held by an insurance company under an agreement to 
pay or credit interest thereon.
    (ii) Custodial account. The term custodial account means an account 
for the benefit of another person that holds any financial instrument 
or contract held for investment (including, but not limited to, a 
depository account, a share or stock in a corporation, a note, bond, 
debenture, or other evidence of indebtedness, a currency or commodity 
transaction, a credit default swap, a swap based upon a nonfinancial 
index, a notional principal contract as defined in Sec.  1.446-3(c), an 
insurance or annuity contract, and any option or other derivative 
instrument).
    (iii) Equity interest in certain entities. In the case of a 
partnership that is a financial institution, the term equity interest 
means either a capital or profits interest in the partnership. In the 
case of a trust that is a financial institution, an equity interest 
means either an interest held by a person treated as an owner of all or 
a portion of the trust under sections 671 through 679 or a person 
holding a beneficial interest in the trust that is described in Sec.  
1.1473-1(b)(3).
    (iv) Regularly traded on an established securities market. Debt or 
equity interests described in paragraph (b)(1)(iii) are regularly 
traded on an established securities market (as defined in Sec.  1.1472-
1(c)(1)(i)(C)) if--
    (A) Trades in such interests are effected, other than in de minimis 
quantities, on such market or markets on at least 60 days during the 
prior calendar year; and
    (B) The aggregate number of such interests that were traded on such 
market or markets during the prior calendar year was at least ten 
percent of the average number of such interests outstanding during the 
prior calendar year.
    (v) Cash value insurance contracts--(A) In general. Except as 
otherwise provided in paragraph (b)(3)(v)(B) or (C) of this section, 
the term cash value insurance contract means an insurance contract that 
has a ``cash value'' (as defined in paragraphs (b)(3)(v)(B) and (C) of 
this section) greater than zero. A term life insurance contract 
described in paragraph (b)(2)(ii) is not a cash value insurance 
contract.
    (B) Cash value. Except as otherwise provided in paragraph 
(b)(3)(v)(C), the term cash value means the greater of--
    (1) The amount that the policyholder is entitled to receive upon 
surrender or termination of the contract (determined without reduction 
for any surrender charge or policy loan), and
    (2) The amount the policyholder can borrow under or with regard to 
the contract.
    (C) Amounts excluded from cash value. Cash value does not include 
an amount payable under an insurance contract as--
    (1) A personal injury or sickness benefit or a benefit providing 
indemnification of an economic loss incurred upon the occurrence of the 
event insured against;
    (2) A refund to the policyholder of a previously paid premium under 
an insurance contract (other than under a life insurance or annuity 
contract) due to policy cancellation, decrease in risk exposure during 
the effective period of the insurance contract, or arising from a 
redetermination of the premium due to correction of posting or other 
similar error; or
    (3) A policyholder dividend (as defined in section 808 but without 
regard to paragraph (b)(2) of that section) provided such dividend is 
not a termination dividend, and relates to either a term life insurance 
contract described in paragraph (b)(2)(ii) of this

[[Page 9088]]

section or an insurance contract under which the only benefit payable 
is described in paragraph (b)(3)(v)(C)(1).
    (c) U.S. owned foreign entity--(1) In general. The term United 
States owned foreign entity (or U.S. owned foreign entity) means any 
foreign entity that has one or more substantial U.S. owners (as defined 
in Sec.  1.1473-1(b)). See Sec.  1.1473-1(e) for the definition of 
foreign entity for purposes of chapter 4 of the Internal Revenue Code.
    (2) Owner-documented FFI treated as U.S. owned foreign entity. An 
FFI that is treated as an owner-documented FFI under Sec.  1.1471-
3(d)(7) and that has one or more direct or indirect owners that are 
specified U.S. persons (as defined in Sec.  1.1473-1(c)) shall be 
treated as a U.S. owned foreign entity by a participating FFI 
maintaining an account for such documented FFI for purposes of 
reporting with respect to its U.S. accounts as described in Sec.  
1.1471-4(d). For the requirements applicable to determining direct and 
indirect ownership in an entity, see Sec.  1.1473-1(b)(2).
    (d) Definition of FFI. The term FFI means any financial institution 
(as defined in paragraph (e) of this section) that is a foreign entity. 
A territory financial institution is not an FFI under this paragraph 
(d).
    (e) Definition of a financial institution--(1) In general. Except 
as otherwise provided in paragraph (e)(5), the term financial 
institution means any entity that--
    (i) Accepts deposits in the ordinary course of a banking or similar 
business (as defined in paragraph (e)(2) of this section);
    (ii) Holds, as a substantial portion of its business (as defined in 
paragraph (e)(3) of this section), financial assets for the account of 
others;
    (iii) Is engaged (or holding itself out as being engaged) primarily 
(as defined in paragraph (e)(4) of this section) in the business of 
investing, reinvesting, or trading in securities (as defined in section 
475(c)(2) without regard to the last sentence thereof), partnership 
interests, commodities (as defined in section 475(e)(2)), notional 
principal contracts (as defined in Sec.  1.446-3(c)), insurance or 
annuity contracts, or any interest (including a futures or forward 
contract or option) in such security, partnership interest, commodity, 
notional principal contract, insurance contract, or annuity contract; 
or
    (iv) Is an insurance company (or the holding company of an 
insurance company) that issues or is obligated to make payments with 
respect to a financial account under paragraph (b)(1) of this section.
    (2) Banking or similar business--(i) In general. An entity is 
considered to be engaged in a banking or similar business if, in the 
ordinary course of its business with customers, the entity engages in 
one or more of the following activities--
    (A) Accepts deposits of funds;
    (B) Makes personal, mortgage, industrial, or other loans;
    (C) Purchases, sells, discounts, or negotiates accounts receivable, 
installment obligations, notes, drafts, checks, bills of exchange, 
acceptances, or other evidences of indebtedness;
    (D) Issues letters of credit and negotiates drafts drawn 
thereunder;
    (E) Provides trust or fiduciary services;
    (F) Finances foreign exchange transactions;
    (G) Enters into, purchases, or disposes of finance leases or leased 
assets; or
    (H) Provides charge and credit card services.
    (ii) Application of section 581. Entities engaged in a banking or 
similar business include, but are not limited to, entities that would 
qualify as banks under section 585(a)(2) (including banks as defined in 
section 581 and any corporation to which section 581 would apply except 
for the fact that it is a foreign corporation).
    (iii) Effect of local regulation. Whether an entity is subject to 
the banking and credit laws of a foreign country, the United States, a 
State, a possession of the United States, or a subdivision thereof, or 
is subject to supervision and examination by agencies having regulatory 
oversight of banking or similar institutions, is relevant to but not 
necessarily determinative of whether that entity qualifies as a 
financial institution under section 1471(d)(5)(A). Whether an entity 
conducts a banking or similar business is determined based upon the 
character of the actual activities of such entity.
    (3) Holding financial assets as a substantial portion of its 
business--(i) Substantial portion. An entity holds financial assets for 
the account of others as a substantial portion of its business if the 
entity's gross income attributable to the holding of financial assets 
and related financial services equals or exceeds 20 percent of the 
entity's gross income during the shorter of--
    (A) The three-year period ending on December 31 of the year in 
which the determination is made; or
    (B) The period during which the entity has been in existence.
    (ii) Effect of local regulation. Whether an entity is subject to 
the banking and credit, broker-dealer, fiduciary or other similar laws 
and regulations of the United States, a State, a possession of the 
United States, a political subdivision thereof, or a foreign country, 
or to supervision and examination by agencies having regulatory 
oversight of banking or other financial institutions, is relevant to 
but not necessarily determinative of whether that entity holds 
financial assets for the account of others as a substantial portion of 
its business.
    (4) In the business of investing, reinvesting, and trading. An 
entity is engaged primarily in the business of investing, reinvesting, 
or trading if the entity's gross income attributable to such activities 
equals or exceeds 50 percent of the entity's gross income during the 
shorter of--
    (A) The three-year period ending on December 31 of the year in 
which the determination is made, or
    (B) The period during which the entity has been in existence.
    (5) Exclusions. Entities described in any of paragraphs (e)(5)(i) 
through (v) of this section are excluded from the definition of a 
financial institution under paragraph (e)(1) of this section and are 
excepted NFFEs under Sec.  1.1472-1(c)(1)(v).
    (i) Certain nonfinancial holding companies. An entity is described 
in this paragraph (e)(5)(i) if it is a foreign entity substantially all 
of the activities of which is to own (in whole or in part) the 
outstanding stock of one or more subsidiaries that engage in trades or 
businesses, provided that no such subsidiary is a financial institution 
(as defined in this paragraph (e)). An entity is not described in this 
paragraph (e)(5)(i) if the entity functions (or holds itself out) as an 
investment fund, such as a private equity fund, venture capital fund, 
leveraged buyout fund or any investment vehicle whose purpose is to 
acquire or fund companies and then hold interests in those companies as 
capital assets for investment purposes.
    (ii) Certain start-up companies. An entity is described in this 
paragraph (e)(5)(ii) if it is a foreign entity that is not yet 
operating a business and has no prior operating history, but is 
investing capital into assets with the intent to operate a business 
other than that of a financial institution. This exclusion expires 24 
months after the initial organization of such entity, and after such 
time, the foreign entity will no longer qualify for this exception for 
start-up companies. An entity is not described in this paragraph 
(e)(5)(ii) if the entity functions (or holds itself out) as an 
investment fund, such as a private equity fund, venture capital fund, 
leveraged buyout fund, or any investment vehicle whose purpose is to 
acquire or fund companies and then

[[Page 9089]]

hold interests in those companies as capital assets for investment 
purposes.
    (iii) Nonfinancial entities that are liquidating or emerging from 
reorganization or bankruptcy. An entity is described in this paragraph 
(e)(5)(iii) if it is a foreign entity that was not a financial 
institution under this paragraph (e) in the past five years and is in 
the process of liquidating its assets or is reorganizing with the 
intent to continue or recommence operations as a nonfinancial entity.
    (iv) Hedging/financing centers of a nonfinancial group. An entity 
is described in this paragraph (e)(5)(iv) if it is a foreign entity 
that primarily engages in financing and hedging transactions with or 
for members of its expanded affiliated group that are not financial 
institutions and that does not provide financing or hedging services to 
non-affiliates, provided that the expanded affiliated group is 
primarily engaged in a business other than that of a financial 
institution under this paragraph (e).
    (v) Section 501(c) entities. An entity is described in this 
paragraph (e)(5)(v) if it is a foreign entity that is described in 
section 501(c).
    (f) Deemed-compliant FFIs. The term deemed-compliant FFI includes a 
registered deemed-compliant FFI (as defined in paragraph (f)(1) of this 
section), a certified deemed-compliant FFI (as defined in paragraph 
(f)(2) of this section), and, to the extent provided in paragraph 
(f)(3) of this section, an owner-documented FFI (as defined in 
paragraph (f)(3) of this section). The term also includes any FFI that 
is described in guidance published in the Federal Register or the 
Internal Revenue Bulletin. A deemed-compliant FFI will be treated 
pursuant to section 1471(b)(2) as having met the requirements of 
section 1471(b).
    (1) Registered deemed-compliant FFIs. A registered deemed-compliant 
FFI means an FFI described in any of paragraphs (f)(1)(i)(A) through 
(E) of this section that has met the procedural requirements described 
in paragraph (f)(1)(ii) of this section. A registered deemed-compliant 
FFI also includes any FFI that is deemed to comply with the 
requirements of section 1471(b) pursuant to an agreement between the 
government of the United States and a foreign government.
    (i) Registered deemed-compliant FFI categories--(A) Local FFIs. An 
FFI is described in this paragraph (f)(1)(i)(A) if the FFI meets the 
requirements of paragraphs (f)(1)(i)(A)(1) through (8).
    (1) The FFI must be licensed and regulated under the laws of its 
country of organization (which must be FATF-compliant at the time the 
FFI registers for deemed-compliant status) as a bank or similar 
organization authorized to accept deposits in the ordinary course of 
its business, a securities broker or dealer, or a financial planner or 
investment adviser, but must not qualify as an FFI solely because it is 
an entity described in paragraph (e)(1)(iii) of this section.
    (2) The FFI must have no fixed place of business outside its 
country of incorporation or organization.
    (3) The FFI must not solicit account holders outside its country of 
incorporation or organization. For this purpose, an FFI will not be 
considered to have solicited account holders outside of its country of 
organization merely because it operates a Web site, provided that the 
Web site does not specifically state that nonresidents may hold deposit 
accounts with the FFI, does not advertise the availability of U.S. 
dollar denominated deposit accounts or other U.S. dollar denominated 
investments, and does not target U.S. customers.
    (4) The FFI must be required under the tax laws of the country in 
which the FFI is incorporated or organized to perform either 
information reporting or withholding of tax with respect to accounts 
held by residents.
    (5) At least 98 percent of the accounts maintained by the FFI must 
be held by residents (including residents that are entities) of the 
country in which the FFI is organized. An FFI which is organized in an 
EU member state may treat account holders that are residents (including 
corporate residents) of other EU member states as residents of the 
country in which the FFI is incorporated or organized for purposes of 
this calculation.
    (6) On or before the date it registers as a deemed-compliant FFI, 
the FFI must implement policies and procedures to ensure that it does 
not open or maintain accounts for any specified U.S. person who is not 
a resident of the country in which the FFI is organized (including a 
U.S. person that was a resident when the account was opened but 
subsequently ceases to be a resident), a nonparticipating FFI, or any 
entity controlled or beneficially owned (as determined under the FFI's 
AML due diligence) by a specified U.S. person.
    (7) With respect to each account that is held by an individual who 
is not a resident of the country in which the FFI is organized or by an 
entity, and that is opened after December 31, 2011, and prior to the 
date that the FFI implements the policies and procedures described in 
paragraph (f)(1)(i)(A)(6), the FFI must review those accounts in 
accordance with the procedures described in Sec.  1.1471-4(c) 
applicable to preexisting accounts to identify any U.S. account or 
account held by a nonparticipating FFI, and must certify to the IRS 
that it did not identify any such account as a result of its review, 
that it has closed any such accounts that were identified, or that it 
agrees to withhold and report on such accounts as would be required 
under Sec.  1.1471-4(b) or (d) if it were a participating FFI.
    (8) In the case of an FFI that is a member of an expanded 
affiliated group, each member of the expanded affiliated group must be 
incorporated or organized in the same country, must meet the 
requirements set forth in this paragraph (f)(1)(i)(A), and must meet 
the procedural requirements of paragraph (f)(1)(ii) of this section.
    (B) Nonreporting members of participating FFI groups. An FFI that 
is a member of a participating FFI group is described in this paragraph 
(f)(1)(i)(B) if it meets the requirements of paragraphs (f)(1)(i)(B)(1) 
through (4) of this section.
    (1) The FFI must review its accounts that were opened prior to the 
date it implements the policies and procedures described in paragraph 
(f)(1)(i)(B)(3) of this section, in accordance with the procedures 
described in Sec.  1.1471-4(c) applicable to preexisting accounts to 
identify any U.S. account or account held by a nonparticipating FFI.
    (2) If any account described in paragraph (f)(1)(i)(B)(1) of this 
section is identified, the FFI must, within 90 days after 
identification of the account, enter into an FFI agreement, transfer 
the account to an affiliate that is a participating FFI or U.S. 
financial institution, or close the account.
    (3) On or before the date it registers with the IRS pursuant to 
paragraph (f)(1)(ii) of this section, the FFI must implement policies 
and procedures to ensure that if it opens any of the accounts described 
in paragraph (f)(1)(i)(B)(1) of this section, it either transfers any 
such accounts to an affiliate that is a participating FFI or U.S. 
financial institution or becomes a participating FFI itself, in either 
case within 90 days of having opened the account.
    (4) The FFI must implement policies and procedures to ensure that 
it identifies any account which becomes an account described in 
paragraph (f)(1)(i)(B)(1) of this section due to a change in 
circumstances and it either transfers such account to an affiliate that 
is a participating FFI or U.S. financial institution or becomes a 
participating FFI itself, in either case within 90 days

