Regulations Relating to Information Reporting by Foreign Financial Institutions and Withholding on Certain Payments to Foreign Financial Institutions and Other Foreign Entities, 5873-5995 [2013-01025]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 78, Number 18 (Monday, January 28, 2013)]
[Rules and Regulations]
[Pages 5873-5995]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-01025]



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Vol. 78

Monday,

No. 18

January 28, 2013

Part II





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; Final Rule

Federal Register / Vol. 78 , No. 18 / Monday, January 28, 2013 / 
Rules and Regulations

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 301

[TD 9610]
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: Final Regulations.

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SUMMARY: This document contains final 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.

DATES: Effective date. These regulations are effective January 28, 
2013.
    Applicability dates. For dates of applicability, see Sec. Sec.  
1.1471-1(c); 1.1471-2(a)(1); 1.1471-2(a)(2)(i), (ii), (iii)(A); 1.1471-
2(a)(4)(ii); 1.1471-3(d)(1); 1.1471-3(d)(4)(i), (ii); (iv); 1.1471-
3(d)(6)(v); 1.1471-3(d)(11)(viii)(A); 1471-3(d)(12)(iii)(B); 1471-
3(e)(3)(ii); 1471-3(e)(4)(vii)(B); 1.1471-4(b)(1), (4); 1.1471-4(d)(7); 
1.1471-4(e)(2)(v); 1.1471-4(e)(3)(iv); 1.1471-5(f)(2)(iv); 1.1471-6(i); 
1.1472-1(b); 1.1473-1(a)(1)(ii) and 1.1473-1(a)(4)(vi); 1.1474-
1(d)(4)(iii)(C) and 1.1474-1(i); 1.1474-2(c); 1.1471-3(c); 1.1474-4(b); 
1.1474-5(c); 1.1474-6(f); 1.1474-7(c); 301.1474-1(e).

FOR FURTHER INFORMATION CONTACT: John Sweeney, (202) 622-3840 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Background

I. In General

    This document contains final amendments to the Income Tax 
Regulations (CFR parts 1 and 301) under sections 1471 through 1474 of 
the Code (commonly known as the Foreign Account Tax Compliance Act, or 
FATCA). 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. Chapter 4 generally requires U.S. withholding agents to withhold 
tax on certain payments to foreign financial institutions (FFIs) that 
do not agree to report certain information to the Internal Revenue 
Service (IRS) regarding their United States accounts (U.S. accounts), 
and on certain payments to certain nonfinancial foreign entities 
(NFFEs) that do not provide information on their substantial United 
States owners (substantial U.S. owners) to withholding agents. 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). The FATCA Notices are available 
at IRS.gov.
    On February 15, 2012 (77 FR 9022), the Treasury Department and the 
IRS published a notice of proposed rulemaking (the proposed 
regulations) addressing chapter 4's due diligence, withholding, 
reporting, and associated requirements. On October 24, 2012, the 
Treasury Department and the IRS released Announcement 2012-42, which 
announced the intention to amend certain provisions of the proposed 
regulations in adopting the final regulations.
    The Treasury Department and the IRS received numerous comments in 
response to the proposed regulations, and a public hearing on the 
proposed regulations was held on May 15, 2012. The comments received in 
writing and at the public hearing were carefully considered in 
developing these final regulations.

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

    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 U.S. voluntary tax 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 U.S. voluntary tax 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 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.

III. Statutory Provisions

    The following discussion briefly explains the statutory provisions 
of FATCA, which are implemented by these regulations. 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

[[Page 5875]]

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 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

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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.

IV. Balanced and Integrated Approach to Implementing Chapter 4

    Chapter 4 grants the Secretary of the Treasury broad regulatory 
authority to prescribe rules and procedures relating to the diligence, 
reporting, and withholding obligations of the statute. These final 
regulations exercise this authority by providing specific operational 
guidelines for implementing FATCA in a manner consistent with its 
principal policy objectives. Recognizing that there are costs 
associated with the implementation of any new withholding and reporting 
regime, the Treasury Department and the IRS solicited comments and 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. This engagement resulted in hundreds of constructive 
comments from and numerous productive meetings with stakeholders. While 
the comments covered a broad range of issues relating to the 
implementation of FATCA, the vast majority of commenters expressed 
concerns regarding the costs and burdens associated with implementing 
FATCA and the legal impediments to compliance in a number of 
jurisdictions. Comments also expressed concerns regarding the 
procedural and systems aspects of registering and reporting.
    The Treasury Department and the IRS carefully considered these 
comments and established three avenues for addressing the principal 
concerns regarding burdens, legal impediments, and technical 
implementation. The first avenue was to adopt a risk-based approach to 
implementing the statute that effectively addresses policy 
considerations, eliminates unnecessary burdens, and, to the extent 
possible, builds on existing practices and obligations. The second 
avenue was to collaborate with foreign governments to develop an 
alternative intergovernmental approach to implementing chapter 4 that 
removes legal impediments, allows for alignment and coordination with 
local law reporting practices, and achieves further burden reductions. 
The third avenue was to develop administrative approaches to simplify 
the process for registering and entering into an agreement with the IRS 
in order to minimize operational costs associated with collecting and 
reporting FATCA information.