[[Page 9090]]

after the date on which the FFI first has knowledge or reason to know 
of the change in the account holder's chapter 4 status.
    (C) Qualified collective investment vehicles. An FFI is described 
in this paragraph (f)(1)(i)(C) if it meets the requirements of 
paragraphs (f)(1)(i)(C)(1) through (3).
    (1) The FFI must be an FFI solely because it is described in 
paragraph (e)(1)(iii) of this section, and must be regulated in its 
country of incorporation or organization as an investment fund.
    (2) Each holder of record of direct debt interests in excess of 
$50,000 or equity interests in the FFI (for example the holders of its 
units or global certificates) or any other account holder of a 
financial account with the FFI must a be participating FFI, registered 
deemed-compliant FFI, U.S. person described in any of Sec.  1.1473-
1(c)(1) through (12), or exempt beneficial owner.
    (3) In the case of an FFI that is part of an expanded affiliated 
group, all other FFIs in the expanded affiliated group must be either 
participating FFIs or registered deemed-compliant FFIs.
    (D) Restricted Funds. An FFI is described in this paragraph (D) if 
it meets the requirements of paragraphs (f)(1)(i)(D)(1) through (7) of 
this section.
    (1) The FFI must be an FFI solely because it is described in 
paragraph (e)(1)(iii) of this section, and must be regulated as an 
investment fund under the laws of its country of incorporation or 
organization (which must be FATF-compliant at the time the FFI 
registers for deemed-compliant status). In addition, interests in the 
FFI may only be sold through distributors described in paragraph 
(f)(1)(i)(D)(2) of this section or redeemed directly by the restricted 
fund.
    (2) Each distributor of the FFI's interests must be a participating 
FFI, a registered deemed-compliant FFI, a nonregistering local bank 
described in paragraph (f)(2)(i) of this section, or a restricted 
distributor described in paragraph (f)(4) of this section. For purposes 
of this paragraph (f)(1)(i)(D) and paragraph (f)(4) of this section, a 
distributor means an underwriter, broker, dealer, or other person who 
participates, pursuant to a contractual arrangement, in the 
distribution of securities.
    (3) The FFI must ensure that each agreement that governs the 
distribution of its debt or equity interests prohibits sales of debt or 
equity interests in the FFI to U.S. persons, nonparticipating FFIs, or 
passive NFFEs with one or more substantial U.S. owners (other than 
interests which are both distributed by and held through a 
participating FFI), and the FFI's prospectus and all marketing 
materials must indicate that sales of interests in the FFI to U.S. 
persons, nonparticipating FFIs, or NFFEs with one or more substantial 
U.S. owners (other than interests which are both distributed by and 
held through a participating FFI) are prohibited.
    (4) The FFI must ensure that each agreement that governs the 
distribution of its debt or equity interests requires the distributor 
to notify the FFI of a change in the distributor's chapter 4 status 
within 90 days of the change. The FFI must certify to the IRS that, 
with respect to any distributor that ceases to qualify as a 
participating FFI, a registered deemed-compliant FFI, a nonregistering 
local bank described in paragraph (f)(2)(i) of this section, or a 
restricted distributor described in paragraph (f)(4) of this section, 
the FFI will terminate its distribution agreement with the distributor 
within 90 days of notification of the distributor's change in status 
and will acquire or redeem all debt and equity interests of the FFI 
issued through that distributor within six months of the distributor's 
change in status.
    (5) With respect to any of the FFI's preexisting direct accounts 
(that is, accounts that are held directly by the ultimate investors), 
the FFI must review those accounts in accordance with the procedures 
described in Sec.  1.1471-4(c) applicable to preexisting accounts to 
identify any U.S. account or account held by a nonparticipating FFI. 
Notwithstanding the previous sentence, the FFI will not be required to 
review the account of any individual investor that purchased its 
interest at a time when all of the FFI's distribution agreements and 
its prospectus contained an explicit prohibition of the issuance of 
shares to U.S. entities and U.S. resident individuals. The FFI will be 
required to certify to the IRS either that it did not identify any such 
account as a result of its review or, if any such accounts were 
identified, that the FFI will either redeem any such account, or will 
withhold and report on such accounts as would be required under Sec.  
1.1471-4(b) and (d) if it were a participating FFI.
    (6) On or before the date that it registers as a deemed-compliant 
FFI, the FFI must implement the policies and procedures described in 
Sec.  1.1471-4(c) for identifying account holders with respect to 
direct account holders to ensure that it either--
    (i) Does not open or maintain an account for any specified U.S. 
person, nonparticipating FFI, or passive NFFE with one or more 
substantial U.S. owners; or
    (ii) Closes any account for any person described in paragraph 
(f)(1)(i)(D)(6)(i) within 90 days of the date that the account was 
opened or the date that the FFI had reason to know the account holder 
became a person described in paragraph (f)(1)(i)(D)(6)(i) of this 
section, or withholds and reports on such account as would be required 
under Sec.  1.1471-4(b) and (d) if it were a participating FFI.
    (7) For an FFI that is part of an expanded affiliated group, all 
other FFIs in the expanded affiliated group must be either 
participating FFIs or registered deemed-compliant FFIs.
    (ii) Procedural requirements for registered deemed-compliant FFIs. 
A registered deemed-compliant FFI may use one or more agents to perform 
the necessary due diligence with respect to identifying its account 
holders and to take any required action associated with obtaining and 
maintaining its deemed-compliant status. However, the FFI remains 
responsible for ensuring that the requirements for its deemed-compliant 
status are met. Unless otherwise provided in this section, a registered 
deemed-compliant FFI will be required to--
    (A) Have its chief compliance officer or an individual of 
equivalent standing with the FFI certify to the IRS in such a manner as 
the IRS specifies that all of the requirements for the deemed-compliant 
category claimed by the FFI have been satisfied as of the date the FFI 
registers as a deemed-compliant FFI;
    (B) Obtain from the IRS a confirmation of its registration as a 
deemed-compliant FFI and an FFI-EIN;
    (C) Agree that if it chooses to publish a passthru payment 
percentage, it will do so in accordance with the procedures set forth 
in Sec.  1.1471-5(h);
    (D) Renew its certification every three years; and
    (E) Agree to notify the IRS if there is a change in circumstances 
which would make the FFI ineligible for the deemed-compliant status for 
which it has registered.
    (iii) Deemed-compliant FFI that is merged or acquired. An FFI which 
has registered as a deemed-compliant FFI under paragraph (f)(1) of this 
section but subsequently ceases to qualify for deemed-compliant status 
under its existing category because it is merged into or is acquired by 
another participating FFI or participating FFI group, will be required 
to notify the IRS and must complete a new registration with the IRS as 
a participating FFI or a deemed-compliant FFI. A deemed-compliant FFI 
that becomes a participating FFI or a member of a participating FFI 
group as a result of a

[[Page 9091]]

merger or acquisition will not be required to redetermine the chapter 4 
status of any account maintained by the FFI prior to the date of the 
merger or acquisition unless that account has a subsequent change in 
circumstances.
    (2) Certified deemed-compliant FFIs. A certified deemed-compliant 
FFI means an FFI described in any of paragraphs (f)(2)(i) through (iv) 
of this section that has certified as to its status as a deemed-
compliant FFI by providing a withholding agent with the documentation 
described in Sec.  1.1471-3(d)(6) or (7) applicable to the relevant 
deemed-compliant category. A certified deemed-compliant FFI is not 
required to register with the IRS.
    (i) Nonregistering local bank. An FFI is described in this 
paragraph (f)(2)(i) if the FFI meets the requirements of paragraphs 
(f)(2)(i)(A) through (F).
    (A) The FFI must operate and be licensed solely as a bank (within 
the meaning of section 581, determined as if the FFI were incorporated 
in the United States) in its country of incorporation or organization 
and engage primarily in the business of making loans and taking 
deposits from unrelated retail customers.
    (B) The FFI must be licensed to conduct business in its country of 
incorporation or organization and must have no fixed place of business 
outside such country.
    (C) The FFI must not solicit account holders outside its country of 
organization. For this purpose, an FFI will not be considered to have 
solicited account holders outside of its country of organization merely 
because it operates a Web site, provided that the Web site does not 
specifically state that nonresidents may hold deposit accounts with the 
FFI, advertise the availability of U.S. dollar denominated deposit 
accounts or other investments, or target U.S. customers.
    (D) The FFI must have no more than $175 million in assets on its 
balance sheet and, if the FFI is a member of an expanded affiliated 
group, the group may have no more than $500 million in total assets on 
its consolidated or combined balance sheets.
    (E) The FFI must be required under the tax laws of the country in 
which the FFI is organized to perform either information reporting or 
withholding of tax with respect to resident accounts. An FFI that is 
not subject to such information reporting or withholding requirements 
will be considered to meet this requirement if all of the accounts 
maintained by the FFI have a value or account balance of $50,000 or 
less, taking into account the account aggregation rules set forth in 
Sec.  1.1471-4(c)(4).
    (F) With respect to an FFI that is part of an expanded affiliated 
group, each FFI in the expanded affiliated group must be incorporated 
or organized in the same country and must meet the requirements set 
forth in this paragraph (f)(2)(i).
    (ii) Retirement funds--(A) Requirements. An FFI is described in 
this paragraph (f)(2)(ii) if the FFI is organized for the provision of 
retirement or pension benefits under the law of the country in which it 
is established or in which it operates and meets the requirements 
described in paragraph (f)(2)(ii)(A)(1) or (2).
    (1) An FFI meets the requirements of this paragraph 
(f)(2)(ii)(A)(1) if--
    (i) All contributions to the FFI (other than transfers of assets 
from accounts described in paragraph (b)(2)(i)(A) of this section or 
other plans described in this paragraph (f)(2)(ii) or Sec.  1.1471-
6(f)) are employer, government, or employee contributions that are 
limited by reference to earned income;
    (ii) No single beneficiary has a right to more than five percent of 
the FFI's assets; and
    (iii) Contributions to the FFI that would otherwise be subject to 
tax under the laws of the jurisdiction where the FFI is established or 
operates are deductible or excluded from gross income of the 
beneficiary, the taxation of investment income attributable to the 
beneficiary is deferred under the laws of such jurisdiction, or 50 
percent or more of the total contributions to the FFI (other than 
transfers of assets from other plans described in this paragraph 
(f)(2)(ii) or Sec.  1.1471-6(f)) are from the government and the 
employer;
    (2) An FFI meets the requirements of this paragraph 
(f)(2)(ii)(A)(2) if--
    (i) The FFI has fewer than 20 participants;
    (ii) The FFI is sponsored by an employer that is not an FFI 
described in paragraph (e)(1)(iii) of this section or passive NFFE;
    (iii) Contributions to the FFI (other than transfers of assets from 
other plans described in paragraph (f)(2)(ii) of this section, or Sec.  
1.1471-6(f)) are limited by reference to earned income;
    (iv) Participants that are not residents of the country in which 
the FFI is organized are not entitled to more than 20 percent of the 
FFI's assets; and
    (v) No participant that is not a resident of the country in which 
the FFI is organized is entitled to more than $250,000 of the FFI's 
assets.
    (B) Example.

    Example 1. FC, a State F foreign corporation, instituted a 
retirement plan for its current and former employees. The plan is 
organized under State F law for the provision of retirement or 
pension benefits and contributions to the plan are excluded from 
beneficiaries' income under State F law. The only contributions 
allowed to be made to the plan are contributions that FC's employees 
make based on a percentage of their compensation income, and such 
contributions (as well as earnings on such contributions) are 
credited to the employee's account. FC does not make contributions 
to the plan. Retirement benefits will reflect the amounts credited 
to the individual accounts. No single beneficiary is entitled to 
more than 5% of the trust's assets. The plan meets the requirements 
of paragraph (f)(2)(ii)(A)(1) of this section because contributions 
are limited by reference to earned income, all contributions to the 
plan are employee contributions, no single beneficiary has a right 
to more than 5% of the plan's assets, and contributions to the plan 
are excluded from the gross income of the beneficiaries.

    (iii) Non-profit organizations. An FFI is described in this 
paragraph (f)(2)(iii) if the FFI meets the following requirements:
    (1) The FFI is established and maintained in its country of 
residence exclusively for religious, charitable, scientific, artistic, 
cultural or educational purposes;
    (2) The FFI is exempt from income tax in its country of residence;
    (3) The FFI has no shareholders or members who have a proprietary 
or beneficial interest in its income or assets;
    (4) The applicable laws of the FFI's country of residence or the 
FFI's formation documents do not permit any income or assets of the FFI 
to be distributed to, or applied for the benefit of, a private person 
or noncharitable FFI other than pursuant to the conduct of the FFI's 
charitable activities, or as payment of reasonable compensation for 
services rendered, or as payment representing the fair market value of 
property which the FFI has purchased; and
    (5) The applicable laws of the FFI's country of residence or the 
FFI's formation documents require that, upon the FFI's liquidation or 
dissolution, all of its assets be distributed to an entity that meets 
the requirements of Sec.  1.1471-6(b) or another organization that 
meets the requirements of this paragraph (f)(2)(iii), or escheat to the 
government of the FFI's country of residence or any political 
subdivision thereof.
    (iv) FFIs with only low-value accounts. An FFI is described in this 
paragraph (f)(2)(iv) if the FFI meets the requirements of paragraphs 
(f)(2)(iv)(A) through (C) of this section.
    (A) The FFI must be an FFI only because it is described in 
paragraphs (e)(1)(i) and/or (ii) of this section.

[[Page 9092]]

    (B) No financial account maintained by the FFI (or, in the case of 
an FFI that is a member of an expanded affiliated group, by any member 
of the expanded affiliated group) has a balance or value in excess of 
$50,000. The balance or value of a financial account shall be 
determined by applying the rules described in paragraph (a)(4)(i) of 
this section, substituting the term financial account for the term 
depository account and the term person for the term individual.
    (C) The FFI must have no more than $50,000,000 in assets on its 
balance sheet as of the end of its most recent accounting year. In the 
case of an FFI that is a member of an expanded affiliated group, the 
entire expanded affiliated group must have no more than $50,000,000 in 
assets on its consolidated or combined balance sheet as of the end of 
its most recent accounting year.
    (3) Owner-documented FFIs--(i) In general. An FFI that meets the 
requirements of this paragraph (f)(3) is treated as a deemed-compliant 
FFI only with respect to payments received by and accounts held with a 
designated withholding agent. A designated withholding agent is a 
withholding agent that agrees to undertake the additional due diligence 
and reporting required under paragraphs (f)(3)(ii)(D) and (E) of this 
section in order to treat the FFI as an owner-documented FFI. An FFI 
meeting the requirements of this paragraph (f)(3) will only be treated 
as a deemed-compliant FFI with respect to a payment or account for 
which it does not act as an intermediary.
    (ii) Requirements of owner-documented FFI status. An FFI will be 
treated as meeting the requirements of this paragraph (f)(3) only if it 
meets all of the following requirements--
    (A) The FFI is not described in paragraph (e)(1)(i), (ii), or (iv) 
of this section;
    (B) The FFI must not be affiliated with any other FFI described in 
paragraph (e)(1)(i), (ii), or (iv) of this section;
    (C) The FFI must not maintain a financial account for any 
nonparticipating FFI or issue debt which constitutes a financial 
account to any person in excess of $50,000;
    (D) The FFI must provide the designated withholding agent (that is 
either a U.S. financial institution or a participating FFI) with all of 
the documentation described in Sec.  1.1471-3(d)(7); and
    (E) The withholding agent must agree to report to the IRS all of 
the information described in Sec.  1.1474-1(i) with respect to any of 
the owner-documented FFI's direct or indirect owners that are specified 
U.S. persons.
    (4) Definition of a restricted distributor. An entity is a 
restricted distributor for purposes of paragraph (f)(1)(D) of this 
section if it operates as a distributor with respect to debt or equity 
interests in an FFI and satisfies paragraphs (f)(4)(i) through (viii) 
of this section.
    (i) The distributor must provide investment services to at least 30 
unrelated customers and no more than half of the distributor's 
customers can be related persons.
    (ii) The distributor must be required to perform AML due diligence 
procedures under the anti-money laundering laws of its country of 
organization (which must be FATF-compliant).
    (iii) The distributor must operate solely in its country of 
incorporation or organization, must not have a fixed place of business 
outside that country, and, if such distributor belongs to an affiliated 
group, must have the same country of incorporation or organization as 
all other members of its affiliated group.
    (iv) The distributor must not solicit customers outside its country 
of incorporation or organization. For this purpose, an FFI will not be 
considered to have solicited account holders outside of its country of 
organization merely because it operates a Web site, provided that the 
Web site does not specifically state that nonresidents may acquire 
securities from the FFI or target U.S. customers.
    (v) The distributor must have no more than $175 million in total 
assets under management and no more than $7,000,000 in gross revenue on 
its income statement for the most recent accounting year and, if the 
distributor belongs to an affiliated group, the entire group must have 
no more than $500 million in total assets under management and no more 
than $20 million in gross revenue for its most recent accounting year 
on a combined or consolidated income statement.
    (vi) The distributor must provide the FFI with a valid Form W-8 
indicating that the distributor satisfies the requirements to be a 
restricted distributor.
    (vii) The agreement governing the distributor's distribution of 
debt or equity interests of the FFI must prohibit the distributor from 
distributing any securities to specified U.S. persons, passive NFFEs 
that have one or more substantial U.S. owners, and nonparticipating 
FFIs, and must require that if the distributor does distribute 
securities to any of the persons described in this paragraph 
(f)(4)(vii), that it will redeem or cancel those interests within six 
months and the commission paid to the distributor will be forfeited to 
the FFI.
    (viii) With respect to sales made on or after December 31, 2011, 
and prior to the time the restrictions described in paragraphs 
(f)(1)(i)(D)(8)(vii) and (viii) of this section were incorporated into 
the distribution agreement, either the agreement governing the 
distributor's distribution of debt or equity interests of the relevant 
FFI must have contained a prohibition of the sale of securities to U.S. 
entities or U.S. resident individuals, or the distributor must review 
all accounts relating to such sales in accordance with the procedures 
described in Sec.  1.1471-4(c) applicable to preexisting accounts and 
certify that it has redeemed all securities sold to any of the persons 
described in paragraph (f)(4)(vii) of this section.
    (g) Recalcitrant account holders--(1) Scope. This paragraph (g) 
provides rules for determining when an account holder of a 
participating FFI is a recalcitrant account holder. Paragraph (g)(2) of 
this section defines the term recalcitrant account holder. Paragraphs 
(g)(3) and (4) of this section provide timing rules for when an account 
holder will begin to be treated as a recalcitrant account holder by a 
participating FFI and when an account holder will cease to be treated 
as a recalcitrant account holder by such institution. For rules for 
determining the holder of an account, see Sec.  1.1471-5(a)(3). For the 
reporting requirements of an FFI with respect to its recalcitrant 
account holders, see Sec.  1.1471-4(d)(6). For the reporting 
requirements of an FFI with respect to passthru payments made to 
recalcitrant account holders, see Sec.  1.1474-1(d).
    (2) Recalcitrant account holder. The term recalcitrant account 
holder means any account holder of an account maintained by a 
participating FFI if such account holder is not an FFI (or presumed to 
be an FFI), the account does not meet the exception to U.S. account 
status described in paragraph (a)(4) of this section (applying to 
depository accounts with a balance of $50,000 or less) or does not 
qualify for any of the exceptions from the documentation requirements 
described in Sec.  1.1471-4(c)(4)(ii), (iii), or (iv) (including if the 
participating FFI elects not to apply such exceptions), (c)(7), or 
(c)(9), and--
    (i) The account holder fails to comply with requests by the 
participating FFI for the documentation or information that is required 
under Sec.  1.1471-4(c) for determining the status of such account

[[Page 9093]]

as a U.S. account or other than a U.S. account;
    (ii) The account holder fails to provide a valid Form W-9 upon 
request from the participating FFI or fails to provide a correct name 
and TIN combination upon request from the participating FFI when the 
participating FFI has received notice from the IRS indicating that the 
name and TIN combination reported by the participating FFI (or a branch 
thereof in the case in which the branch reports the account separately 
under Sec.  1.1471-4(d)(2)(ii)(C)) for the account holder is incorrect; 
or
    (iii) If foreign law would prevent reporting by the participating 
FFI (or branch or division thereof) of the information described in 
Sec.  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 of 
such law to permit such reporting.
    (3) Start of recalcitrant account holder status--(i) Preexisting 
accounts identified during the procedures described in Sec.  1.1471-
4(c) for identifying U.S. accounts--(A) Accounts other than high-value 
accounts. Account holders of preexisting accounts that are not high-
value accounts (as described in Sec.  1.1471-4(c)(8)(i)) and that are 
described in paragraph (g)(2) of this section will be treated as 
recalcitrant account holders beginning on the date that is two years 
after the date on which the participating FFI's FFI agreement first 
entered into effect.
    (B) High-value accounts. Account holders of preexisting accounts 
that are high-value accounts (as described in Sec.  1.1471-4(c)(8)(i)) 
and paragraph (g)(2) of this section) will be treated as recalcitrant 
account holders beginning on the date that is one year after the date 
on which the participating FFI's FFI agreement first entered into 
effect.
    (C) Preexisting accounts subject to enhanced review. An account 
holder that holds a preexisting account that is identified when the 
participating FFI applies the enhanced review described in Sec.  
1.1471-4(c)(8)(iii) with respect to a calendar year other than the year 
preceding the date on which the FFI's FFI agreement is first effective, 
and that is described in paragraph (g)(2) of this section shall be 
treated as a recalcitrant account holder beginning on July 1 of the 
year following the year at the end of which the account had a balance 
or value of $1,000,000 or more.
    (ii) Accounts that are not preexisting accounts and accounts 
requiring name/TIN correction. An account holder of an account that is 
not a preexisting account and that is described in paragraph (g)(2) of 
this section will be treated as a recalcitrant account holder beginning 
90 days after the date the account is opened by the FFI or 90 days 
after the participating FFI requests a correct name and TIN combination 
from an account holder as described in paragraph (g)(2)(ii) of this 
section or, in a case where the account holder is subject to backup 
withholding under section 3406(a)(1)(B), within the time prescribed in 
Sec.  31.3406(d)-5(a).
    (iii) Accounts with changes in circumstances. An account holder 
holding an account that is described in paragraph (g)(2) of this 
section (including a preexisting account) following a change in 
circumstances (including an event treated as a change in circumstances 
under Sec.  1.1471-4(c)(2)(iii)) with respect to such account will be 
treated as a recalcitrant account holder beginning on the date that is 
90 days after the date on which the participating FFI requests 
documentation described in Sec.  1.1471-4(c)(3)(i) or (c)(4)(i)(B), or 
a valid and effective waiver described in paragraph (g)(2)(iii) of this 
section following such change in circumstances. For the definition of a 
change in circumstances with respect to an account, see Sec.  1.1471-
3(c)(6)(ii)(C).
    (4) End of recalcitrant account holder status. An account holder 
that is treated as a recalcitrant account holder under paragraphs 
(g)(2) and (3) of this section will cease to be so treated as of the 
date on which the account holder is no longer described in paragraph 
(g)(2) of this section.
    (h) Passthru payment--(1) Defined. The term passthru payment means 
any withholdable payment and any foreign passthru payment.
    (2) Foreign passthru payment. [Reserved].
    (i) Expanded affiliated group--(1) Scope of paragraph. This 
paragraph (i) defines the term expanded affiliated group for purposes 
of chapter 4 of the Internal Revenue Code. For the responsibilities of 
a participating FFI with respect to its expanded affiliated group, see 
Sec.  1.1471-4(e).
    (2) Expanded affiliated group defined--(i) In general. An expanded 
affiliated group means an affiliated group as defined in section 
1504(a), determined--
    (A) By substituting ``more than 50 percent'' for ``at least 80 
percent each place it appears; and
    (B) Without regard to paragraphs (2) and (3) of section 1504(b).
    (ii) Partnerships and other entities. A partnership or any entity 
other than a corporation shall be treated as a member of an expanded 
affiliated group if such entity is controlled (within the meaning of 
section 954(d)(3) by members of such group (including any entity 
treated as a member of such group by reason of this sentence).
    (j) Effective/applicability date. The rules of this section apply 
on [EFFECTIVE DATE OF FINAL RULE].
    Par. 8. Section 1.1471-6 is added to read as follows:


Sec.  1.1471-6  Payments beneficially owned by exempt beneficial 
owners.

    (a) Purpose and scope of paragraph. This section describes classes 
of beneficial owners that are described in section 1471(f) (exempt 
beneficial owners). The classes of persons treated as exempt beneficial 
owners under this section are: Foreign governments, political 
subdivisions of a foreign government, and wholly owned 
instrumentalities and agencies of a foreign government; international 
organizations and wholly owned agencies or instrumentalities of an 
international organization; foreign central banks of issue; governments 
of United States possessions; certain foreign retirement plans; and 
certain entities wholly owned by one or more other exempt beneficial 
owners. Paragraph (b) of this section defines which foreign entities 
are treated as foreign governments, political subdivisions of foreign 
governments, and wholly owned agencies and instrumentalities of foreign 
governments for purposes of this section. Paragraph (c) of this section 
defines which entities are treated as international organizations and 
wholly owned agencies or instrumentalities of international 
organizations for purposes of this section. Paragraph (d) of this 
section defines which entities are treated as foreign central banks of 
issue for purposes of this section. Paragraph (e) defines which 
entities are governments of United States possessions for purposes of 
this section. Paragraph (f) of this section describes a class of 
foreign retirement plans that are treated as exempt beneficial owners. 
Paragraph (g) of this section describes a class of exempt beneficial 
owners that are wholly owned by other classes of exempt beneficial 
owners. See Sec. Sec.  1.1471-2(a)(3)(v) and 1.1472-1(c)(1)(iv) for 
descriptions of the withholding exemptions provided to a withholding 
agent that makes a withholdable payment beneficially owned by an exempt 
beneficial owner. See also Sec.  1.1471-3(d)(8) for the documentation 
requirements applicable to a withholding agent in determining

[[Page 9094]]

when a withholdable payment is beneficially owned by an exempt 
beneficial owner.
    (b) Foreign government, any political subdivision of a foreign 
government, or any wholly owned agency or instrumentality of any one or 
more of the foregoing. A person is described in this paragraph (b) if 
it is a foreign government, any political subdivision of a foreign 
government, or any wholly owned agency or instrumentality of any one or 
more of the foregoing.
    (1) Definition. Solely for purposes of this section, the term 
foreign government, any political subdivision of a foreign government, 
or any wholly owned agency or instrumentality of any one or more of the 
foregoing means only the integral parts or controlled entities of a 
foreign sovereign.
    (2) Integral part. Solely for purposes of paragraph (b) of this 
section, an integral part of a foreign sovereign is any person, body of 
persons, organization, agency, bureau, fund, instrumentality, or other 
body, however designated, that constitutes a governing authority of a 
foreign country. The net earnings of the governing authority must be 
credited to its own account or to other accounts of the foreign 
sovereign, with no portion inuring to the benefit of any private 
person. An integral part does not include any individual who is a 
sovereign, official, or administrator acting in a private or personal 
capacity. All the facts and circumstances will be taken into account in 
determining whether an individual is acting in a private or personal 
capacity.
    (3) Controlled entity. (i) Solely for purposes of paragraph (b) of 
this section, a controlled entity means an entity that is separate in 
form from a foreign sovereign or that otherwise constitutes a separate 
juridical entity, but satisfies the following requirements--
    (A) It is wholly owned and controlled by a foreign sovereign 
directly or indirectly through one or more controlled entities;
    (B) Its net earnings are credited to its own account or to other 
accounts of the foreign sovereign, with no portion of its income 
inuring to the benefit of any private person as defined in paragraph 
(b)(4) of this section; and
    (C) Its assets vest in the foreign sovereign upon dissolution. (ii) 
A controlled entity also includes a partnership or any other entity 
owned and controlled by more than one foreign sovereign, so long as it 
otherwise satisfies paragraphs (b)(3)(i)(A) through (C) of this 
section, after replacing ``foreign sovereign'' with ``one or more 
foreign sovereigns'' in each place it appears therein.
    (4) Inurement to the benefit of private persons. Solely for 
purposes of this paragraph (b)--
    (i) Income will be presumed not to inure to the benefit of private 
persons if such persons (within the meaning of section 7701(a)(1)) are 
the intended beneficiaries of a governmental program that is carried on 
by the foreign sovereign and the activities of which constitute 
governmental functions (within the meaning of the regulations under 
section 892).
    (ii) Income will be considered to inure to the benefit of private 
persons if such income benefits--
    (A) Private persons through the use of a governmental entity as a 
conduit for personal investment, including the operation of a 
commercial banking business providing services to private persons; or
    (B) Private persons who divert such income from its intended use by 
the exertion of influence or control through means explicitly or 
implicitly approved of by the foreign sovereign.
    (5) Commercial activities. Solely for purposes of paragraph (b) of 
this section, the definition of a foreign government, any political 
subdivision of a foreign government, or any wholly owned agency or 
instrumentality of any one or more of the foregoing provided in this 
paragraph (b) applies regardless of whether income is derived from the 
conduct of a commercial activity as defined in the regulations under 
section 892, except to the extent that such activity is conducted by a 
controlled entity that is a financial institution within the meaning of 
Sec.  1.1471-5(e)(1)(i) or (ii).
    (c) International organization and any wholly owned agency or 
instrumentality thereof. A person is described in this paragraph (c) if 
it is an international organization and any wholly owned agency or 
instrumentality thereof, as defined in section 7701(a)(18).
    (d) Foreign central bank of issue. (1) A person is described in 
this paragraph (d) if it is a foreign central bank of issue. Solely for 
purposes of this section, the term foreign central bank of issue means 
a bank which is by law or government sanction the principal authority, 
other than the government itself, issuing instruments intended to 
circulate as currency. Such a bank is generally the custodian of the 
banking reserves of the country under whose law it is organized.
    (2) A foreign central bank of issue may include an instrumentality 
that is separate from a foreign government, whether or not owned in 
whole or in part by a foreign government. For example, foreign banks 
organized along the lines of, and performing functions similar to, the 
Federal Reserve System qualify as foreign central banks of issue for 
purposes of this section.
    (3) The Bank for International Settlements shall be treated as 
though it were a foreign central bank of issue for purposes of chapter 
4 of the Internal Revenue Code.
    (4) Solely for purposes of determining whether an entity is an 
exempt beneficial owner under section 1471(f), a foreign central bank 
is a beneficial owner with respect to income earned on collateral held 
by the foreign central bank in the normal course of its operations.
    (e) Governments of U.S. possessions. A person is described in this 
paragraph (f) if it is a government of a United States possession. 
Whether a person or entity constitutes a government of a United States 
possession for purposes of this chapter 4 of the Internal Revenue Code 
will be determined by applying principles analogous to those set forth 
in paragraph (b) of this section.
    (f) Certain retirement funds--(1) Requirements. A fund is described 
in this paragraph (f) if it is the beneficial owner of the payment and 
the fund meets the requirements described in paragraph (f)(1)(i) or 
(ii) of this section.
    (i) A fund meets the requirements of this paragraph (f)(1)(i) if 
the fund--
    (A) Is established in a country with which the United States has an 
income tax treaty in force and is generally exempt from income taxation 
in that country;
    (B) Is operated principally to administer or provide pension or 
retirement benefits; and
    (C) Is entitled to benefits under the treaty on income that the 
fund derives from U.S. sources as a resident of the other country that 
satisfies any applicable limitation on benefits requirement.
    (ii) A fund meets the requirements of this paragraph (f)(1)(ii) if 
the fund--
    (A) Is formed for the provision of retirement or pension benefits 
under the law of the country in which is established;
    (B) Receives all of its contributions (other than transfers of 
assets from accounts described in Sec.  1.1471-5(b)(2)(i)(A) or other 
plans described in Sec.  1.1471-5(f)(2)(ii) or this paragraph (f)) from 
government, employer, or employee contributions that are limited by 
reference to earned income;
    (C) Does not have a single beneficiary with a right to more than 
five percent of the entity's assets; and

[[Page 9095]]

    (D) Is exempt from tax on investment income under the laws of the 
country in which it is established or in which it operates due to its 
status as a retirement or pension plan, or receives 50 percent or more 
of its total contributions (other than transfers of assets from 
accounts described in Sec.  1.1471-5(b)(2)(i)(A) or other plans 
described in Sec.  1.1471-5(f)(2)(ii) or this paragraph (f)) from the 
government and the employer.
    (2) Examples. The following examples illustrate the provisions of 
paragraph (f) of this section:

    Example 1. FP, a foreign pension fund established in Country X, 
is generally exempt from income taxation in Country X, and is 
operated principally to provide retirement benefits in such country. 
The U.S.-Country X income tax treaty is identical in all material 
respects to the 2006 U.S. model income tax convention. FP is a 
resident of Country X under Article 4(2)(a) and a qualified person 
under Article 22(2)(d) of the U.S.-Country X income tax treaty. 
Therefore, FP is a pension fund described in paragraph (f)(1)(i) of 
this section.
    Example 2. FC, a State F foreign corporation formed a pension 
trust to provide pension benefits under the law of State and 
pursuant to a retirement plan for its employees and former 
employees. Retirement benefits under the plan are based on a 
percentage of the final year's salary paid to an individual, times 
the number of years of service. Pursuant to the plan, all 
contributions (calculated as a percentage of the employee's salary) 
are made by FC to the pension trust. The income of the trust is 
credited to the trust's account and subsequently used to satisfy the 
pension plan's obligations to retired employees. No single 
beneficiary is entitled to more than 5% of the trust's assets. State 
F does not have an income tax treaty with the United States. The 
trust is a foreign employer sponsored retirement plan that meets the 
requirements of paragraph (f)(1)(ii) of this section.
    Example 3.  The facts are the same as in Example 1, except that 
Country X does not have a treaty with the United States and 
employees are allowed to make contributions to the trust based on a 
percentage of compensation income, and such contributions are 
credited to the employee's account as well as interest accrued on 
such contributions. Retirement benefits will reflect the amounts 
credited to the individual accounts. No single beneficiary is 
entitled to more than 5% of the trust's assets. The pension plan is 
acting as an investment conduit and is not the beneficial owner of 
the amounts credited to the individual accounts. As a result, such 
plan is not a foreign employer sponsored retirement plan that meets 
the requirements of paragraph (f)(1) of this section. See Sec.  
1.1471-5(b)(2) for an exception for certain accounts that are part 
of a retirement plan that acts as an investment conduit.

    (g) Entities wholly owned by exempt beneficial owners. A person is 
described in this paragraph (g) if it is an FFI that is described in 
Sec.  1.1471-5(e)(1)(iii), as long as such FFI is wholly owned by one 
or more entities described in paragraph (b), (c), (d), (e), or (f) of 
this section.
    (h) Effective/applicability date. The rules of this section apply 
on [EFFECTIVE DATE OF FINAL RULE].
    Par. 9. Section 1.1472-1 is added to read as follows:


Sec.  1.1472-1  Withholding on NFFEs.