A. Targeted Regulations

    These final regulations address potential administrative burdens 
associated with FATCA compliance by adopting a risk-based and targeted 
approach to implement the statute with respect to scope, diligence, and 
timing. In particular, with respect to scope, consistent with the 
objectives of the statute, the regulations limit the institutions, 
obligations, and accounts subject to FATCA to more specifically target 
concerns and address practical considerations. For example, the final 
regulations refine the scope of FATCA in the following ways:
     Expansion of Grandfather Rule for Certain Obligations. To 
promote the orderly implementation of FATCA, the final regulations 
exempt from chapter 4 withholding all obligations outstanding on 
January 1, 2014, and any associated collateral. In addition, because 
evolving areas of the law may create chapter 4 withholding obligations 
in the future and create uncertainty and risk in the meantime, the 
final regulations address obligations (and associated collateral) that 
may give rise to withholdable payments through future regulations under 
section 871(m) (relating to dividend equivalent payments) or to foreign 
passthru payments under the chapter 4 foreign passthru payment rules. 
Such obligations are grandfathered if the obligations are outstanding 
at any point prior to six months after the implementing regulations are 
published.
     Scope of Covered Financial Institutions. In response to 
comments, the final regulations treat passive entities that are not 
professionally managed as NFFEs rather than as FFIs. The final 
regulations also provide appropriate exemptions for financial 
institutions and certain passive NFFEs that are part of a nonfinancial 
group of companies and that support the operations of the group.
     Expansion of Deemed Compliant and Other Exempt Categories. 
The final regulations expand the categories of FFIs that are deemed to 
comply with FATCA without the need to enter into an agreement with the 
IRS in order to focus the application of FATCA on higher-risk financial 
institutions that provide services to the global investment community. 
In addition, the final regulations expand the scope of retirement funds 
that are considered exempt beneficial owners the income of which is not 
subject to chapter 4 withholding.
    With respect to diligence, the final regulations reduce the 
administrative burdens associated with identifying U.S. accounts by 
calibrating due diligence requirements based on the value and risk 
profile of the account, and by permitting FFIs in many cases to rely on 
information they already collect. For example, the final regulations 
reduce the burdens associated with identifying U.S. accounts in the 
following ways:
     Accounts exempt from review. The final regulations exempt 
from review entirely all preexisting accounts held by individuals with 
a balance or value of $50,000 or less. This threshold is raised to 
$250,000 for preexisting accounts held by entities and for preexisting 
accounts that are cash value insurance and annuity contracts. In 
addition, the final regulations exempt insurance contracts with a 
balance or value of $50,000 or less from treatment as financial 
accounts.
     Reduced diligence and documentation rules for lower value 
preexisting accounts. In the case of preexisting accounts with a 
balance or value of $1,000,000 or less, the final regulations permit a 
participating FFI to determine whether any of its accounts held by 
individuals are U.S. accounts based solely on a search of 
electronically searchable account information for certain U.S. indicia. 
In addition, for such accounts held by passive NFFEs, the final 
regulations allow a withholding agent to rely on its review conducted 
for anti-money laundering due diligence purposes to identify any 
substantial U.S. owners of the payee in lieu of obtaining a 
certification.
     Reliance on self-certification. In the case of accounts 
held by entities, the final regulations expand the ability of FFIs to 
rely on a self-certification from

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an account holder as to its chapter 4 status.
    Finally, with respect to timing, the final regulations allow 
reasonable timeframes to review existing accounts and implement FATCA's 
obligations in stages to minimize burdens and costs consistent with 
achieving the statute's compliance objectives. For example:
     Time allowed for review of pre-existing accounts. The 
final regulations treat all accounts maintained by an FFI prior to 
January 1, 2014, as preexisting accounts. In addition, the final 
regulations allow participating FFIs and withholding agents until 
December 31, 2015, to document account holders and payees that are not 
prima facie FFIs.
     Phased implementation of reporting. The final regulations 
modify the due date for the first information report by requiring 
participating FFIs to file the first information reports with respect 
to the 2013 and 2014 calendar years not later than March 31, 2015.
     Phased implementation of withholding on passthru payments 
and gross proceeds. The final regulations exempt from withholding 
foreign passthru payments and gross proceeds from sales or dispositions 
of property occurring before January 1, 2017.