    (a) Overview. This section provides rules for withholding under 
section 1472. This paragraph (a) provides a general overview. Paragraph 
(b) of this section provides the general rule for withholding on 
withholdable payments made to an NFFE, including a coordinating rule 
for withholdable payments made by participating FFIs. Paragraph (c) of 
this section provides exceptions from withholding on withholdable 
payments made to certain NFFEs. Paragraph (d) of this section provides 
rules for establishing the status of a payee and when a withholding 
agent may treat a payee as the beneficial owner of the payment for 
purposes of this section. Paragraph (e) of this section provides a 
cross-reference to Sec.  1.1474-1 for information reporting 
requirements on withholdable payments made to a payee and the income 
tax filing requirement of a withholding agent that withholds under this 
section. Paragraph (e) of this section also sets forth information 
reporting rules with respect to substantial U.S. owners of certain 
NFFEs. Paragraph (f) of this section provides the effective date of 
this section.
    (b) Withholdable payments made to an NFFE--(1) In general. Except 
as otherwise provided in paragraph (b)(2) or (c) of this section, a 
withholding agent must withhold 30 percent of any withholdable payment 
made to a payee that is an NFFE unless--
    (i) The beneficial owner of such payment is the NFFE or any other 
NFFE;
    (ii) The withholding agent can, pursuant to paragraph (d) of this 
section, treat the beneficial owner of the payment as an NFFE that does 
not have any substantial U.S. owners, or as an NFFE that has identified 
its substantial U.S. owners; and
    (iii) The withholding agent reports the information described in 
paragraph (e) of this section relating to any substantial U.S. owners 
of the beneficial owner of such payment.
    (2) Coordination of withholding requirements under section 1472 
applicable to participating FFIs. A participating FFI must comply with 
the provisions set forth in Sec.  1.1471-4(b) and its FFI agreement to 
determine its withholding obligations under section 1472 and paragraph 
(b) of this section with respect to any withholding payment made to a 
payee that is an NFFE. See also Sec.  1.1471-2(a)(3) for coordination 
of withholding requirements applicable to participating FFIs under 
section 1471(a) and (b).
    (c) Exceptions--(1) Beneficial owner that is an excepted NFFE. A 
withholding agent is not required to withhold under section 1472(a) and 
paragraph (b) of this section on a withholdable payment (or portion 
thereof) if the withholding agent may treat the payment as beneficially 
owned by an excepted NFFE. For purposes of this paragraph (c)(1), an 
excepted NFFE means an NFFE that is one of the following--
    (i) Publicly traded corporation. A corporation the stock of which 
is regularly traded on one or more established securities markets.
    (A) Regularly traded. For purposes of this section, stock of a 
corporation is regularly traded on one or more established securities 
markets for a calendar year if--
    (1) One or more classes of stock of the corporation that, in the 
aggregate, represent more than 50 percent of the total combined voting 
power of all classes of stock of such corporation entitled to vote and 
of the total value of the stock of such corporation are listed on such 
market or markets during the prior calendar year; and
    (2) With respect to each class relied on to meet the more than 50 
percent listing requirement of paragraph (c)(1)(i)(A)(1) of this 
section--
    (i) Trades in each such class are effected, other than in de 
minimis quantities, on such market or markets on at least 60 days 
during the prior calendar year; and
    (ii) The aggregate number of shares in each such class that are 
traded on such market or markets during the prior year are at least ten 
percent of the average number of shares outstanding in that class 
during the prior calendar year.
    (B) Entities treated as meeting the regularly traded requirement. A 
class of stock shall be considered to meet the trading requirements of 
paragraph (c)(1)(i) of this section for a calendar year if the stock is 
traded during such year on an established securities market located in 
the United States and is regularly quoted by dealers making a market in 
the stock. A dealer makes a market in a stock only if the dealer 
regularly and actively offers to, and in fact does, purchase the stock 
from, and sell the stock to, customers who are not related persons (as 
defined in section 954(d)(3)) with respect to the dealer in

[[Page 9096]]

the ordinary course of a trade or business.
    (C) Established securities market--(1) In general. For purposes of 
paragraph (c)(1)(i) of this section, the term established securities 
market means, for any calendar year--
    (i) A foreign securities exchange that is officially recognized, 
sanctioned, or supervised by a governmental authority of the foreign 
country in which the market is located, and has an annual value of 
shares traded on the exchange (or a predecessor exchange) exceeding $1 
billion during each of the three calendar years immediately preceding 
the beginning of the calendar year in which the determination is being 
made;
    (ii) A national securities exchange which is registered under 
section 6 of the Securities Exchange Act of 1934 (15 USC 78f) or the 
Securities and Exchange Commission;
    (iii) Any exchange designated under a Limitation on Benefits 
article of an income tax treaty with the United States that is 
currently in force; and
    (iv) Any other exchange that the Secretary may designate in 
published guidance.
    (2) Foreign exchange with multiple tiers. If an exchange in a 
foreign country has more than one tier or market level on which stock 
may be separately listed or traded, each such tier shall be treated as 
a separate exchange.
    (3) Discretion to determine that an exchange does not qualify as an 
established securities market. The Commissioner may provide in 
published guidance that a securities exchange that otherwise meets the 
requirements of paragraph (c)(1)(i)(C) of this section does not qualify 
as an established securities market, if--
    (i) The exchange does not have adequate listing, financial 
disclosure, or trading requirements (or does not adequately enforce 
such requirements); or
    (ii) There is not clear and convincing evidence that the exchange 
ensures the active trading of listed stocks.
    (4) Computation of dollar value of stock traded. For purposes of 
paragraph (c)(1)(i)(C)(1)(i) of this section, the value in U.S. dollars 
of shares traded during a calendar year shall be determined on the 
basis of the dollar value of such shares traded as reported by the 
International Federation of Stock Exchanges located in Paris, or, if 
not so reported, then by converting into U.S. dollars the aggregate 
value in local currency of the shares traded using an exchange rate 
equal to the average of the spot rates on the last day of each month of 
the calendar year.
    (ii) Certain affiliated entities related to a publicly traded 
corporation. Any corporation that is a member of the same expanded 
affiliated group (as defined in Sec.  1.1471-5(i)) as a corporation 
described in paragraph (c)(1)(i) of this section.
    (iii) Certain territory entities. Any territory entity that is 
directly or indirectly wholly owned by one or more bona fide residents 
of the same U.S. possession under the laws of which the entity is 
organized. The term bona fide resident of a U.S. possession means an 
individual who qualifies as a bona fide resident under section 937(a) 
and Sec.  1.937-1.
    (iv) Exempt beneficial owner described in Sec.  1.1471-6(b) through 
(g). An entity that is an exempt beneficial owner described in any of 
Sec.  1.1471-6(b) through (g).
    (v) Active NFFEs. Any entity that is an active NFFE. The term 
active NFFE means an NFFE if less than 50 percent of its gross income 
for the preceding calendar year is passive income or less than 50 
percent of the assets held by the NFFE at any time during the preceding 
calendar year are assets that produce or are held for the production of 
passive income. For purposes of this paragraph (c)(1)(v), the term 
passive income means the portion of gross income that consists of--
    (A) Dividends;
    (B) Interest;
    (C) Rents and royalties, other than rents and royalties derived in 
the active conduct of a trade or business conducted by employees of the 
NFFE;
    (D) Annuities;
    (E) Death benefits from life insurance contracts (under U.S. or 
applicable law);
    (F) Amounts received from or with respect to a pool of insurance 
contracts if the amounts received depend upon the performance of the 
pool;
    (G) The excess of gains over losses from the sale or exchange of 
property that gives rise to passive income described in paragraphs 
(c)(1)(v)(A) through (G) of this section;
    (H) The excess of gains over losses from transactions (including 
futures, forwards, and similar transactions) in any commodities, but 
not including any commodity hedging transaction described in section 
954(c)(5)(A), determined by treating the corporation or partnership as 
a controlled foreign corporation;
    (I) The excess of foreign currency gains over foreign currency 
losses (as defined in section 988(b)) attributable to any section 988 
transaction; and
    (J) Net income from notional principal contracts as defined in 
Sec.  1.446-3(c)(1).
    (vi) Excepted FFIs. Any entity described in Sec.  1.1471-5(e)(5).
    (2) Payments made to a WP or WT. A withholding agent is not 
required to withhold on a withholdable payment (or portion thereof) 
under section 1472(a) and paragraph (b) of this section if the 
withholding agent may treat the payee as an NFFE that is a WP or WT.
    (d) Rules for determining payee and beneficial owner--(1) In 
general. For purposes of this section, except in the case of a payee 
that is a WP or WT, a withholding agent may treat a withholdable 
payment as beneficially owned by the payee as determined under Sec.  
1.1471-3. Thus, a withholding agent may treat a withholdable payment as 
beneficially owned by an excepted NFFE if the withholding agent can 
reliably associate the payment with valid documentation to determine 
the payee's status as an excepted NFFE under the rules of Sec.  1.1471-
3(d).
    (2) Payments made to an NFFE that is a WP or WT. A withholding 
agent may treat the payee of a withholdable payment as an NFFE that is 
a WP or WT if the withholding agent can reliably associate the payment 
with valid documentation to determine the payee's status under the 
rules of Sec.  1.1471-3(b)(3) and (d).
    (3) Payments made to a partner or beneficiary of an NFFE that is an 
NWP or NWT. A withholding agent may treat a partner or beneficiary of 
an NFFE that is an NWP or NWT, respectively, as the payee of a 
withholdable payment under this section if the withholding agent can 
reliably associate the payment with a valid Form W-8 or written 
notification that the NFFE is a flow-through entity as described in 
Sec.  1.1471-3(c)(2), including valid documentation sufficient to 
establish the chapter 4 status of each payee of the payment that is a 
partner or beneficiary, respectively, by applying the rules described 
in Sec.  1.1471-3(d).
    (4) Payments made to a beneficial owner that is an NFFE. A 
withholding agent may treat the beneficial owner of a withholdable 
payment as an NFFE that does not have any substantial U.S. owners or 
that has identified all of its substantial U.S. owners if it can 
reliably associate the payment with valid documentation identifying the 
beneficial owner as an NFFE that does not have any substantial U.S. 
owners or that has identified all of its substantial U.S. owners by 
applying the rules described in Sec.  1.1471-3(d).
    (5) Absence of valid documentation. A withholding agent that cannot 
reliably associate the payment with documentation as described in any 
of paragraphs (d)(2) through (4) of this

[[Page 9097]]

section must treat the payment as made to a payee in accordance with 
the presumption rules under Sec.  1.1471-3(f).
    (e) Information reporting requirements--(1) Reporting on 
withholdable payments. A withholding agent that treats a withholdable 
payment as made to any payee described in paragraph (d) of this section 
must provide information about such payee on Form 1042-S and file a 
withholding income tax return on Form 1042 to the extent required under 
Sec.  1.1474-1(d) and (c), respectively.
    (2) Reporting on substantial U.S. owners. A withholding agent that 
receives information about any substantial U.S. owners of an NFFE that 
is not excepted under paragraph (c) of this section must report to the 
IRS on a designated form, on or before March 15 of the calendar year 
following the year in which the withholdable payment was made, the 
following information--
    (i) Name of the NFFE that is owned by a substantial U.S. owner;
    (ii) Name of each such owner;
    (iii) Each such owner's TIN;
    (iv) The mailing address for each such owner; and
    (v) Any other information as required by the designated form and 
its accompanying instructions.
    (f) Effective/applicability date. The rules of this section apply 
on [EFFECTIVE DATE OF FINAL RULE].
    Par. 10. Section 1.1473-1 is added to read as follows:


Sec.  1.1473-1  Section 1473 definitions.

    (a) Definition of withholdable payment--(1) In general. Except as 
otherwise provided in this paragraph (a), the term withholdable payment 
means--
    (i) Any payment of U.S. source FDAP income (as defined in paragraph 
(a)(2) of this section); and
    (ii) For any sales or other dispositions occurring after December 
31, 2014, any gross proceeds from the sale or other disposition (as 
defined in paragraph (a)(3)(i)) of any property of a type which can 
produce interest or dividends that are U.S. source FDAP income.
    (2) U.S. source FDAP income defined--(i) In general--(A) FDAP 
income defined. Except as provided in paragraph (a)(2)(i)(B) of this 
section, for purposes of chapter 4 of the Internal Revenue Code the 
term FDAP income means fixed or determinable annual or periodic income 
that is described in Sec.  1.1441-2(b)(1) or 1.1441-2(c).
    (B) U.S. source. The term U.S. source FDAP income means FDAP 
income, as defined in paragraph (a)(2)(i)(A) of this section, that is 
derived from sources within the United States as described in paragraph 
(a)(2)(ii) of this section, including (but not limited to) the types of 
income enumerated in paragraphs (a)(2)(iii) through (vi) of this 
section. Except as provided in paragraph (a)(4) of this section, no 
exception to withholding on U.S. source FDAP income applies for 
purposes of determining whether a payment of such income is a 
withholdable payment. Thus, an exclusion from an amount subject to 
withholding under Sec.  1.1441-2(a) for purposes of chapter 3 or an 
exclusion from taxation under section 881 shall not apply for purposes 
of determining whether income is U.S. source FDAP income under this 
paragraph (a)(2)(i)(B).
    (ii) Determination of source of income--(A) In general. Except as 
provided in paragraph (a)(2)(ii)(B) of this section, a payment is 
derived from sources within the United States if it is income treated 
as derived from sources within the United States under sections 861 
through 865 and other relevant provisions of the Code. In the case of a 
payment of FDAP income for which the source of the payment cannot be 
determined at the time the payment is made, the payment shall be 
treated by a withholding agent as being from sources within the United 
States for purposes of paragraph (a)(2)(i)(B) of this section.
    (B) Special source rule for certain interest. Interest that is 
described in section 861(a)(1)(A)(i) or (ii) shall be treated as U.S. 
source FDAP income under this paragraph (a)(2).
    (iii) Original issue discount. For purposes of chapter 4 of the 
Internal Revenue Code, the rules described in Sec.  1.1441-2(b)(3)(ii) 
for determining when an amount representing original issue discount is 
subject to withholding for chapter 3 purposes will apply to determine 
when original issue discount from sources within the United States is 
U.S. source FDAP income under this paragraph (a)(2).
    (iv) REMIC residual interests. U.S. source FDAP income includes an 
amount described in Sec.  1.1441-2(b)(5).
    (v) Withholding liability of payee that is satisfied by withholding 
agent. If a withholding agent satisfies a withholding liability arising 
under chapter 4 of the Internal Revenue Code with respect to a 
withholdable payment from the withholding agent's own funds, the 
satisfaction of such liability shall be treated as an additional 
payment of U.S. source FDAP income made to the payee to the extent that 
the withholding agent's satisfaction of such withholding also satisfies 
a tax liability of the payee under section 881 or 871 with respect to 
the same payment, and the satisfaction of the tax liability constitutes 
additional income to the payee under Sec.  1.1441-3(f) that is U.S. 
source FDAP income. In such a case, the amount of any additional 
payment treated as made by the withholding agent for purposes of this 
paragraph (a)(2)(v) and any tax liability resulting from such payment 
shall be determined under Sec.  1.1441-3(f). See Sec.  1.1474-6 
regarding the coordination of the withholding requirements under 
chapters 3 and 4 in the case of a withholdable payment that is also 
subject to withholding under chapter 3.
    (vi) Special rule for sales of interest bearing debt obligations. 
Income that is otherwise described as U.S. source FDAP income in 
paragraphs (a)(2)(i) through (v) of this section does not include an 
amount of interest accrued on the date of a sale or exchange of an 
interest bearing debt obligation when the sale occurs between two 
interest payment dates.
    (vii) Payment of U.S. source FDAP income--(A) Amount of payment of 
U.S. source FDAP income. The amount of U.S. source FDAP income is the 
gross amount of the payment of such income, unreduced by any deductions 
or offsets. The rules described in Sec.  1.1441-3(b)(1) shall apply to 
determine the amount of an interest payment on an interest-bearing 
obligation. In the case of a corporate distribution, the distributing 
corporation or intermediary shall determine the portion of the 
distribution that is treated as U.S. source FDAP income under this 
paragraph (a)(2) in the same manner as the distributing corporation or 
intermediary determines the portion of the distribution subject to 
withholding under Sec.  1.1441-3(c). Any portion of a payment on a debt 
instrument or a corporate distribution that does not constitute U.S. 
source FDAP income under this paragraph (a)(2) solely because of a 
provision other than the source rules of sections 861 through 865 shall 
be taken into account as gross proceeds under paragraph (a)(3) of this 
section. For rules regarding the determination of the amount of a 
payment of U.S. source FDAP income under paragraph (a)(2) of this 
section made in a medium other than U.S. dollars, see Sec.  1.1441-
3(e). For determining the amount of a payment of a dividend equivalent, 
see section 871(m) and the regulations thereunder.
    (B) When payment of U.S. source FDAP income is made. A payment is 
considered made when the amount would be includible in the income of 
the beneficial owner under the U.S. tax principles governing the cash 
basis method of accounting. If an FFI acts as an intermediary with 
respect to a

[[Page 9098]]

payment of U.S. source FDAP, the FFI will be treated as making a 
payment of such U.S. source FDAP to the person with respect to which 
the FFI acts as an intermediary when it pays or credits such amount to 
such person. For rules regarding when a payment is considered made in 
the case of income allocated under section 482 that apply for purposes 
of this paragraph (a)(2)(vii)(B), see Sec.  1.1441-2(e)(2). The rules 
of Sec.  1.1441-2(e)(3) regarding blocked income apply for purposes of 
this paragraph (a)(2)(vii)(B). The rules of Sec.  1.1441-2(e)(4) 
regarding when a dividend is considered paid apply for purposes of this 
paragraph (a)(2)(vii)(B). For rules regarding when interest is 
considered paid if a foreign person has made an election under Sec.  
1.884-4(c)(1), see Sec.  1.1441-2(e)(5).
    (3) Gross proceeds defined--(i) Sale or other disposition--(A) In 
general. Except as otherwise provided in this paragraph (a)(3)(i), the 
term sale or other disposition means any sale, exchange, or disposition 
of property described in paragraph (a)(3)(ii) of this section that 
requires recognition of gain or loss under section 1001, without regard 
to whether the owner of such property is a foreign person that is not 
subject to U.S. Federal income tax with respect to such sale, exchange, 
or disposition. The term sale or other disposition includes (but is not 
limited to) sales of securities, redemptions of stock, retirements and 
redemptions of indebtedness, and entering into short sales and a 
closing transaction in a forward contract, option or other instrument 
that is otherwise a sale. Such term further includes a distribution 
from a corporation to the extent the distribution is a return of 
capital or a capital gain to the beneficial owner of the payment. Such 
term does not include grants or purchases of options, exercises of call 
options for physical delivery, or mere executions of contracts that 
require delivery of personal property or an interest therein. For 
purposes of this section only, a constructive sale under section 1259 
or a mark to fair market value under section 475 or 1296 is not a sale 
or disposition.
    (B) Special rule for sales effected by brokers. In the case of a 
sale effected by a broker (with the term ``effect'' defined in Sec.  
1.6045-1(a)(10)), a sale means a sale as defined in Sec.  1.6045-
1(a)(9) with respect to property described in paragraph (a)(3)(ii) of 
this section.
    (C) Special rule for gross proceeds from sales settled by clearing 
organization. In the case of a clearing organization that settles sales 
and purchases of securities between members of such organization on a 
net basis, the gross proceeds from a sale or disposition are limited to 
the net amount paid or credited to a member's account that is 
associated with a sale of property described in paragraph (a)(3)(ii) of 
this section by such member as of the time that such transaction is 
settled under the settlement procedures of such organization. A 
clearing organization for purposes of this paragraph (a)(3)(i)(C) is an 
entity that is in the business of holding securities for member 
organizations and transferring securities among such members by credit 
or debit to the account of a member without the necessity of physical 
delivery of the securities.
    (ii) Property of a type that can produce interest or dividends that 
are U.S. source FDAP income--(A) In general. Property is of a type that 
can produce interest or dividends that are U.S. source FDAP income when 
the property is of a type that ordinarily gives rise to the payment of 
interest or dividends constituting U.S. source FDAP income, regardless 
of whether any such payment is made during the period such property is 
held by the person selling or disposing of such property. Thus, for 
example, stock issued by a domestic corporation is property of a type 
that can produce dividends from sources within the United States if a 
dividend from such corporation would be from sources within the United 
States, regardless of whether the stock pays dividends at regular 
intervals and regardless of whether the issuer has any plans to pay 
dividends or has ever paid a dividend with respect to the stock.
    (B) Termination of specified notional principal contract. In the 
case of a termination that requires recognition of gain or loss under 
section 1001 of a contract that can produce the payment of a dividend 
equivalent as defined in section 871(m), such contract shall be treated 
as property that is described in paragraph (a)(3)(ii)(A) of this 
section, without regard to whether the taxpayer is a foreign person 
subject to U.S. Federal income tax with respect to such transaction. To 
the extent that the proceeds from such termination include the payment 
of a dividend equivalent, the gross amount of such proceeds will not 
include the amount of such dividend equivalent.
    (C) Registered investment company distributions. The amount of a 
distribution that is designated as a capital gain dividend under 
section 852(b)(3)(C) or 871(k)(2) is a payment of gross proceeds to the 
extent attributable to property described in paragraph (a)(3)(ii)(A) of 
this section.
    (iii) Payment of gross proceeds--(A) When gross proceeds are paid. 
With respect to a sale that is effected by a broker that results in a 
payment of gross proceeds as defined under this paragraph (a)(3), the 
date the gross proceeds are considered paid is the date that the 
proceeds of such sale are credited to the account of or otherwise made 
available to the person entitled to the payment. In a case in which 
gross proceeds are paid to a financial institution or other entity 
acting as an intermediary for the person selling or otherwise disposing 
of the property, the gross proceeds are considered paid to such person 
on the date that the proceeds are credited to the account of or 
otherwise made available to such institution.
    (B) Amount of gross proceeds. Except as otherwise provided in this 
paragraph (a)(3)--
    (1) The amount of gross proceeds from a sale or other disposition 
means the total amount realized as a result of a sale or other 
disposition of property described in paragraph (a)(3)(ii) under section 
1001;
    (2) In the case of a sale effected by a broker, the amount of gross 
proceeds from a sale or other disposition means the total amount paid 
or credited to the account of the person entitled to the payment 
increased by any amount not so paid by reason of the repayment of 
margin loans. The broker may but is not required to take commissions 
into account with respect to the sale in determining the amount of 
gross proceeds;
    (3) In the case of a corporate distribution, the amount treated as 
gross proceeds excludes the amount described in paragraph 
(a)(2)(vii)(A) of this section that is treated as U.S source FDAP 
income;
    (4) In the case of a sale of an obligation described in paragraph 
(a)(2)(vi), gross proceeds includes any interest accrued between 
interest payment dates; and
    (5) In the case of a sale, retirement, or redemption of a debt 
obligation, gross proceeds excludes the amount of original issue 
discount treated as U.S. source FDAP income under paragraph (a)(2)(iii) 
of this section.
    (iv) Withholding requirements on gross proceeds. For the 
withholding requirements with respect to a payment constituting gross 
proceeds and for determining the withholding agent that is required to 
withhold on such payment, see Sec.  1.1471-2(a)(2)(v).
    (4) Payments not treated as withholdable payments. The following 
payments are not withholdable