B. Intergovernmental Agreements

1. In General
    In many cases, foreign law would prevent an FFI from reporting 
directly to the IRS the information required by the FATCA statutory 
provisions and these regulations, thus potentially exposing the FFI to 
withholding. Such an outcome would be inconsistent with FATCA's 
objective to address offshore tax evasion through increased information 
reporting. To overcome these legal impediments, the Treasury Department 
has collaborated with foreign governments to develop two alternative 
model intergovernmental agreements that facilitate the effective and 
efficient implementation of FATCA in a manner that removes domestic 
legal impediments to compliance, fulfills FATCA's policy objectives, 
and further reduces burdens on FFIs located in partner jurisdictions.
    The first model intergovernmental agreement was published on July 
26, 2012. A partner jurisdiction signing an agreement with the United 
States based on the first model (Model 1 IGA) agrees to adopt rules to 
identify and report information about U.S. accounts that meet the 
standards set out in the Model 1 IGA. FFIs covered by a Model 1 IGA 
that are not otherwise excepted or exempt pursuant to the agreement 
must identify U.S. accounts pursuant to due diligence rules adopted by 
the partner jurisdiction and report specified information about the 
U.S. accounts to the partner jurisdiction. The partner jurisdiction 
then exchanges this information with the IRS on an automatic basis. 
These standards ensure that the IRS will receive the same quality and 
quantity of information about U.S. accounts from FFIs covered by a 
Model 1 IGA as it receives from FFIs applying these final regulations.
    A second model intergovernmental agreement was published on 
November 14, 2012. A partner jurisdiction signing an agreement with the 
United States based on the second model (Model 2 IGA) agrees to direct 
and enable all FFIs that are located in the jurisdiction, and that are 
not otherwise excepted or exempt pursuant to the Model 2 IGA, to 
register with the IRS and report specified information about U.S. 
accounts directly to the IRS in a manner consistent with chapter 4 and 
these final regulations, except as expressly modified by the Model 2 
IGA. In the case of certain recalcitrant account holders, the 
information reported to the IRS by FFIs covered by a Model 2 IGA is 
supplemented by government-to-government exchange of information.
    Both Model 1 IGAs and Model 2 IGAs (together, IGAs) contemplate 
that the partner jurisdiction will require all financial institutions 
that are located in the jurisdiction, and that are not otherwise 
excepted or exempt pursuant to the agreement, to identify and report 
information about U.S. accounts. In consideration of the full 
cooperation by the partner jurisdiction, the model agreements 
contemplate a number of simplifications and burden reductions 
associated with the application of FATCA in the partner jurisdiction. 
The Treasury Department and the IRS believe that IGAs represent 
efficient and effective ways of implementing the requirements of 
chapter 4 and will continue to conclude bilateral agreements based on 
the two models with interested jurisdictions. In addition, the Treasury 
Department and the IRS continue to receive comments strongly supporting 
the approach to FATCA implementation embodied in the IGAs. 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.
2. Interaction of IGAs With the Final Regulations
    FFIs covered by a Model 1 IGA, and that are in compliance with 
local laws implemented to identify and report U.S. accounts in 
accordance with the terms of the Model 1 IGA, will be treated as 
satisfying the due diligence and reporting requirements of chapter 4. 
Accordingly, consistent with the terms of the Model 1 IGA, these FFIs 
do not need to apply the final regulations for purposes of complying 
with and avoiding withholding under FATCA. In certain cases prescribed 
in the Model 1 IGA, the laws of the partner jurisdiction may allow the 
resident FFI to elect to apply provisions of these regulations instead 
of the rules otherwise prescribed in the Model 1 IGA.
    FFIs covered by a Model 2 IGA with the United States will be 
required to implement FATCA in the manner prescribed by these 
regulations except to the extent expressly modified by the Model 2 IGA. 
The final regulations accommodate such variations.

C. Streamlined Registration and Technical Implementation

    FFIs registering with the IRS will be able to do so through a 
secure online web portal, the FATCA Registration Portal (Portal), from 
anywhere in the world. The Portal is designed to accomplish an entirely 
paperless registration process. Registering FFIs will be able to use 
the Portal to register their chapter 4 status (such as participating 
FFI or reporting Model 1 FFI (both as defined in the final 
regulations)), manage their registration information, and, as 
appropriate, agree to the terms of or make the representations required 
for their status. The Portal will also facilitate electronic 
communication between the IRS and FFIs and other registrants. 
Registered FFIs designated as leads of an expanded affiliated group 
will be able to use the Portal to manage the registration status of 
group members. The Portal will also be used by registering FFIs that 
are already Qualified Intermediaries (QIs) to renew their QI status. An 
FFI's submission and maintenance of registration information through 
the Portal will maximize processing efficiencies, minimize errors, and 
ensure expedient issuance of a Global Intermediary Identification 
Number (``GIIN''). An FFI will use its GIIN to establish its chapter 4 
status for withholding purposes and to identify the institution for 
reporting purposes under the final regulations. The IRS currently 
contemplates that the GIIN may also be used by reporting Model 1 FFIs 
to satisfy reporting requirements under local law and is discussing 
this possibility with its Model 1 IGA partners. With regard to 
reporting, the IRS is also discussing with partner jurisdictions the 
possibility of adopting

[[Page 5878]]

a single format for reporting FATCA information, whether that 
information is reported directly to the IRS or to the tax 
administration in a Model 1 IGA jurisdiction.
    The IRS also anticipates that the certifications of compliance 
required to be made by responsible officers pursuant to Sec. Sec.  
1.1471-4(c)(7) and 1.1471-4(f)(3) will be made electronically through 
the Portal, resulting in similar efficiencies.

Summary of Comments and Explanation of Revisions

I. In General

    The Treasury Department and the IRS received a number of general 
comments requesting improvements to the readability of the proposed 
regulations. In response, the Treasury Department and the IRS made 
substantial changes in the final regulations to simplify and clarify 
the chapter 4 rules. In addition, the Treasury Department and the IRS 
received numerous specific comments regarding the proposed regulations 
and made numerous changes to the final regulations in response to those 
comments.
    The following discussion addresses the significant changes in the 
final regulations from the proposed regulations. To facilitate this 
discussion, the defined terms from Sec.  1.1471-1(b) are used 
throughout.

II. Comments and Changes to Sec.  1.1471-1--Scope of Chapter 4 and 
Definitions

    The chapter 4 definitions have been revised to reflect the IGAs and 
other changes adopted in the final regulations. Revisions of the 
definitions are discussed as relevant in the succeeding sections of 
this preamble.

III. Comments and Changes to Sec.  1.1471-2--Requirement To Deduct and 
Withhold Tax on Withholdable Payments to Certain FFIs

A. Grandfathered Obligations

    Comments requested modifications to the scope of grandfathered 
obligations to facilitate market transition and allow time for adapting 
master agreements and collateral arrangements in light of the IGAs, the 
future issuance of guidance under section 871(m), and other systems 
developments. In response, the final regulations provide that 
grandfathered obligations consist of: (1) Any obligation outstanding on 
January 1, 2014; (2) any obligation that produces withholdable payments 
solely because the obligation is treated as giving rise to a dividend 
equivalent pursuant to section 871(m) and the regulations thereunder 
and that is executed on or before the date that is six months after the 
date on which obligations of its type are first treated as giving rise 
to dividend equivalents; and (3) any agreement requiring a secured 
party to make payments with respect to collateral securing one or more 
grandfathered obligations (even if the collateral is not itself a 
grandfathered obligation). If collateral (or a pool of collateral) 
secures both grandfathered obligations and obligations that are not 
grandfathered, the collateral posted to secure the grandfathered 
obligations must be determined by allocating (pro rata by value) the 
collateral (or, in the case of a pool of collateral, each item 
comprising the pool of collateral) to all outstanding obligations 
secured by the collateral (or pool of collateral).
    In addition, the final regulations provide that an obligation will 
not give rise to a foreign passthru payment if it is executed on or 
before the date that is six months after the date on which final 
regulations defining the term foreign passthru payment are filed with 
the Federal Register. Comments also requested clarification of the 
outstanding date of a debt instrument that is reopened in a qualified 
reopening under Sec.  1.1275-2(k). For debt obligations, the final 
regulations determine the date the obligation is outstanding based on 
the issue date of the debt. Thus, whether debt issued in a qualified 
reopening will be treated as a grandfathered obligation depends on the 
issue date of the original debt, which is the issue date of the debt 
issued in the qualified reopening.
    The final regulations also provide that the date a non-debt 
obligation is outstanding is the date a legally binding agreement is 
executed. Thus, a line of credit or a revolving credit facility for a 
fixed term may qualify as an obligation provided that the agreement as 
of its issue date fixes the material terms (including a stated maturity 
date) under which the credit will be provided.
    In response to comments regarding insurance contracts, the final 
regulations provide that: (1) a life insurance contract payable no 
later than upon the death of the insured individual(s) is an obligation 
that may qualify as a grandfathered obligation; and (2) premiums paid 
for an insurance contract or annuity contract that is treated as a 
grandfathered obligation are treated as payments made under a 
grandfathered obligation.
    Finally, comments requested provisions to simplify a withholding 
agent's determination of whether an obligation is grandfathered. 
Accordingly, the final regulations provide that: (1) A withholding 
agent, other than the issuer of the obligation (or an agent of the 
issuer) may, absent actual knowledge, rely on a written statement by 
the issuer of the obligation to determine whether such obligation meets 
the requirements for grandfathered treatment; (2) a withholding agent 
is required to treat a modification as material only if the withholding 
agent knows or has reason to know that such modification was material; 
and (3) a withholding agent, other than the issuer of the obligation 
(or an agent of the issuer), absent actual knowledge, will have reason 
to know of a material modification if it receives a disclosure thereof 
from the issuer of the obligation (or from such issuer's agent).

B. Other Changes to the Withholding Provisions

    Comments requested that the withholding provisions under chapter 4 
conform with certain withholding provisions of chapter 3. In addition, 
comments requested that the election to be withheld upon under section 
1471(b)(3) and provided in the proposed regulations be available on an 
account-by-account basis. In response to these comments, the final 
regulations: (1) Clarify the exception to withholding when a 
withholding agent lacks control, custody, or knowledge of a payment; 
(2) treat a payment as a withholdable payment in the absence of 
knowledge of its source or character, or allow for up to a one-year 
escrow of 30 percent of the payment pending a determination of the 
relevant facts; and (3) permit the election to be withheld upon 
pursuant to Sec.  1.1471-2(a)(2)(iii) to be made on an account-by-
account basis, provided other applicable requirements are satisfied.

IV. Comments and Changes to Sec.  1.1471-3--Identification of Payee

A. Documentation Alternatives

1. In General
    Comments requested that the final regulations generally permit a 
withholding agent to rely upon a withholding certificate to establish 
the chapter 4 status of a payee without obtaining additional 
documentary evidence, unless such documentary evidence is required 
under chapter 3. This comment was adopted. The final regulations 
further expand the types of documentary evidence upon which a 
withholding agent may rely with respect to offshore obligations, 
including government Web sites and reports from government agencies. 
For preexisting obligations, the final regulations permit a withholding 
agent to rely on information previously recorded in the withholding 
agent's files, in addition to

[[Page 5879]]

standardized industry codes, in determining the chapter 4 status of the 
payee. For these purposes, a standardized industry code may be any 
coding system employed by the withholding agent.
2. Written Statements
    Comments requested that the final regulations permit reliance on 
written statements without additional documentation for offshore 
obligations that do not generate payments of U.S. source FDAP income 
(such as a depository account maintained outside of the United States 
by an FFI) and enumerate the elements they must contain. This comment 
was adopted. A written statement may also be relied upon with respect 
to an offshore obligation that generates payments of U.S. source FDAP 
income if it is accompanied by documentary evidence establishing the 
foreign status of the person named on the written statement.
    Comments noted that signed documentation outside of the United 
States generally does not require signature under penalties of perjury, 
and that such a requirement would depart from current AML due diligence 
procedures. The final regulations remove the penalties of perjury 
requirement for written statements used as documentation for payments 
made outside of the United States on offshore obligations, other than 
for payments of U.S. source FDAP income.
3. Substitute and Non-IRS Forms
    Comments requested the ability to use substitute forms, including 
forms prepared or filled out in a foreign language. In response, the 
final regulations provide that substitute forms may be both prepared in 
and filled out in a foreign language, provided the withholding agent 
furnishes the IRS with a translated version upon request. Such 
substitute forms must contain the same certifications as the official 
IRS form to the extent relevant. For this purpose, a substitute form 
for individuals is acceptable, provided that the form contains the 
required information, including the individual's permanent residence 
address, all relevant tax identification numbers, and, if not signed 
under penalties of perjury, the withholding agent has obtained 
applicable documentary evidence that supports the person's claim of 
foreign status. Qualifying non-IRS forms may be used within the United 
States as well as for offshore obligations, and also may be used for 
purposes of chapter 3 to the extent provided in Sec.  1.1441-
1(e)(4)(vi).
4. Reliance on Pre-FATCA Form W-8
    In response to comments that FFIs would have difficulty obtaining 
new documentation on all preexisting account holders in a compressed 
time frame, the final regulations provide that a withholding agent may 
rely upon a pre-FATCA Form W-8 in lieu of obtaining an updated version 
of the withholding certificate in certain circumstances.
5. Curing Inconsequential Errors
    Comments requested that a minor error in a withholding certificate 
not invalidate the certificate if the error can be cured with 
supplemental information already on file for the payee. In response, 
the final regulations provide that a withholding agent may treat a 
withholding certificate as valid, notwithstanding an inconsequential 
error, if it otherwise has sufficient documentation to cure the error 
that does not contradict the information on the withholding 
certificate. A failure to make a required certification, or to provide 
a country of residence (or country under which treaty benefits are 
sought), is not an inconsequential error.