[[Page 9099]]

payments under paragraph (a)(1) of this section--
    (i) Certain short-term obligations. A payment of interest or 
original issue discount on short-term obligations described in section 
871(g)(1)(B)(i) or 881(f).
    (ii) Effectively connected income. Any item of income that is taken 
into account under section 871(b)(1) or 882(a)(1) for the taxable year. 
An item of income is taken into account under section 871(b)(1) or 
882(a)(1) when the income is (or is deemed to be) effectively connected 
with the conduct of a trade or business in the United States and is 
includible in the beneficial owner's gross income for the taxable year. 
An amount of income shall not be treated as taken into account under 
section 871(b)(1) or 882(a)(1) if the income is (or is deemed to be) 
effectively connected with the conduct of a trade or business in the 
United States and the beneficial owner claims an exception from tax 
under an income tax treaty because the income is not attributable to a 
permanent establishment in the United States.
    (iii) Ordinary course of business payments. Payments made in the 
ordinary course of the withholding agent's business for nonfinancial 
services, goods, and the use of property. Such payments include 
ordinary course payments for nonfinancial services, wages, office and 
equipment leases, software licenses, transportation, freight, gambling 
winnings, awards, prizes, scholarships, and interest on outstanding 
accounts payable arising from the acquisition of nonfinancial services, 
goods, and other tangible property. Ordinary course payments do not 
include dividends; any interest other than interest described in the 
preceding sentence; dividend equivalent payments with respect to which 
the withholding agent acts as custodian, intermediary, or agent; or 
bank or brokerage fees.
    (iv) Gross proceeds from sales of excluded property. Gross proceeds 
from the sale or other disposition of any property that can produce 
U.S. source FDAP income excluded from the definition of withholdable 
payment under paragraphs (a)(4)(i) through (iii) of this section.
    (v) Fractional Shares. Sales described in Sec.  1.6045-1(c)(3)(ix).
    (5) Special payment rules for flow-through entities, complex 
trusts, and estates--(i) In general. This paragraph (a)(5) provides 
special rules for a flow-through entity, complex trust, or estate to 
determine when such entity must treat U.S. source FDAP income as having 
been paid by such entity to its partners, owners, or beneficiaries (as 
applicable depending on the type of entity).
    (ii) Partnerships. An amount of U.S. source FDAP income is treated 
as being paid to a partner under rules similar to the rules prescribing 
when withholding is required for chapter 3 purposes as described in 
Sec.  1.1441-5(b)(2)(i)(A).
    (iii) Simple trusts. An amount of U.S. source FDAP income is 
treated as being paid to a beneficiary of a simple trust under rules 
similar to the rules prescribing when withholding is required for 
chapter 3 purposes as described in Sec.  1.1441-5(b)(2)(ii).
    (iv) Complex trusts and estates. An amount of U.S. source FDAP 
income is treated as paid to a beneficiary of a complex trust or estate 
under rules similar to the rules prescribing when withholding is 
required for chapter 3 purposes as described in Sec.  1.1441-
5(b)(2)(iii).
    (v) Grantor trusts. In a case in which an amount of U.S. source 
FDAP income is paid to a grantor trust, a person treated as an owner of 
such trust is treated as having been paid such income by the trust at 
the time it is received by or credited to the trust.
    (vi) Special rule for NWP or NWT. In the case of a partnership, 
simple trust, or complex trust that is a NWP or NWT, the rules 
described in paragraphs 5(ii) and (iii) shall not apply, and U.S. 
source FDAP income is treated as paid to the partner or beneficiary at 
the time the income is paid to the partnership or trust, respectively.
    (vii) Special rule for determining when gross proceeds are treated 
as paid to partner, owner, or beneficiary of a flow through entity. 
[Reserved].
    (6) Reporting of withholdable payments. See Sec.  1.1474-1(c) and 
(d) for a description of the income tax return and information 
reporting requirements applicable to a withholding agent that has made 
a withholdable payment.

    (7) Example. Satisfaction of payee's chapter 4 liability by 
withholding agent. FFI1 is entitled to receive a payment of $100 of 
U.S. source interest from withholding agent, WA. The payment is 
subject to withholding under chapter 4 of the Internal Revenue Code, 
but is not subject to withholding under section 1442, and FFI1 has 
no substantive tax liability under section 881 with respect to this 
payment. A pays the full $100 to FFI1 and, after the date of 
payment, pays the $30 of tax due under chapter 4 to the IRS from its 
own funds. Because no underlying tax liability of FFI1 is satisfied, 
and further because WA and FFI1 did not execute any agreement for WA 
to pay this tax and WA did not have an obligation to pay this tax 
apart from the requirements of chapter 4, WA's payment of the tax 
does not give rise to a deemed payment of U.S. source FDAP income to 
FFI1 under paragraph (a)(2)(v) of this section. Thus, WA is not 
required to pay any additional tax with respect to this payment for 
purposes of chapter 4.

    (b) Substantial U.S. owner--(1) Definition. The term substantial 
United States owner (or substantial U.S. owner) means:
    (i) With respect to any foreign corporation, any specified U.S. 
person that owns, directly or indirectly, more than ten percent of the 
stock of such corporation (by vote or value);
    (ii) With respect to any foreign partnership, any specified U.S. 
person that owns, directly or indirectly, more than ten percent of the 
profits interests or capital interests in such partnership; and
    (iii) In the case of a trust--
    (A) Any specified U.S. person treated as an owner of any portion of 
such trust under subpart E of Part I of subchapter J of chapter 1 
(sections 671 through 679); or
    (B) Any specified U.S. person that holds, directly or indirectly, 
more than ten percent of the beneficial interests of such trust.
    (2) Direct and indirect ownership in foreign entities. For purposes 
of this paragraph (b), ownership includes direct ownership and indirect 
ownership by application of paragraph (b)(2)(i), (ii), or (iii) of this 
section.
    (i) Indirect ownership of stock. Stock owned directly or indirectly 
by an entity (other than a participating FFI, a deemed-compliant FFI 
(excluding an owner-documented FFI), a U.S. financial institution, or 
an entity described in Sec.  1.1471-6 or 1.1472-1(c)(1)) that is a 
corporation, partnership, or trust shall be considered as being owned 
proportionately by its shareholders, partners, grantors or others 
persons treated as owners under sections 671 through 679 of any portion 
of the trust that includes the stock, or beneficiaries, respectively. 
Stock considered to be owned by a person by reason of the application 
of the preceding sentence shall, for purposes of applying such 
sentence, be treated as actually owned by such person.
    (ii) Indirect ownership in a partnership or beneficial trust 
interest. A capital or profits interest in a partnership or an 
ownership or beneficial trust interest (as defined in paragraph (b)(3) 
of this section) owned or held directly or indirectly by an entity 
(other than a participating FFI, a deemed-compliant FFI, a U.S. 
financial institution, or an entity described in Sec.  1.1471-6 or 
1.1472-1(c)(1)) that is a corporation, partnership, or trust shall be 
considered as being owned or held proportionately by its shareholders,

[[Page 9100]]

partners, grantors or others persons treated as owners under sections 
671 through 679 of any portion of the trust that includes the 
partnership or beneficial trust interest, or beneficiaries, 
respectively. Partnership or beneficial trust interests considered to 
be owned or held by a person by reason of the application of the 
preceding sentence shall, for purposes of applying such sentence, be 
treated as actually owned or held by such person.
    (iii) Indirect ownership through U.S. persons. Attribution under 
these rules shall not stop with a specified U.S. person in the chain of 
ownership running from the foreign entity that does not meet the 
definition of a substantial U.S. owner to the extent that the result of 
further attribution would be to treat a specified U.S. person as a 
substantial U.S. owner.
    (iv) Ownership and holdings through options. If any specified U.S. 
person holds, directly or indirectly applying the principles of 
paragraphs (b)(2)(i), (ii), and (iii) of this section, an option to 
acquire stock in a corporation or an option to acquire a capital or 
profits interest in a partnership or an ownership or beneficial 
interest in a trust, such option shall be considered as ownership of 
the underlying equity or other ownership interest by such person in 
such entity for purposes of this paragraph (b). For purposes of the 
preceding sentence, an option to acquire such an option, and each one 
of a series of such options, shall be considered as an option to 
acquire such stock or other ownership interest described in this 
paragraph (b)(2)(iv).
    (v) Determination of proportionate interest. For purposes of this 
paragraph (b), and except as otherwise provided in paragraph (b)(3) of 
this section, the determination of a person's proportionate interest in 
a corporation, partnership, or trust is based on all relevant facts and 
circumstances. In this determination, any arrangement that artificially 
decreases a specified U.S. person's proportionate interest in any such 
entity will not be recognized in determining whether such person is a 
substantial U.S. owner.
    (3) Beneficial trust interests--(i) Holding a beneficial interest--
(A) In general. For purposes of paragraph (b)(1)(iii)(B) of this 
section, a specified U.S. person will be treated as directly or 
indirectly holding a beneficial interest in a foreign trust if such 
specified U.S. person has the right to receive directly or indirectly 
(for example, through a nominee) a mandatory distribution or may 
receive, directly or indirectly, a discretionary distribution from the 
trust. Whether a person has a right to a mandatory distribution is 
determined taking into account all facts and circumstances.
    (B) Discretionary distribution. A discretionary distribution is a 
distribution at the discretion of the trustee of such trust.
    (ii) Valuation rules for beneficial interests in foreign trusts. If 
a specified U.S. person is a beneficiary of a foreign trust and may 
receive solely one or more discretionary distributions, the value of 
the specified U.S. person's interest in the foreign trust is the fair 
market value of the currency and other property distributed from the 
foreign trust to the specified U.S. person during the prior calendar 
year. If a specified U.S. person is a beneficiary of a foreign trust 
and has the right to receive solely mandatory distributions from the 
trust, the value of the specified U.S. person's interest in the foreign 
trust is determined under section 7520. If a specified U.S. person is a 
beneficiary of a foreign trust and has the right to receive mandatory 
distributions and discretionary distributions from the trust, the value 
of the specified U.S. person's interest in the foreign trust is the sum 
of the value of all of the currency or other property distributed from 
the trust at the discretion of the trustee during the prior calendar 
year to the specified U.S. person as a beneficiary and the value of the 
specified U.S. person's right as a beneficiary to receive mandatory 
distributions from the trust as determined under section 7520.
    (iii) Determining the ten percent threshold in the case of a 
beneficial interest in a foreign trust--(A) Discretionary beneficial 
interests. If a specified U.S. person is a direct or indirect 
beneficiary of a foreign trust and may only receive a discretionary 
distribution, such person will be treated as holding more than ten 
percent of the beneficial interests in such trust if the value of the 
currency or other property distributed to such specified U.S. person 
during the prior calendar year exceeds ten percent of the value of all 
distributions made by such trust during that year.
    (B) Mandatory beneficial interests. If a specified U.S. person is a 
direct or indirect beneficiary of a foreign trust and has the right to 
receive only mandatory distributions from the trust, such person will 
be treated as holding more than ten percent of the beneficial interests 
in such trust if the value of the person's interest, determined under 
paragraph (b)(3)(ii) of this section, exceeds ten percent of the value 
of all the assets held by the trust.
    (C) Mandatory and discretionary beneficial interests. If a 
specified U.S. person is a beneficiary of a foreign trust and such 
person has the right to mandatory distributions from the trust and the 
opportunity for discretionary distributions from the trust, such person 
will be treated as holding more than ten percent of the beneficial 
interests in such trust if the value of the person's interest, 
determined under paragraph (b)(3)(ii) of this section, exceeds either 
ten percent of the value of all distributions made by such trust during 
the year or ten percent of the value of all assets of the trust.
    (4) Exception for certain beneficial interests. A specified U.S. 
person with an interest described in paragraph (b)(3)(iii)(A) of this 
section shall only be treated as a substantial U.S. owner if the value 
of the currency or other property distributed to such specified U.S. 
person during the calendar year exceeds $5,000. A specified U.S. person 
described in paragraph (b)(3)(iii)(B) or (C) of this section shall only 
be treated as a substantial U.S. owner if the value of such person's 
interest, determined under paragraph (b)(3)(ii) of this section, 
exceeds $50,000.
    (5) Special rule for certain investment vehicles and insurance. In 
the case of any financial institution described in Sec.  1.1471-
5(e)(1)(iii) or (iv), paragraphs (b)(1)(i) through (iii) of this 
section shall be applied by substituting ``zero percent'' for ``ten 
percent.''
    (6) Determination dates for substantial U.S. owners. A foreign 
entity may make the determination of whether it has one or more direct 
or indirect substantial U.S. owners as of the last day of such entity's 
accounting year or as of the date on which such foreign entity provides 
the documentation described in Sec.  1.1471-3(d) to the withholding 
agent with which the foreign entity holds an account for which such 
determination is required to be made.
    (7) Examples. The following examples illustrate the provisions of 
paragraph (b) of this section:

    Example 1. Indirect ownership. U is a specified U.S. person. U 
owns directly 100% of the sole class of stock of F1, a foreign 
corporation. F1 owns directly 90% of the sole class of stock of F2, 
a foreign corporation, and U owns directly the remaining 10% of the 
sole class of stock of F2. F2 owns directly 10% of the sole class of 
stock of F3, a foreign corporation, and U owns directly 3% of the 
sole class of stock of F3. U is treated as owning 13% of the sole 
class of stock of F3 for purposes of this paragraph (b), and is 
treated as owning 100% of the sole class of stock of F2 for purposes 
of this paragraph (b). U is a substantial U.S. owner of F1, F2, and 
F3.
    Example 2. Determining the 10% threshold in the case of a 
beneficial interest in a foreign

[[Page 9101]]

trust. U, a United States citizen, holds only an interest described 
in paragraph (b)(3)(iii)(A) in FT1, a foreign trust. U also holds 
only an interest described in paragraph (b)(3)(iii)(A) in FT2, also 
a foreign trust, and FT2, in turn, holds only an interest described 
in paragraph (b)(3)(iii)(A) in FT1. U receives $25,000 from FT1 in 
Year 1. FT2 receives $120,000 from FT1 in Year 1 and distributes the 
entire amount to its beneficiaries in year 1. The distribution from 
FT1 is FT2's only source of income. U receives $40,000 from FT2. FT1 
distributes $750,000 to all of its beneficiaries in Year 1. U's 
discretionary interest in FT1 does not meet the 10% threshold as 
determined under paragraph (b)(3)(iii)(A). See paragraph (b)(3)(ii). 
U's discretionary interest in FT2, however, does meet the 10% 
threshold as determined under paragraph (b)(3)(iii)(A).
    Example 3. Determining ownership (determination date). F, a 
foreign corporation that is an NFFE, has a calendar year accounting 
year. On December 31 of Year 1, U, a specified U.S. person, owns 12% 
of the sole class of outstanding stock of F. In March of Year 2, F 
redeems a portion of U's stock and reduces U's ownership of F to 9%. 
In May of Year 2, F opens an account with P, a participating FFI, 
and delivers to P the documentation required under Sec.  1.1471-
3(d). At the time F opens its account with P, U is the only 
specified U.S. person that directly or indirectly owns stock in F. 
Because of the redemption, U's interest in F is 9% on the date F 
opens its account with P. F may determine whether it has a 
substantial U.S. owner as of the date it provides the documentation 
required under Sec.  1.1471-3(d) to P, which would be the day it 
opens the account. As a result, F may indicate in its Sec.  1.1471-
3(d) documentation that it has no substantial U.S. owners.