B. Continuing Validity of Documentation

    Comments requested relief from the general requirement to refresh 
documentation every three years. In response, the final regulations 
permit documentation to remain valid indefinitely, subject to a change 
in circumstances, if the chapter 4 status claimed is a specified low-
risk category. The Treasury Department and the IRS are considering 
extending the final regulations' validity rule to chapter 3 in 
appropriate circumstances (for example, when the payee does not make a 
claim that withholding under chapter 3 is reduced pursuant to a 
treaty).

C. Owner-Documented FFIs

    In response to comments requesting reduced documentation 
requirements for the owner-documented FFI provisions, the final 
regulations make several modifications that also take into account the 
policy considerations presented by owner-documented FFIs. These 
modifications include: (1) permitting transitional reliance, subject to 
certain requirements, on documentation collected for AML due diligence 
purposes for payments made prior to January 1, 2017, on preexisting 
obligations; (2) allowing such entities to issue debt interests to an 
expanded group of holders, provided such debt holders are reported in 
the same manner as equity holders; (3) simplifying the withholding 
statement provided for an owner-documented FFI; and (4) providing for 
indefinite validity for withholding certificates and withholding 
statements submitted with respect to obligations having an aggregate 
value equal to or less than $1,000,000.

D. ``Eyeball Test'' and Effectively Connected Income Presumption

    Comments requested that chapter 4 incorporate the so-called 
``eyeball test'' under chapters 3 and 61 that treats payments inside 
the United States to certain entities that have ``incorporated,'' 
``corporation,'' or an indication of status as a financial institution 
in their names as made to U.S. exempt recipients. Moreover, comments 
noted that withholding agents often already obtain documentary evidence 
for these entities to satisfy AML due diligence requirements. In 
response to these comments, the final regulations permit a withholding 
agent to rely upon documentary evidence obtained with respect to the 
payee, in lieu of a Form W-9, in order to establish the entity's status 
as a U.S. person and rely on the ``eyeball test'' to determine (to the 
extent applicable) the payee's status as other than a specified U.S. 
person under chapter 4.
    Comments also requested that the final regulations incorporate the 
chapter 3 rules under which withholding agents are permitted to presume 
that payments made to U.S. branches of certain banks and insurance 
companies are payments of income that is effectively connected with the 
conduct of a trade or business within the United States. In response, 
the regulations permit a withholding agent to presume that a payment 
made to a U.S. branch of certain banks and insurance companies is a 
payment of income that is effectively connected with a trade or 
business within the United States (and thus not a withholdable payment) 
if the withholding agent obtains a GIIN that enables the withholding 
agent to confirm that the FFI is a participating FFI or registered 
deemed-compliant FFI, as well as an EIN for the U.S. branch that 
enables the withholding agent to properly report the payment. 
Conforming changes are anticipated to be made to the presumption rule 
in chapter 3 to provide consistency with the rule set forth in these 
regulations.

E. Rules for Offshore Obligations of Funds and New Accounts of 
Preexisting Customers

    Comments requested additional clarity regarding when an interest in 
an investment fund should be treated as an offshore obligation. 
Comments also

[[Page 5880]]

stated that, in general, an investment fund's office is not separate 
from that of its manager or administrator, and shares issued by 
investment funds are not ``maintained and executed'' at a particular 
office. In response to these comments, the definition of an offshore 
obligation has been amended to clarify that an offshore obligation also 
includes an equity interest in a foreign entity if the owner of the 
interest purchased the interest outside the United States either 
directly from the foreign entity or from another entity located outside 
the United States.
    Comments also requested that a new account of a preexisting 
customer be treated as a preexisting obligation. Comments stated that 
in such cases, withholding agents and FFIs generally do not get 
additional documentation from the customer because they are not 
required to do so for AML due diligence purposes. In response to these 
comments, the final regulations permit a new account of a customer that 
has a preexisting obligation to be treated as a preexisting obligation, 
provided that the withholding agent or FFI maintaining the account also 
treats the new obligation and the prior obligation as one obligation 
for purposes of applying AML due diligence, aggregating balances, and 
applying the standards of knowledge for purposes of chapter 4. The 
final regulations also permit this treatment to apply on a group basis 
for expanded affiliated groups and sponsored FFI groups.

F. Standards of Knowledge

    Under the final regulations, the standards of knowledge provisions 
have been modified to allow withholding agents to rely on a claim of 
status as a participating or registered-deemed compliant FFI based on 
checking the payee's GIIN against the published IRS FFI list. Prior to 
January 1, 2015, a withholding agent is not required to confirm GIINs 
regarding an FFI's claim of status as a reporting Model 1 FFI. However, 
an FFI will have reason to know that such claim is unreliable if the 
withholding agent does not have a permanent residence address for the 
FFI (or address of the relevant branch) in the relevant country that 
has in effect a Model 1 IGA.
    The final regulations further provide: (1) Limits, generally 
conformed with the chapter 3 limits, on a withholding agent's reason to 
know regarding a payee's claim of status as a foreign person; (2) 
limits on the review that must be conducted with respect to particular 
types of documentation, and in particular on the scope of review with 
respect to preexisting obligations; and (3) further guidance regarding 
when a payee has made a reasonable explanation regarding the presence 
of U.S. indicia. The Treasury Department and the IRS intend to issue 
guidance under chapter 3 that is consistent with the rules in these 
regulations regarding such reasonable explanations.

G. Reliance on Presumptions in Lieu of Documentation

    Under the final regulations, a withholding agent may choose to rely 
on presumption rules in lieu of accepting and reviewing documentation 
of payees. This accommodates withholding agents that are unsure whether 
the documentation they have obtained is reliable or that do not wish to 
accept the responsibility associated with the acceptance of the 
documentation.

H. Consolidation and Sharing of Documentation, and Third-Party Reliance

    Comments requested reduction of duplicative documentation 
requirements, facilitation of documentation sharing, and more detailed 
rules regarding reliance on agents or third-party service providers. In 
response, the final regulations adopt the following provisions.
1. Multiple Accounts of the Same Payee
    The final regulations provide rules (consistent with chapter 3 in 
Sec.  1.1441-1(e)(4)(ix)(A)) for a withholding agent to rely on 
documentation for multiple accounts of the same payee if the 
withholding agent aggregates the balance or value of those accounts 
(when relevant) and shares information across those accounts for 
purposes of determining when the withholding agent has actual knowledge 
or reason to know that the chapter 4 status claimed is inaccurate.
2. Mergers or Bulk Acquisitions
    The final regulations provide a temporary six month period during 
which withholding agents that acquire accounts in a merger or bulk 
acquisition for value may rely, in the absence of contrary knowledge or 
a change in circumstances, upon the chapter 4 statuses assigned by a 
predecessor that is a U.S. withholding agent, a participating FFI, or a 
reporting Model 1 FFI that has completed all due diligence required 
under its agreement or pursuant to the applicable Model 1 IGA, provided 
that the predecessor is not a member of the withholding agent's 
expanded affiliated group prior to a merger or bulk acquisition, or 
after a bulk acquisition. At the end of the temporary period, the 
acquirer may continue to so rely only if the documentation it has, 
including the acquired documentation, supports the chapter 4 statuses 
claimed.
3. Common Agents
    The final regulations provide rules (consistent with Sec.  1.1441-
1(e)(4)(ix)(A)(4) and (B)) with respect to sharing and relying upon 
documentation that has been provided by a common agent for multiple 
parties, including a fund advisor or principal underwriter that 
collects documentation for a family of mutual funds. This reliance is 
made contingent upon the agent also sharing any knowledge regarding 
inaccuracy or unreliability of the chapter 4 status claims across all 
the withholding agents with which the agent shares the documentation.
4. Third-Party Data Providers
    The final regulations provide rules permitting a withholding agent 
to rely upon documentation collected with respect to an entity by a 
third-party data provider, subject to conditions including: (1) The 
third-party data provider is in the business of collecting information 
regarding entities and providing business reports or credit reports to 
unrelated customers and must have reviewed all information it has for 
the entity and verified that such additional information does not 
conflict with the chapter 4 status claimed by the entity; (2) the 
third-party data provider collects documentation sufficient to meet the 
applicable documentation requirements; and (3) the third-party data 
provider provides notice of changes in circumstances. This provision 
permits withholding agents to rely upon documentation collected by a 
third-party data provider, but does not relieve the withholding agent 
of the obligation to determine whether that documentation is reliable 
based on the information contained in the documentation and other 
information in the withholding agent's files.
5. Introducing Brokers
    Comments requested that for purposes of chapter 4 a withholding 
agent be permitted to rely upon certifications regarding a payee's 
chapter 4 status provided by an introducing broker that is a QI or 
participating FFI (in addition to introducing brokers who are U.S. 
persons, as provided under the proposed regulations). In response to 
these comments, the final regulations permit reliance upon a 
certification provided by a participating FFI (which includes a QI that 
is a financial institution) if the participating FFI is

[[Page 5881]]

acting as an agent of the payee with respect to an obligation and 
receiving all payments made by the withholding agent with respect to 
that obligation on behalf of the payee, provided that certain 
requirements are met and the withholding agent does not know or have 
reason to know that the broker has not obtained valid documentation as 
represented or the information contained in the certification is 
otherwise inaccurate.
6. Transfer Agents
    Comments requested that a transfer agent's obligations as a 
withholding agent be limited to the obligations of the principal on 
behalf of which the transfer agent acts in order to avoid duplicative 
efforts or conflicts between the standards applicable to the transfer 
agent and the principal. In response, the final regulations provide 
that merely acting as an agent with respect to a financial account 
belonging to the principal will not cause the agent to also have a 
financial account for that customer unless the agent would be treated 
as having the financial account independent of its actions as an agent. 
An agent that makes a payment on behalf of a principal is a withholding 
agent with respect to the payment and, accordingly (as under chapter 3) 
has a responsibility to determine the chapter 4 status of the payee and 
withhold, if required. However, because the obligation belongs to the 
principal, the level of due diligence that must be completed with 
respect to the obligation is determined by the obligation's status with 
respect to the principal. In order to minimize any duplicative 
responsibilities, the final regulations permit the agent to rely 
(absent contrary knowledge or reason to know) upon documentation 
collected by the principal or a certification by the principal that 
appropriate documentation has been collected.