    (c) Specified U.S. person. The term specified United States person 
(or specified U.S. person) means any U.S. person other than--
    (1) A corporation the stock of which is regularly traded on one or 
more established securities markets, as described in Sec.  1.1472-
1(c)(1)(i);
    (2) Any corporation that is a member of the same expanded 
affiliated group as a corporation described in Sec.  1.1472-1(c)(1)(i);
    (3) Any organization exempt from taxation under section 501(a) or 
an individual retirement plan as defined in section 7701(a)(37);
    (4) The United States or any wholly owned agency or instrumentality 
thereof;
    (5) Any State, the District of Columbia, any possession of the 
United States, any political subdivision of any of the foregoing, or 
any wholly owned agency or instrumentality of any one or more of the 
foregoing;
    (6) Any bank as defined in section 581;
    (7) Any real estate investment trust as defined in section 856;
    (8) Any regulated investment company as defined in section 851 or 
any entity registered with the Securities Exchange Commission under the 
Investment Company Act of 1940 (15 U.S.C. 80a-64);
    (9) Any common trust fund as defined in section 584(a);
    (10) Any trust that is exempt from tax under section 664(c) or is 
described in section 4947(a)(1);
    (11) A dealer in securities, commodities, or derivative financial 
instruments (including notional principal contracts, futures, forwards, 
and options) that is registered as such under the laws of the United 
States or any State; and
    (12) A broker as defined in section 6045(c) and Sec.  1.6045-
1(a)(1).
    (d) Withholding agent--(1) In general. Except as provided in this 
paragraph (d), the term withholding agent means any person, U.S. or 
foreign, in whatever capacity acting, that has the control, receipt, 
custody, disposal, or payment of a withholdable payment.
    (2) Participating FFIs as withholding agents. Except as otherwise 
provided in the FFI agreement of a participating FFI, the term 
withholding agent includes a participating FFI that has the control, 
receipt, custody, disposal, or payment of a passthru payment (as 
defined in Sec.  1.1471-5(h)). The term withholding agent also includes 
a registered deemed-compliant FFI to the extent that such FFI is 
required to withhold on a passthru payment as part of the conditions 
for maintaining its status as a deemed-compliant FFI under Sec.  
1.1471-5(f)(1)(ii). For the withholding requirements of a participating 
FFI with respect to limited branches and limited FFIs that are in the 
same expanded affiliated group as the participating FFI, see Sec.  
1.1471-4(b).
    (3) Grantor trusts as withholding agents. The term withholding 
agent includes a grantor trust with respect to a withholdable payment 
or a passthru payment (in the case of a grantor trust that is a 
participating FFI) made to a person treated as an owner of the trust 
under sections 671 through 679. For purposes of determining when a 
payment is treated as made to such owner of a trust, see Sec.  1.1473-
1(a)(5)(v).
    (4) Deposit and return requirements. See Sec.  1.1474-1(a) for the 
requirement of any person that meets the definition of a withholding 
agent under this paragraph (d) to deposit any tax withheld, and Sec.  
1.1474-1(c) and (d) for the requirement to file income tax and 
information returns.
    (5) Multiple withholding agents. When several persons qualify as a 
withholding agent with respect to a single payment, only one tax is 
required to be withheld and deposited. See Sec.  1.1474-1(a). A person 
who, as a nominee described in Sec.  1.6031(c)-1T, has furnished to a 
partnership all of the information required to be furnished under Sec.  
1.6031(c)-1T(a) shall not be treated as a withholding agent if it has 
notified the partnership that it is treating the provision of 
information to the partnership as a discharge of its obligations as a 
withholding agent.
    (6) Exception for certain individuals. The term withholding agent 
excludes an individual with respect to a withholdable payment made by 
such person that is not made in the course of such person's trade or 
business (including as an agent with respect to making or receiving 
such payment).
    (e) Foreign entity. The term foreign entity means any entity that 
is not a U.S. person and includes a territory entity.
    (f) Effective/applicability date. The rules of this section apply 
on [EFFECTIVE DATE OF FINAL RULE].
    Par. 11. Section 1.1474-1 is added to read as follows:


Sec.  1.1474-1  Liability for withheld tax.

    (a) Payment and returns of tax withheld--(1) In general. A 
withholding agent is required to deposit any tax withheld pursuant to 
chapter 4 of the Internal Revenue Code as provided under paragraph (b) 
of this section and to make the returns prescribed by paragraphs (c) 
and (d) of this section, except as otherwise may be required by an FFI 
agreement. When several persons qualify as withholding agents with 
respect to a single payment, only one tax is required to be withheld 
and deposited.
    (2) Withholding agent liability. A withholding agent that is 
required to withhold with respect to a payment subject to withholding 
under Sec.  1.1471-2(a), 1.1471-4(b) (in the case of a participating 
FFI), or 1.1472-1(b) but fails either to withhold or to deposit any tax 
withheld with an authorized financial institution, as required under 
paragraph (b) of this section, is liable for the amount of tax not 
withheld and deposited.
    (3) Use of agents--(i) In general. A withholding agent may use an 
agent to fulfill its obligations under chapter 4 of the Internal 
Revenue Code. The acts of an agent of a withholding agent (including 
the receipt of withholding certificates, the payment of amounts of 
income subject to withholding, and the deposit of tax withheld) are 
imputed to the withholding agent on whose behalf it is acting. For this 
purpose, the agent's actual knowledge or reason to know shall be 
imputed to the withholding

[[Page 9102]]

agent. The withholding agent's liability under paragraph (a)(2) of this 
section will exist irrespective of the fact that the agent is also a 
withholding agent and is itself separately liable for failure to comply 
with the provisions of chapter 4. However, the same tax, interest, or 
penalties shall not be collected more than once. If the agent is a 
foreign person, a withholding agent may treat the acts of the foreign 
agent as its own for purposes of determining whether it has complied 
with the provisions of chapter 4 of the Internal Revenue Code, but only 
if--
    (A) There is a written agreement between the withholding agent and 
the foreign person acting as agent;
    (B) Books and records and relevant personnel of the foreign agent 
are available (on a continuous basis, including after termination of 
the relationship) in order to evaluate the withholding agent's 
compliance with the provisions of chapter 4; and
    (C) The withholding agent remains fully liable for the acts of its 
agent and does not assert any of the defenses that may otherwise be 
available, including under common law principles of agency, in order to 
avoid tax liability under the Internal Revenue Code.
    (ii) Liability of agent of withholding agent. An agent of a 
withholding agent is subject to the same withholding and reporting 
obligations that apply to any withholding agent under the provisions of 
chapter 4 of the Internal Revenue Code. However, a foreign agent cannot 
apply the provisions of this paragraph (a)(3) to appoint another person 
its agent with respect to the payments it receives from the withholding 
agent.
    (4) Liability for failure to obtain documentation timely or to act 
in accordance with applicable presumptions--(i) In general. A 
withholding agent that cannot reliably associate a payment with 
documentation on the date of payment and that does not withhold under 
Sec.  1.1471-2(a) or 1.1472-1(b), or withholds at less than the 30 
percent rate prescribed under sections 1471 and 1472, is liable under 
this section for the tax required to be withheld under Sec.  1.1471-
2(a) or 1.1472-1(b), without the benefit of a reduced rate unless--
    (A) The withholding agent has appropriately relied on the 
presumptions described in Sec.  1.1471-3(f) in order to treat the 
payment as exempt from withholding; or
    (B) The withholding agent can demonstrate to the satisfaction of 
the Commissioner that the proper amount of withholding was satisfied by 
another withholding agent or was otherwise paid.
    (ii) Withholding satisfied by another withholding agent. If a 
withholding agent fails to deduct and withhold any amount required to 
be deducted and withheld under Sec.  1.1471-2(a) or 1.1472-1(b), and 
that tax is paid by another withholding agent, then the amount of tax 
required to be deducted and withheld shall not be collected from the 
first-mentioned withholding agent. However, the withholding agent is 
not relieved from liability for any interest or penalties or additions 
to tax otherwise applicable in respect of the failure to deduct and 
withhold.
    (b) Payment of withheld tax. Every withholding agent who withholds 
tax pursuant to chapter 4 of the Internal Revenue Code shall deposit 
such tax with an authorized financial institution as provided in Sec.  
1.6302-2(a). If for any reason the total amount of tax required to be 
returned for any calendar year pursuant to the income tax return 
described in paragraph (c) of this section has not been deposited 
pursuant to Sec.  1.6302-2, the withholding agent shall pay the balance 
of such tax due for such year at such place as the IRS shall specify. 
The tax shall be paid when filing the return described in paragraph 
(c)(1) of this section for such year, unless the IRS specifies 
otherwise.
    (c) Income tax return--(1) In general. Every withholding agent 
shall file an income tax return on Form 1042 (or such other form as the 
IRS may prescribe) to report chapter 4 reportable amounts (as defined 
in paragraph (d)(2)(i) of this section). This income tax return shall 
be filed on the same income tax return used to report amounts subject 
to reporting for chapter 3 purposes as described in Sec.  1.1461-1(b). 
The return must show the aggregate amount of payments that are chapter 
4 reportable amounts (as defined in paragraph (d)(2)(i) of this 
section) and must report the tax withheld for the preceding calendar 
year by the withholding agent, in addition to any information required 
by the form and its accompanying instructions. Withholding certificates 
and other statements or information provided to a withholding agent are 
not required to be attached to the return. A Form 1042 (or such other 
form as the IRS may prescribe) must be filed under this paragraph 
(c)(1) even if no tax was required to be withheld for chapter 4 
purposes during the preceding calendar year. The withholding agent must 
retain a copy of Form 1042 for the applicable period of limitations on 
assessment and collection with respect to the amounts required to be 
reported on the Form 1042. For purposes of determining the applicable 
period of limitations, chapter 4 reportable amounts are treated as if 
such amounts are subject to withholding under chapter 3. See section 
6501 and the regulations thereunder for the applicable period of 
limitations. Adjustments to the total amount of tax withheld described 
in Sec.  1.1474-2 shall be stated on the return as prescribed by the 
form and accompanying instructions. A participating FFI shall file Form 
1042 in accordance with this paragraph (c) except as otherwise provided 
in its FFI agreement.
    (2) Amended returns. An amended return under this paragraph (c) 
must be filed on Form 1042 (or such other form as the IRS may 
prescribe). An amended return must include such information as the form 
or its accompanying instructions shall require, including, with respect 
to any information that has changed from the time of the filing of the 
return, the information that was shown on the original return and the 
corrected information.
    (d) Information returns for payment reporting--(1) Filing 
requirement--(i) In general. Every withholding agent must file an 
information return on Form 1042-S (or such other form as the IRS may 
prescribe) to report to the IRS chapter 4 reportable amounts as 
described in paragraph (d)(2)(i) of this section that were paid to a 
recipient during the preceding calendar year. A separate Form 1042-S 
must be filed with the IRS for each recipient of an amount subject to 
reporting. A separate Form 1042-S must also be filed with the IRS for 
each separate type of payment made to a single recipient. The Form 
1042-S shall be prepared in such manner as the form and accompanying 
instructions prescribe. One copy of the Form 1042-S shall be filed with 
the IRS on or before March 15 of the calendar year following the year 
in which the amount subject to reporting was paid, with a transmittal 
form as provided in the instructions to the Form 1042-S. Withholding 
certificates, certifications, documentary evidence, or other statements 
or documentation provided to a withholding agent are not required to be 
attached to the form. A copy of the Form 1042-S must be furnished to 
the recipient for whom the form is prepared (or any other person, as 
required under this paragraph or the instructions to the form) on or 
before March 15 of the calendar year following the year in which the 
amount subject to reporting was paid. The copy provided to the 
recipient of the payments may show more than one type of income or 
other payment subject to reporting on the Form 1042-S. The withholding 
agent must retain a copy of each Form 1042-S for the period of 
limitations on

[[Page 9103]]

assessment and collection applicable to the tax reportable on the Form 
1042 to which the Form 1042-S relates (determined as set forth in 
paragraph (c)(1) of this section).
    (ii) Recipient--(A) Defined. The term recipient under this 
paragraph (d) means a person that is a recipient of a passthru payment 
(including a withholdable payment) or, in the case of a participating 
FFI, foreign reportable amount described in paragraph (d)(2)(ii) of 
this section reportable for Form 1042-S reporting purposes, and 
includes--
    (1) A participating FFI or a deemed-compliant FFI (regardless of 
whether such FFI is a flow-through entity or acts as an intermediary 
with respect to the payment except as otherwise provided under 
paragraph (d)(1)(ii)(B)(7) of this section);
    (2) A nonparticipating FFI that is a beneficial owner of the 
payment;
    (3) A territory financial institution that acts as an intermediary 
with respect to a payment and that agrees to be treated as a U.S. 
person under Sec.  1.1471-3(c)(3)(iii)(F), and a territory financial 
institution that is a beneficial owner of the payment;
    (4) An account holder of a participating FFI to the extent that the 
FFI issues a Form 1042-S to such person or the FFI provides information 
sufficient for a withholding agent to report on a Form 1042-S with 
respect to such account holder under an election by the participating 
FFI under section 1471(b)(3) or when the participating FFI or QI does 
not otherwise have withholding responsibility for the payment;
    (5) An NFFE except to the extent described in paragraph 
(d)(1)(ii)(A)(6) of this section;
    (6) A partner, owner, or beneficiary in a flow-through entity that 
is an NFFE when the withholding agent treats such partner, owner, or 
beneficiary as a payee and beneficial owner for purposes of determining 
the amount required to be withheld under Sec.  1.1472-1;
    (7) An exempt beneficial owner of a payment, including when the 
payment is made to such owner through a nonparticipating FFI that 
provides documentation and information sufficient for a withholding 
agent to determine the portion of the payment paid to such owner;
    (8) A qualified intermediary that is a foreign branch of a U.S. 
person except as otherwise provided under paragraph (d)(1)(ii)(B)(7) of 
this section);
    (9) A limited branch of a participating FFI; and
    (10) Any other person required to be reported as a recipient as 
required on Form 1042-S or the instructions to the form.
    (B) Persons that are not recipients. Persons that are not 
recipients include--
    (1) A person that the withholding agent properly treats as a U.S. 
person under the rules of Sec.  1.1471-3;
    (2) Except as provided in paragraph (d)(1)(ii)(A)(8) of this 
section, a wholly owned entity that is disregarded under Sec.  
301.7701-2(c)(2) as an entity separate from its owner;
    (3) A flow-through entity that is an NFFE to the extent that the 
withholding agent treats a partner, owner, or beneficiary of the NFFE 
as a recipient pursuant to paragraph (d)(1)(ii)(A)(6) of this section;
    (4) An owner of an NFFE except as otherwise provided in paragraph 
(d)(1)(ii)(A)(6) of this section;
    (5) A territory financial institution that acts as an intermediary 
with respect to a payment and does not agree to be treated as a U.S. 
person under Sec.  1.1471-3(c)(3)(iii)(G);
    (6) An account holder that is included in a pool of recalcitrant 
account holders of a participating FFI;
    (7) A participating FFI, registered deemed-compliant FFI, or 
foreign branch of a U.S. financial institution that is a QI that is 
acting as an intermediary or flow-through entity with respect to a 
payment to the extent that such entity provides to its withholding 
agent information sufficient for the withholding agent to report on 
Form 1042-S with respect to one or more account holders of such FFI or 
payees that are nonparticipating FFIs;
    (8) A nonparticipating FFI that acts as an intermediary with 
respect to a payment or that is a flow-through entity; and
    (9) Any other person not treated as a recipient on Form 1042-S and 
its accompanying instructions.
    (2) Amounts subject to reporting--(i) In general. Subject to 
paragraph (d)(2)(iii) of this section, the term chapter 4 reportable 
amount means an amount reportable on a Form 1042-S for chapter 4 of the 
Internal Revenue Code purposes that is--
    (A) U.S. source FDAP income (regardless of whether subject to 
withholding under chapter 4 and including a passthru payment that is 
U.S. source FDAP income) paid on or after January 1, 2014;
    (B) Gross proceeds subject to withholding under chapter 4; and
    (C) Foreign passthru payments subject to withholding under chapter 
4.
    (ii) Special transitional reporting by participating FFIs--(A) 
Reporting requirements for certain payments to nonparticipating FFIs. 
In the case of a participating FFI that makes a payment to a 
nonparticipating FFI of a foreign reportable amount, the participating 
FFI shall report with respect to each such nonparticipating FFI the 
aggregate amount of all such payments made to the participating FFI for 
each of the calendar years 2015 and 2016. A foreign reportable amount 
means-
    (1) FDAP income. A payment of FDAP income as defined in Sec.  
1.1473-1(a)(2)(i)(A) that would be a withholdable payment if paid by a 
U.S. person; and
    (2) Other financial payments. [Reserved].
    (B) Payments to limited branches. A participating FFI shall report 
withholdable payments made to limited branches as described in Sec.  
1.1471-4(e)(2).
    (iii) Exceptions to reporting. A chapter 4 reportable amount does 
not include any amount that is excluded from the definition of 
withholdable payments under Sec.  1.1473-1(a)(4)(i), (iii), (iv), and 
(v).
    (iv) Coordination with chapter 3 of the Internal Revenue Code. A 
payment that is not subject to reporting under this paragraph (d)(2) 
may be subject to chapter 3 reporting on Form 1042-S to the extent 
provided on such form and its accompanying instructions or under Sec.  
1.1461-1(c)(2). The recipient information and other information 
required to be reported on Form 1042-S for purposes of chapter 4 shall 
be in addition to the information required to be provided on Form 1042-
S for purposes of chapter 3.
    (3) Required information. The information required to be furnished 
under this paragraph (d)(3) shall be based upon the information 
provided by or on behalf of the recipient of an amount subject to 
reporting (as corrected and supplemented based on the withholding 
agent's actual knowledge), the presumption rules of Sec.  1.1471-3(f), 
or the requirements for reporting recalcitrant account holders of 
participating FFIs under Sec.  1.1471-4(d)(6). The Form 1042-S must 
include the following information, if applicable--
    (i) The name, address, and EIN of the withholding agent;
    (ii) A description of each category of income or payment made based 
on the income and payment codes provided on the form (for example, 
interest, dividends, and gross proceeds) and the aggregate amount in 
each category expressed in U.S. dollars;
    (iii) The rate and amount of withholding applied or the basis for 
exempting the payment from withholding under chapter 4 of the