I. Electronic Transmission of Documentation

    Comments requested that a withholding agent be permitted to rely 
upon withholding certificates that are signed with a handwritten 
signature, scanned into an electronic device, and then emailed to the 
withholding agent. The final regulations adopt the rule of the proposed 
regulations, which permits the electronic transmission of a withholding 
certificate that has been signed with a handwritten signature and then 
scanned and emailed to the withholding agent if the requirements of 
Sec.  1.1441-1(e)(4)(iv) are met. Further, the Treasury Department and 
the IRS continue to consider whether to retain the confirmation 
requirements in chapters 3 and 4. In addition, in response to comments, 
the final regulations do not require that documentary evidence that has 
been transmitted electronically be a certified or notarized copy.

 J. Other Changes Made to Payee Identification Rules

    Consistent with a risk-based approach to compliance under chapter 
4, the final regulations adopt in whole or part several modifications 
requested by comments, including modifications to:
    (1) Permit documentary evidence that does not contain an address, 
provided that the documentary evidence contains the person's country of 
residence or citizenship, and the withholding agent has obtained a 
permanent residence address for the person.
    (2) Include a director, any foreign equivalent of an officer in the 
United States, and any other person granted written authority as a 
person authorized to sign a withholding certificate or written 
statement.
    (3) Permit, in lieu of retention of copies of documentation, the 
retention of notations regarding documentation reviewed and (for 
obligations that are not preexisting obligations) any U.S. indicia 
identified, in the course of AML due diligence.
    (4) Treat registered deemed-compliant FFIs as payees under the same 
circumstances in which participating FFIs are treated as payees.
    (5) Treat all excepted NFFEs in the same manner, and provide that 
any excepted NFFE is the payee, unless it is acting as an agent or 
intermediary (other than a QI accepting primary withholding 
responsibility).
    (6) Permit the submission of a withholding certificate within 30 
days of payment (rather than the 15 days permitted in the proposed 
regulations) without an affidavit of accuracy as of the time of 
payment.
    (7) Provide a definition for the term standing instructions to pay 
amounts to include current payment instructions that will repeat 
without further instructions being provided by the account holder.
    (8) Clarify that a withholding statement submitted by a 
participating FFI or registered deemed-compliant FFI can include pooled 
information with respect to each class of payees unless payee-specific 
information is provided for purposes of chapter 3, in which case a 
chapter 4 status must be provided for each payee that is identified on 
the withholding statement.

V. Comments and Changes to Sec.  1.1471-4--FFI Agreement

A. In General

1. FFI Agreement
    The Treasury Department and the IRS received comments requesting 
additional guidance on the requirements of the FFI agreement. In 
response to these comments, the final regulations set forth all of the 
substantive requirements applicable to an FFI under the FFI agreement. 
The final regulations provide the requirements for verifying compliance 
with the FFI agreement, define an event of default and procedures for 
remediating of an event of default, allow participating FFIs to file 
collective refund claims on behalf of certain account holders and 
payees for amounts overwithheld, and provide procedural requirements if 
a participating FFI is legally prohibited from reporting or withholding 
as required under the FFI agreement. In addition, the final regulations 
do not restrict a participating FFI's ability to terminate an FFI 
agreement. This responds to comments concerning future withholding 
requirements for foreign passthru payments, and allows an FFI the 
flexibility to reconsider its status as further guidance is 
promulgated.
    The Treasury Department and the IRS expect to publish a revenue 
procedure setting out the terms of an FFI agreement, consistent with 
these final regulations, coordinating an FFI's obligations under the 
FFI agreement with chapter 3 obligations and with the provisions of any 
applicable IGA, and including administrative provisions such as those 
relating to termination, renewal, and modification of the agreement.
2. Effective Date of the FFI Agreement
    Many comments were received regarding the effective date provided 
in the proposed regulations for implementing the chapter 4 rules. 
Comments requested a delay of the effective date of the FFI agreement 
to allow FFIs sufficient time to modify systems and to implement the 
required account opening procedures. In response to comments, the final 
regulations delay the effective date of the FFI agreement until 
December 31, 2013, for all participating FFIs that receive a GIIN prior 
to January 1, 2014. This change aligns the effective date of, and due 
diligence periods under, the FFI agreement with the timelines provided 
under the IGAs.

[[Page 5882]]

3. U.S. Branches of Participating FFIs
    Comments requested further clarifications on the application of the 
chapter 4 rules to U.S. branches of participating FFIs. In response to 
these comments, the final regulations provide comprehensive rules for 
U.S. branches of participating FFIs. A U.S. branch of a participating 
FFI that is treated as a U.S. person, as provided in Sec.  1.1441-
1(b)(2)(iv), is subject to special requirements to fulfill the 
withholding, due diligence, and reporting requirements of a U.S. 
financial institution to the extent provided under chapters 4 and 61 
and section 3406(a). Additionally, such a U.S. branch is required to 
file a separate Form 1042 to report amounts subject to reporting under 
chapter 4 and any taxes withheld.
    A U.S. branch of a participating FFI that is not treated as a U.S. 
person is required to fulfill the general requirements set forth in 
Sec.  1.1471-4 for withholding, due diligence, and reporting.