[[Page 9104]]

Internal Revenue Code (based on exemption codes provided on the form);
    (iv) The name and address of the recipient and its TIN or EIN (when 
required);
    (v) The name and address of any FFI acting as an intermediary, a 
flow-through entity that is an NFFE, or territory financial institution 
that is not treated as a U.S. person under Sec.  1.1471-3(c)(2)(iii)(G) 
when an account holder or owner of such entity (including an unknown 
recipient or owner) is treated as the recipient of the payment;
    (vi) The TIN or EIN of an entity reported under paragraph (d)(3)(v) 
of this section;
    (vii) The country (based on the country codes provided on the form) 
of the recipient and of any entity the name of which appears on the 
form; and
    (viii) Such information as the form or instructions may require in 
addition to, or in lieu of, information required under this paragraph 
(d)(3).
    (4) Method of reporting--(i) Payments by U.S. withholding agent to 
recipients. Except as otherwise provided in this paragraph (d) or on 
the Form 1042-S and its accompanying instructions, a withholding agent 
that is a U.S. person (other than a foreign branch of a U.S. person 
that is a qualified intermediary) and that makes a payment of a chapter 
4 reportable amount must file a separate Form 1042-S for each recipient 
that receives such amount. Except as otherwise provided on Form 1042-S 
or its instructions, only payments for which the income or payment 
code, exemption code, withholding rate, and recipient code are the same 
may be reported on a single Form 1042-S filed with the IRS. See 
paragraph (d)(4)(ii) of this section for reporting of payments made to 
a person that is not a recipient and that is otherwise to be reported 
on Form 1042-S.
    (A) Payments to certain entities that are beneficial owners. If the 
beneficial owner of a payment made by a U.S. withholding agent is an 
exempt beneficial owner, a nonparticipating FFI, an NFFE, or a 
territory entity, it must complete Form 1042-S treating such entity as 
the recipient of the payment.
    (B) Payments to participating FFIs, deemed-compliant FFIs, or 
certain QIs. A U.S. withholding agent that makes a payment of a chapter 
4 reportable amount to a participating FFI or a deemed-compliant FFI 
shall complete Forms 1042-S treating the participating FFI or the 
deemed-compliant FFI as the recipient. A participating FFI acting as an 
intermediary with respect to a payment may provide a U.S. withholding 
agent with pooled information regarding recalcitrant account holders 
that are entitled to the payment pursuant to an election under section 
1471(b)(3) and Sec.  1.1471-2(a)(2)(iii), pursuant to Sec.  1.1471-
2(a)(2)(i) in the case of a payment of U.S. source FDAP to a 
participating FFI that is an NQI, NWP, or NWT, or pursuant to Sec.  
1.1471-2(a)(2)(iii)(B) in the case of a foreign branch of a U.S. 
financial institution that provides pooled information regarding its 
account holders subject to withholding under chapter 4 of the Internal 
Revenue Code. The U.S. withholding agent must complete a separate Form 
1042-S issued to the FFI for each such pool to the extent required on 
Form 1042-S and its accompanying instructions. A participating FFI may, 
however, provide to its withholding agent specific payee information 
with respect to one or more recalcitrant account holders that are 
entitled to the payment. In such a case, the participating FFI 
providing such information shall not be treated as a recipient of the 
payment. See paragraph (d)(4)(ii)(A) of this section for reporting 
rules applicable to cases in which participating FFIs, deemed-compliant 
FFIs, or certain QIs are not treated as recipients.
    (C) Amounts paid to territory financial institutions acting as 
intermediaries. A U.S. withholding agent making a payment to a 
territory financial institution acting as an intermediary shall 
complete Form 1042-S as follows--
    (1) If the territory financial institution has agreed to be treated 
as a U.S. person with respect to the payment under Sec.  1.1471-
3(c)(3)(iii)(F), the withholding agent files Form 1042-S treating the 
territory financial institution as the recipient; or
    (2) If the territory financial institution has provided the 
withholding agent with a withholding certificate that transmits 
information regarding beneficial owners or other recipients of a 
chapter 4 reportable amount, the withholding agent must complete a 
separate Form 1042-S for each recipient whose documentation is 
associated with the territory financial institution's withholding 
certificate as described in paragraph (d)(4)(ii)(A) of this section and 
must report the territory financial institution under that paragraph.
    (D) Amounts paid to NFFEs. A U.S. withholding agent that makes 
payments of chapter 4 reportable amounts to an NFFE shall complete 
Forms 1042-S treating the NFFE as the recipient unless such withholding 
agent treats a partner, owner, or beneficiary in a flow-through entity 
that is an NFFE as a payee for purposes of determining the amount 
required to be withheld under Sec.  1.1472-1(b).
    (ii) Payments made by withholding agents to certain entities that 
are not recipients--(A) Form 1042-S reporting of entities that provide 
information for a withholding agent to perform specific payee 
reporting. If a U.S. withholding agent makes a payment of a chapter 4 
reportable amount to a flow-through entity that is an NFFE, a 
nonparticipating FFI receiving a payment on behalf of an exempt 
beneficial owner, a territory financial institution, a participating 
FFI, a deemed-compliant FFI, or a foreign branch of a U.S. financial 
institution that is acting as a QI, it must complete a separate Form 
1042-S for each recipient that is an owner of or account holder in such 
entity to the extent the withholding agent can reliably associate the 
payment with valid documentation (under the rules of Sec.  1.1471-3(c) 
and (d)) provided by such entity (as applicable) with respect to each 
such recipient. If a payment is made through tiers of such entities, 
the withholding agent must nevertheless complete Form 1042-S for each 
recipient to the extent it can reliably associate the payment with 
documentation provided with respect to that recipient. A withholding 
agent that is completing a Form 1042-S for a recipient described in 
this paragraph (d)(4)(ii)(A) must include on the Form 1042-S the name 
of such entity through which the recipient receives the payment and its 
TIN or FFI-EIN (if applicable).
    (B) Nonparticipating FFIs that act as intermediaries. If a 
withholding agent makes a payment of a chapter 4 reportable amount to a 
nonparticipating FFI that it is required to treat as an intermediary or 
as a flow-through entity with regard to a payment under rules described 
in Sec.  1.1471-3(c)(2)(iii), and except as otherwise provided in 
paragraph (d)(1)(ii)(A)(7), it shall report the recipient of the 
payment as an unknown recipient and shall report the nonparticipating 
FFI as provided in paragraph (d)(4)(ii)(A) of this section for an 
entity not treated as a recipient.
    (C) Disregarded entities. If a U.S. withholding agent makes a 
payment to a disregarded entity but receives a valid withholding 
certificate or other documentary evidence from a person that is the 
single owner of a disregarded entity, the withholding agent must file a 
Form 1042-S treating the single owner as the recipient. The FFI-EIN on 
the Form 1042-S, or TIN, if required, must be the single owner's FFI-
EIN or TIN.
    (iii) Reporting by nonparticipating FFIs, flow-through entities, or 
territory financial institutions that do not elect to

[[Page 9105]]

be treated as U.S. persons. A nonparticipating FFI, a flow-through 
entity that is a foreign person, or territory financial institution 
must file Forms 1042-S for chapter 4 reportable amounts paid to 
recipients in the same manner as a U.S. withholding agent. A Form 1042-
S will not be required, however, if another withholding agent has 
reported the same amount with regard to the same recipient for which 
such entity would otherwise be required to file a return under this 
paragraph (d)(4)(iii) and the entire amount that should be withheld 
from such payment has been withheld. The nonparticipating FFI, flow-
through entity, or territory financial institution must report payments 
made to recipients to the extent it has failed to provide the 
appropriate documentation to another withholding agent or to the extent 
it knows, or has reason to know, that less than the required amount has 
been withheld.
    (iv) Other withholding agents. Any person that is a withholding 
agent that is not a participating FFI shall file Forms 1042-S in the 
same manner as a U.S. withholding agent and in accordance with the 
instructions to the form. A participating FFI shall file Forms 1042-S 
in accordance with this paragraph (d) except as otherwise provided in 
its FFI agreement.
    (e) Magnetic media reporting. A withholding agent that is not a 
financial institution and that is required to file 250 or more Form 
1042-S information returns for a taxable year must file Form 1042-S 
returns on magnetic media. See Sec.  301.6011-2(b) of this chapter for 
the requirements of a withholding agent that is not a financial 
institution with respect to the filing of Forms 1042-S on magnetic 
media. See Sec.  301.1474-1(a) of this chapter for the requirements 
applicable to a withholding agent that is a financial institution with 
respect to the filing of Forms 1042-S on magnetic media.
    (f) Indemnification of withholding agent. A withholding agent is 
indemnified against the claims and demands of any person for the amount 
of any tax it deducts and withholds in accordance with the provisions 
of chapter 4 of the Internal Revenue Code and the regulations 
thereunder. A withholding agent that withholds based on a reasonable 
belief that such withholding is required under chapter 4 and the 
regulations thereunder is treated for purposes of section 1474 and this 
paragraph (f) as having withheld tax in accordance with the provisions 
of chapter 4 and the regulations thereunder. This paragraph (f) does 
not relieve a withholding agent from tax liability under chapter 3 or 4 
of the Internal Revenue Code or the regulations under those chapters.
    (g) Extensions of time to file Forms 1042 and 1042-S. The IRS may 
grant an extension of time to file Form 1042 or 1042-S as described in 
Sec.  1.1461-1(g).
    (h) Penalties. For penalties and additions to tax for failure to 
file returns or file and furnish statements in accordance with this 
section, see sections 6651, 6662, 6663, 6721, 6722, 6723, 6724(c), 
7201, 7203, and the regulations under those sections. For penalties and 
additions to the tax for failure to timely pay the tax required to be 
withheld under chapter 4 of the Code, see sections 6656, 6672, and 7202 
and the regulations under those sections.
    (i) Reporting requirements with respect to owner-documented FFIs--
(1) Reporting by U.S. withholding agent. In a case in which a U.S. 
withholding agent makes during a calendar year a payment of a chapter 4 
reportable amount to an entity account holder that the withholding 
agent treats as an owner-documented FFI under Sec.  1.1471-3(d)(6), the 
withholding agent will be required to report for such calendar year 
with respect to each specified U.S. person that has a direct or 
indirect interest in such entity the following information--
    (a) The name of the owner-documented FFI;
    (b) The name of the specified U.S. person;
    (c) The TIN or EIN of the specified U.S. person;
    (d) The address of the specified U.S. person; and
    (e) Any other information required on the form and accompanying 
instructions provided for purposes of such reporting.
    (2) Cross reference to reporting by participating FFIs. For the 
reporting requirements of a participating FFI with respect to an 
account holder that it treats as an owner-documented FFI, see Sec.  
1.1471-4(d)(2)(iv).
    (j) Effective/applicability date. The rules of this section apply 
on [EFFECTIVE DATE OF FINAL RULE].
    Par. 12. Section 1.1474-2 is added to read as follows:


Sec.  1.1474-2  Adjustments for overwithholding or underwithholding of 
tax.

    (a) Adjustments of overwithheld tax--(1) In general. Except as 
otherwise provided by this section, a withholding agent that has 
overwithheld tax under chapter 4 and made a deposit of the tax as 
provided in Sec.  1.6302-2(a) may adjust the amount of overwithheld tax 
either pursuant to the reimbursement procedure described in paragraph 
(a)(3) of this section or pursuant to the set-off procedure described 
in paragraph (a)(4) of this section. Adjustments under this paragraph 
(a) may only be made within the time prescribed under paragraph (a)(3) 
or (a)(4) of this section. After such time, a refund of the amount of 
overwithheld tax can only be claimed pursuant to the procedures 
described in Sec.  1.1474-5 and chapter 65 of the Code and the 
regulations thereunder.
    (2) Overwithholding. For purposes of this section, the term 
overwithholding means any amount actually withheld (determined before 
application of the adjustment procedures under this section) from an 
item of income or other payment pursuant to chapter 4 of the Internal 
Revenue Code or the regulations thereunder in excess of both the amount 
required to be withheld with respect to such item of income or other 
payment under chapter 4 and, in the case of an amount subject to 
chapter 3 withholding, the actual tax liability of the beneficial owner 
of the income or payment to which the withheld amount is attributable, 
regardless of whether such overwithholding was in error or appeared 
correct at the time it occurred.
    (3) Reimbursement of tax--(i) General rule. Under the reimbursement 
procedure, the withholding agent repays the beneficial owner or payee 
for the amount of overwithheld tax. In such a case, the withholding 
agent may reimburse itself by reducing, by the amount actually repaid 
to the beneficial owner or payee, the amount of any deposit of tax made 
by the withholding agent under Sec.  1.6302-2(a)(1)(iii) for any 
subsequent payment period occurring before the end of the calendar year 
following the calendar year of overwithholding. A withholding agent 
must obtain valid documentation as described under Sec.  1.1471-3(c)(7) 
with respect to the beneficial owner or payee supporting a reduced rate 
of withholding before adjusting the amount of tax under this paragraph 
(a)(3)(i). Any such reduction that occurs for a payment period in the 
calendar year following the calendar year of overwithholding shall be 
allowed only if--
    (A) The repayment occurs before the earlier of the due date 
(without regard to extensions) for filing the Form 1042-S for the 
calendar year of overwithholding or the date that the Form 1042-S is 
actually filed with the IRS;
    (B) The withholding agent states on timely filed (not including 
extensions) Form 1042-S the amount of tax withheld and the amount of 
any actual repayment; and

[[Page 9106]]

    (C) The withholding agent states on a timely filed (not including 
extensions) Form 1042 for the calendar year of overwithholding, that 
the filing of the Form 1042 constitutes a claim for credit in 
accordance with Sec.  1.6414-1.
    (ii) Record maintenance. If the beneficial owner or payee is repaid 
an amount of overwithheld tax under the provisions of this paragraph 
(a)(3), the withholding agent shall keep as part of its records a 
receipt showing the date and amount of repayment, and the withholding 
agent must provide a copy of such receipt to the beneficial owner or 
payee. For this purpose, a canceled check or an entry in a statement is 
sufficient provided that the check or statement contains a specific 
notation that it is a refund of tax overwithheld.
    (4) Set-offs. Under the set-off procedure, the withholding agent 
may repay the beneficial owner or payee by applying the amount 
overwithheld against any amount which otherwise would be required under 
chapter 3 or 4 of the Internal Revenue Code or the regulations 
thereunder to be withheld from the amount paid by the withholding agent 
to such person before the earlier of the due date (without regard to 
extensions) for filing the Form 1042-S for the calendar year of 
overwithholding or the date that the Form 1042-S is actually filed with 
the IRS. For purposes of making a return on Form 1042 or 1042-S (or an 
amended form) for the calendar year of overwithholding and for purposes 
of making a deposit of the amount withheld, the reduced amount shall be 
considered the amount required to be withheld from such payment under 
chapter 3 or 4, respectively, and the regulations thereunder.
    (5) Examples. The principles of paragraph (a) of this section are 
illustrated by the following examples:

    Example 1. (i) Fund A, organized as a United Kingdom 
corporation, is a unit investment trust that is an FFI and that is a 
resident that qualifies for the benefits of the income tax treaty 
between the United States and the United Kingdom. On December 1, 
2014, domestic corporation C pays a dividend of $100 to Fund A, at 
which time C withholds $30 of tax pursuant to Sec.  1.1471-2(a) and 
remits the balance of $70 to Fund A because it does not hold valid 
documentation that Fund A is a participating FFI or deemed-compliant 
FFI. On February 10, 2015, prior to the time that C is obligated to 
file its Form 1042, Fund A furnishes a valid Form W-8BEN described 
in Sec. Sec.  1.1441-1(e)(2)(i) and 1.1471-3(c)(3)(ii) upon which C 
may rely to treat Fund A as the beneficial owner of the income and 
as a participating FFI so that C may reduce the rate of withholding 
to 15% under the provisions of the United States-United Kingdom 
income tax treaty with respect to the payment. C repays the excess 
tax withheld of $15 to Fund A.
    (ii) During the 2014 calendar year, C makes no other payments 
upon which tax is required to be withheld under chapter 3 or 4 of 
the Code; accordingly, its Form 1042 for such year, filed on March 
15, 2015, shows total tax withheld of $30, an adjusted total tax 
withheld of $15, and tax deposited of $30 for such year. Pursuant to 
Sec.  1.6414-1, C claims a credit for the overpayment of $15 shown 
on the Form 1042 for 2014. Accordingly, C is permitted to reduce by 
$15 any deposit required by Sec.  1.6302-2 to be made of tax 
withheld during the 2015 calendar year with respect to taxes due 
under chapters 3 or 4. The Form 1042-S required to be filed by C 
with respect to the dividend of $100 paid to Fund A in 2014 is 
required to show tax withheld of $30 and tax repaid of $15 to Fund 
A.
    Example 2. (i) In November 2014, Bank A, a foreign bank 
organized in the United Kingdom that is a nonqualified intermediary, 
receives on behalf of one of its account holders, Z, an individual, 
a $100 dividend payment from C, a domestic corporation. At the time 
of payment, C withholds $30 pursuant to Sec.  1.1471-2(a) and remits 
the balance of $70 to Bank A, because it does not hold valid 
documentation that it may rely on to treat Bank A as a participating 
FFI or deemed-compliant FFI. On December 2014, prior to the time 
that C files its Forms 1042 and 1042-S, Bank A furnishes a valid 
Form W-8IMY and FFI withholding statement described in Sec.  1.1471-
3(c)(3)(iii) that establishes Bank A's status as a participating FFI 
that is a nonqualified intermediary, as well as a valid Form W-8BEN 
that has been completed by Z as described in Sec.  1.1471-
3(c)(2)(ii) and Sec.  1.1441-1(e)(2)(i) upon which C may rely to 
treat the payment as made to Z, a nonresident alien individual who 
is a resident of the United Kingdom eligible for a reduced rate of 
withholding of 15% under the income tax treaty between the United 
States and United Kingdom. Although C has already deposited the $30 
that was withheld, as required by Sec.  1.6302-2(a)(1)(iv), C remits 
the amount of $15 to Bank A for the benefit of Z.
    (ii) During the 2014 calendar year, C makes no other payments 
upon which tax is required to be withheld under chapters 3 or 4; 
accordingly, its return on Form 1042 for such year, which is filed 
on March 15, 2015, shows total tax withheld of $30, an adjusted 
total tax withheld of $15, and tax deposited of $30. Pursuant to 
Sec.  1.6414-1(b), C claims a credit for the overpayment of $15 
shown on the Form 1042 for 2014. Accordingly, it is permitted to 
reduce by $15 any deposit required by Sec.  1.6302-2 to be made of 
tax withheld during the 2015 calendar year. The Form 1042-S required 
to be filed by C for 2014 with respect to the dividend of $100 
beneficially owned by Z is required to show tax withheld of $30 and 
tax repaid of $15 to Z.

    (b) Withholding of additional tax when underwithholding occurs. A 
withholding agent that has underwithheld under chapter 4, may apply the 
procedures described in Sec.  1.1461-2(b) (by substituting the term 
``chapter 4'' for ``chapter 3'') to satisfy its withholding obligations 
under chapter 4 with respect to a payee or beneficial owner.
    (c) Effective/applicability date. The rules of this section apply 
on [EFFECTIVE DATE OF FINAL RULE].
    Par. 13. Section 1.1474-3 is added to read as follows:


Sec.  1.1474-3  Withheld tax as credit to beneficial owner of income.

    (a) Creditable tax. The entire amount of the income, if any, 
attributable to a payment from which tax is required to be withheld 
under chapter 4 of the Internal Revenue Code (including income deemed 
paid by a withholding agent under Sec.  1.1473-1(a)(2)(v)) shall be 
included in gross income in a return required to be made by the 
beneficial owner of the income, without deduction for the amount 
required to be or actually withheld, but the amount of tax actually 
withheld shall be allowed as a credit against the total income tax 
computed in the beneficial owner's return.
    (b) Amounts paid to persons that are not the beneficial owners. 
Amounts actually deducted and withheld under chapter 4 of the Internal 
Revenue Code on payments made to a fiduciary, agent, partnership, 
trust, or intermediary are deemed to have been paid by the beneficial 
owner of the item of income or other payment subject to withholding 
under chapter 4 except when the fiduciary, agent, partnership, trust, 
or intermediary pays the tax from its own funds and does not in turn 
withhold with respect to the payment made to such person. Thus, for 
example, if a beneficiary of a trust is subject to the taxes imposed by 
section 1, 2, 3, or 11 of the Internal Revenue Code upon any amount of 
distributable net income or other taxable distribution received from a 
foreign trust, the part of any amount withheld at source under chapter 
4 of the Code that is properly allocable to the income so taxed to such 
beneficiary shall be credited against the amount of the income tax 
computed upon the beneficiary's return, and any excess shall be 
refunded to the beneficiary in accordance with Sec.  1.1474-5 and 
chapter 65 of the Code.
    (c) Effective/applicability date. The rules of this section apply 
on [EFFECTIVE DATE OF FINAL RULE].
    Par. 14. Section 1.1474-4 is added to read as follows:


Sec.  1.1474-4  Tax paid only once.

    (a) Tax paid. If the tax required to be withheld under chapter 4 on 
a payment is paid by the payee, beneficial owner,

[[Page 9107]]

or the withholding agent, it shall not be re-collected from any other, 
regardless of the original liability therefor. However, this section 
does not relieve the person that did not withhold tax from liability 
for interest or any penalties or additions to tax otherwise applicable.
    (b) Effective/applicability date. The rules of this section apply 
on [EFFECTIVE DATE OF FINAL RULE].
    Par. 15. Section 1.1474-5 is added to read as follows:


Sec.  1.1474-5  Refunds or credits.

    (a) Refund and credit--(1) In general. Except to the extent 
otherwise provided in this section, a refund or credit under chapter 65 
of tax which has actually been withheld at the source at the time of 
payment under chapter 4 shall be made to the beneficial owner of the 
payment to which the amount of withheld tax is attributable if the 
beneficial owner or payee meets the requirements of this paragraph (a). 
To the extent that the amount withheld under chapter 4 of the Internal 
Revenue Code is not actually withheld at source, but is later paid by 
the withholding agent to the IRS, the refund or credit under chapter 65 
of the Code shall be made to the withholding agent to the extent the 
withholding agent can provide documentation with respect to the 
beneficial owner or payee described in paragraphs (a)(2) and (3) of 
this section sufficient for the beneficial owner or payee to have 
obtained a refund of the tax and sufficient for the withholding agent 
to have applied a reduced rate or exemption from withholding under 
chapter 4 of the Code. The preceding sentence shall not, however, apply 
to a nonparticipating FFI that is acting as a withholding agent with 
respect to one or more of its account holders. In such a case, only the 
account holders of the nonparticipating FFI will be entitled to a 
credit or refund of an amount withheld upon under chapter 4, to the 
extent otherwise allowable under this section.
    (2) Limitation to refund and credit for a nonparticipating FFI. 
Notwithstanding paragraph (a)(1) of this section, a nonparticipating 
FFI (determined as of the time of payment) that is the beneficial owner 
of an item of income or other payment that is subject to withholding 
under chapter 4 of the Code shall not be entitled to any credit or 
refund pursuant to section 1474(b)(2) and this section unless it is 
entitled to a reduced rate of tax with respect to the income or other 
payment by reason of any treaty obligation of the United States. If the 
nonparticipating FFI is entitled to a reduced rate of tax with respect 
to an item of income or other payment by reason of any treaty 
obligation of the United States, the amount of any credit or refund 
with respect to such tax shall not exceed the amount of credit or 
refund attributable to such reduction in rate on the item of income or 
other payment, and no interest otherwise allowable under section 6611 
shall be allowed or paid with respect to such credit or refund
    (3) Requirement to provide additional documentation for certain 
beneficial owners--(i) In general. Except as provided in paragraph 
(a)(3)(ii) of this section, no refund or credit shall be allowed under 
paragraph (a)(1) of this section to a beneficial owner from whose 
income or other payment to which the amount of such withheld tax was 
attributable if such beneficial owner is an NFFE, unless the NFFE 
attaches to its income tax return the information described in 
paragraph (a)(3)(iii) of this section.
    (ii) Claim of reduced withholding under an income tax treaty. 
Paragraph (a)(3)(i) of this section does not apply to a beneficial 
owner that is entitled to a reduced rate of tax with respect to the 
income or other payment by reason of any treaty obligation of the 
United States.
    (iii) Additional documentation to be furnished to the IRS for 
certain NFFEs. The information described in this paragraph (a)(3)(iii) 
is--
    (A) A certification that the beneficial owner does not have any 
substantial U.S. owners;
    (B) The form described in Sec.  1.1472-1(e)(2) relating to each 
substantial U.S. owner of such entity; or
    (C) Other appropriate documentation to establish withholding was 
not required under chapter 4.
    (b) Tax repaid to payee. For purposes of this section and Sec.  
1.6414-1, any amount of tax withheld under chapter 4, which, pursuant 
to Sec.  1.1474-2(a)(1), is repaid by the withholding agent to the 
beneficial owner of the income or payment to which the withheld amount 
is attributable shall be considered as tax which, within the meaning of 
sections 1474 and 6414, was not actually withheld by the withholding 
agent.
    (c) Effective/applicability date. The rules of this section apply 
on [EFFECTIVE DATE OF FINAL RULE].
    Par. 16. Section 1.1474-6 is added to read as follows:


Sec.  1.1474-6  Coordination of chapter 4 of the Internal Revenue Code 
with other withholding provisions.

    (a) In general. This section coordinates the withholding 
requirements of a withholding agent when a withholdable payment or 
passthru payment is subject to withholding under both chapter 4 and 
another provision of the Code. See Sec.  1.1473-1(a) for the definition 
of withholdable payment and see Sec.  1.1471-5(h) for the definition of 
passthru payment.
    (b) Coordination of withholding for amounts subject to withholding 
under sections 1441, 1442, and 1443--(1) In general. In the case of a 
withholdable payment or passthru payment that is both subject to 
withholding under chapter 4 and is an amount subject to withholding 
under Sec.  1.1441-2(a), a withholding agent may credit the withholding 
applied under chapter 4 of the Internal Revenue Code against its 
liability for any tax due under sections 1441, 1442, or 1443. See Sec.  
1.1474-1(c) and (d) for the income tax return and information return 
reporting requirements that apply in the case of a payment that is a 
withholdable payment subject to withholding under chapter 4 of the Code 
that is also an amount subject to withholding under Sec.  1.1441-2(a).
    (2) When withholding is applied. For purposes of paragraph (b)(1) 
of this section, withholding is applied by a withholding agent under 
section 1441 (or section 1442 or 1443) or chapter 4 of the Code (as 
applicable) when the withholding agent has withheld on the payment and 
has designated the withholding as having been made under section 1441 
(or section 1442 or 1443) or chapter 4 to the extent required in the 
reporting described in Sec.  1.1474-1(b) and (c). For purposes of 
allowing an offset of withholding and allowing a credit to a 
withholding agent against its liability for such tax as described in 
paragraph (b)(1) of this section, withholding is treated as applied for 
purposes of paragraph (a) of this section only when the withholding 
agent has actually withheld on a payment and has not made any 
adjustment for overwithheld tax applicable to the amount withheld that 
would be otherwise permitted with respect to the payment.
    (c) Coordination with amounts subject to withholding under section 
1445--(1) In general. An amount subject to withholding under section 
1445 is not subject to withholding under chapter 4.
    (2) Determining amount of distribution from certain domestic 
corporations subject to section 1445 or chapter 4 withholding--(i) 
Distribution from qualified investment entity. In the case of a 
passthru payment (including a withholdable payment) subject to 
withholding under chapter 4 that is a distribution with respect to the 
stock of a qualified investment entity as

[[Page 9108]]

described in section 897(h)(4)(A), withholding under chapter 4 does not 
apply when withholding under section 1445 applies to such amounts. With 
respect to the portion of such distribution that is not subject to 
withholding under section 1445 but is subject to withholding under 
section 1441 (or section 1442 or 1443) and chapter 4, the coordination 
rule described in paragraph (b)(1) of this section shall apply.
    (ii) Distribution from a United States Real Property Holding 
Corporation. A distribution (or portion of a distribution) from a 
United States real property holding corporation (or from a corporation 
that was a United States real property holding corporation at any time 
during the five-year period ending on the date of the distribution) 
with respect to its stock that is a United States real property 
interest under section 897(c) is subject to withholding under chapter 4 
and is also subject to the withholding provisions of section 1441 (or 
section 1442 or 1443) and section 1445. In such a case, to the extent 
that the United States real property holding corporation chooses to 
withhold on a distribution only under section 1441 (or section 1442 or 
1443) pursuant to Sec.  1.1441-3(c)(4)(i)(A), the coordination rule 
described in paragraph (b)(1) of this section shall apply to such 
distribution. Alternatively, to the extent that the United States real 
property holding corporation chooses to withhold under both section 
1441 (or section 1442 or 1443) and section 1445 pursuant to Sec.  
1.1441-3(c)(4)(i)(B), the coordination rule described in paragraph 
(b)(1) of this section shall apply to the portion of such distribution 
described in Sec.  1.1441-3(c)(4)(i)(B)(1), and withholding under 
section 1445 shall apply to the amount of such distribution described 
in Sec.  1.1441-3(c)(4)(i)(B)(2). A withholding agent other than a 
United States real property holding corporation may, absent actual 
knowledge or reason to know otherwise, rely on the representations of 
the United States real property holding corporation making the 
distribution regarding the portion of the distribution that is 
estimated to be a dividend under Sec.  1.1441-3(c)(2)(ii)(A) and in the 
case of a failure by the withholding agent to withhold under chapter 4 
the required amount shall be imputed to the United States real property 
holding corporation.
    (d) Coordination with section 1446--(1) In general. Except as 
otherwise provided in paragraph (d)(2) of this section, a withholdable 
payment or a passthru payment subject to withholding under section 1446 
shall not be subject to withholding under chapter 4. See Sec.  1.1473-
1(a)(4)(ii) for the exclusion from withholdable payment and the 
requirements for such exclusion for any item of income that is taken 
into account under section 871(b)(1) or 882(a)(1) for the taxable year.
    (2) Determining amount of distribution subject to section 1446. 
[Reserved].
    (e) Coordination of withholding under section 3406. [Reserved].

    (f) Example. Chapter 4 withholding satisfies chapter 3 
withholding obligation. WA, a U.S. withholding agent, makes a 
payment consisting of a dividend from sources within the United 
States to NPFFI. NPFFI is a nonparticipating FFI that is a resident 
of country X, a country that has an income tax treaty in force with 
the United States that would allow WA to reduce the rate of 
withholding for section 1442 purposes on a payment of U.S. source 
dividends paid to NPFFI to 15%. Because the payment is a 
withholdable payment and NPFFI is a nonparticipating FFI, WA 
withholds on the payment at the rate of 30% under chapter 4. WA does 
not make any adjustment for overwithholding that is otherwise 
permitted with respect to this payment. Although the payment is also 
an amount subject to withholding under section 1442, WA is not 
required to withhold any tax on this payment under section 1442. WA 
may credit its withholding applied under chapter 4 against the 
amount of tax otherwise required to be withheld on this payment 
under section 1442. See Sec.  1.1474-5(a)(2) for the credit and 
refund procedures for nonparticipating FFIs that are entitled to a 
reduced rate of tax with respect to an amount subject to withholding 
under chapter 4 by reason of any treaty obligation of the United 
States.

    (g) Effective/applicability date. The rules of this section apply 
on [EFFECTIVE DATE OF FINAL RULE].
    Par. 17. Section 1.1474-7 is added to read as follows:


Sec.  1.1474-7  Confidentiality of information.

    (a) Confidentiality of information. Pursuant to section 1474(c)(1), 
the provisions of Sec.  3406(f)-1(a) shall apply (substituting 
``sections 1471 through 1474'' for ``section 3406'') to information 
obtained or used in connection with the requirements of chapter 4.
    (b) Exception for disclosure of participating FFIs. Pursuant to 
section 1474(c)(2), the identity of a participating FFI or deemed-
compliant FFI shall not be treated as return information for purposes 
of section 6103.
    (c) Effective/applicability date. The rules of this section apply 
on [EFFECTIVE DATE OF FINAL RULE].

PART 301--PROCEDURE AND ADMINISTRATION

    Par. 18. The authority citation for part 301 is amended by adding 
an entry, in numerical order, to read as follows:

    Authority:  26 U.S.C. 7805 * * *

    Section 301.1474-1 also issued under 26 U.S.C. 1474(f). * * *

    Par. 19. Section 301.1474-1 is added to read as follows:


Sec.  301.1474-1  Required use of magnetic media for financial 
institutions filing Form 1042-S.

    (a) Financial institutions filing of information returns on Form 
1042-S. If a financial institution is required to file a Form 1042-S, 
Foreign Person's U.S. Source Income Subject to Withholding under Sec.  
1.1474-1(d) of this chapter, the financial institution must file the 
information required by the applicable forms and schedules on magnetic 
media. Returns filed on magnetic media must be made in accordance with 
applicable regulations, revenue procedures, publications, forms, 
instructions and the IRS.gov Internet site. In prescribing regulations, 
revenue procedures, publications, forms, and instructions, including 
those on the IRS.gov Internet site, the Commissioner may direct the 
type of magnetic media filing. See Sec.  601.601(d)(2) of this chapter.
    (b) Waiver. The Commissioner may grant waivers from the 
requirements of this section in cases of undue hardship. A request for 
waiver must be made in accordance with applicable revenue procedures or 
publications. The waiver also will be subject to the terms and 
conditions regarding the method of filing as may be prescribed by the 
Commissioner.
    (c) Failure to file. If a financial institution fails to file a 
Form 1042-S on magnetic media when required to do so by this section, 
the financial institution is deemed to have failed to comply with the 
information reporting requirements under section 6723 of the Internal 
Revenue Code. See section 6724(c) for failure to meet magnetic media 
requirements. In determining whether there is reasonable cause for 
failure to file the return, Sec.  301.6651-1(c) and rules similar to 
the rules in Sec.  301.6724-1(c)(3) (undue economic hardship related to 
filing information returns on magnetic media) will apply.
    (d) Meaning of terms. The following definitions apply for purposes 
of this section--
    (1) Magnetic media. The term magnetic media means any magnetic 
media permitted under applicable

[[Page 9109]]

regulations, revenue procedures, or publications. These generally 
include magnetic tape, tape cartridge, and diskette, as well as other 
media, such as electronic filing, specifically permitted under the 
applicable regulations, procedures, publications, forms, or 
instructions. See Sec.  601.601(d)(2) of this chapter.
    (2) Financial institution. The term financial institution has the 
meaning set forth in section 1471(d)(5) of the Internal Revenue Code 
and the regulations thereunder.
    (e) Effective/applicability date. This section applies to any Form 
1042-S filed with respect to taxable years ending after December 31, 
2013.

Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2012-2979 Filed 2-8-12; 8:45 am]
BILLING CODE 4830-01-P