B. Withholding by FFIs

    The final regulations provide that an FFI is not required to 
withhold on foreign passthru payments until the later of January 1, 
2017, or six months after the date of publication in the Federal 
Register of final regulations defining the term foreign passthru 
payments.
    Comments requested more comprehensive rules concerning the 
withholding requirements of a participating FFI under the FFI 
agreement. In response to these comments, the final regulations provide 
that a participating FFI may apply the exceptions from withholding 
provided in Sec.  1.1471-2, including the exception for grandfathered 
obligations and the transitional withholding requirements for payments 
made to prima facie FFIs. In addition, the proposed regulations did not 
provide detail on the coordination of withholding under sections 
1471(a) and 1472 with withholding under section 1471(b). The final 
regulations provide that a participating FFI that satisfies its 
obligations under Sec.  1.1471-4(b) to withhold on withholdable 
payments made to payees that are nonparticipating FFIs and recalcitrant 
account holders will be deemed to satisfy its obligations under 
sections 1471(a) and 1472 with respect to such payees and account 
holders.

C. Due Diligence

    The final regulations adopt numerous comments intended to assist 
participating FFIs in complying with their obligations to perform due 
diligence to identify and document account holders.
1. General Requirements for Due Diligence
    In response to comments, the final regulations modify the general 
requirements for identifying and documenting account holders in a 
number of ways. For example, the final regulations modify the record 
retention requirements for offshore obligations to allow an FFI to 
retain a notation in its files regarding the documentary evidence 
examined, rather than retaining a copy of the documentary evidence 
itself, unless the FFI is required pursuant to its AML due diligence to 
retain copies of documentation reviewed. In such cases, the final 
regulations no longer require a notation of the name of the person who 
reviewed the documentary evidence.
    The final regulations also provide special procedures to identify 
and document accounts acquired in mergers or bulk acquisitions for 
value from another financial institution. For accounts acquired from 
nonparticipating FFIs or deemed-compliant FFIs that do not apply the 
final regulations' due diligence procedures, the final regulations 
allow a participating FFI to apply preexisting account identification 
and documentation procedures. For accounts acquired from another 
participating FFI, certain deemed-compliant FFIs, or U.S. financial 
institutions, the final regulations allow a participating FFI to rely 
on the chapter 4 determinations made by such transferor financial 
institution, subject to certain conditions. Additionally, the final 
regulations in Sec.  1.1471-4 incorporate by reference the revised 
rules for documentation standards, validity periods of documentation, 
and reliance on valid documentation collected by other withholding 
agents provided in Sec.  1.1471-3(c).
2. Account of a Preexisting Customer and Sharing of Account 
Documentation
    Comments requested that a new account opened at an FFI by a 
customer that has a preexisting account with the FFI be treated as a 
preexisting account rather than a new account. Comments stated that in 
such cases, FFIs generally do not obtain documentation from the 
customer for AML due diligence purposes. Recognizing the substantial 
burden for the FFI to separately document an existing customer, the 
final regulations revise the definition of a preexisting obligation to 
permit a new account of a customer that has a preexisting account to be 
treated as a preexisting account provided that the FFI maintaining the 
account also treats the new account and the preexisting account as one 
account for purposes of applying AML due diligence, aggregating 
balances, and applying the standards of knowledge for purposes of 
chapter 4 to all such accounts. The final regulations allow this 
treatment on a group basis for expanded affiliated groups and sponsored 
FFI groups that share documentation within the group. In addition, to 
address comments concerning the burden of documenting multiple accounts 
of a customer generally (regardless of whether any such accounts are 
preexisting accounts), the final regulations allow a participating FFI, 
participating FFI group, or a sponsored FFI group to apply the 
provisions for documentation sharing systems described in Sec.  1.1471-
3(c)(8).
3. Change in Circumstances
    In response to comments that the obligations of a participating FFI 
following a change in circumstances were unclear in the proposed 
regulations, the final regulations provide that an FFI must retain a 
record of documentation to establish the account holder's chapter 4 
status within the earlier of 90 days from the date of a change in 
circumstances or the date a withholdable payment or foreign passthru 
payment is made to the account or, if unable to do so, must treat such 
account as held by a recalcitrant account holder or nonparticipating 
FFI (as applicable).
4. Entity Accounts
    Comments indicated that for certain investment entities, direct 
investment may be held in bearer form so that the investment entity is 
unable to document such account holders until the time of payment. The 
final regulations allow a participating FFI that is an investment 
entity to document an account holder of a preexisting account that is 
in bearer form at the time of payment.
    The final regulations clarify that in addition to documenting the 
entity account holder, a participating FFI is also required to document 
the payee (if other than the account holder) to the extent necessary to 
determine whether withholding applies. For example, if an account is 
held by an NFFE that is a flow-through entity (other than a WP, WT, or 
excepted NFFE), the participating FFI is also required to identify and 
document the partners, owners, or beneficiaries of such entity to 
determine if withholding is required

[[Page 5883]]

with respect to payments of U.S. source FDAP income made to such 
account.
5. Individual Accounts
a. New Accounts
    Comments requested alternative documentation options to address 
difficulties in obtaining U.S. tax forms from account holders. In 
response to these comments, the final regulations modify the 
identification and documentation procedures of participating FFIs with 
respect to individual accounts that are new accounts to permit certain 
alternative forms of documentation. For example, the final regulations 
permit a participating FFI to rely on information provided by a third-
party credit agency to establish an account holder's foreign status 
when certain conditions are met.
    The final regulations adopt the requirement in the proposed 
regulations for a participating FFI to review all information collected 
in connection with 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's claim of 
foreign status is unreliable or incorrect. The final regulations 
clarify that a participating FFI is required in such reviews to apply 
the standards of knowledge provided in Sec.  1.1471-3(e) for offshore 
obligations held by individuals. If the participating FFI is not able 
to establish an account holder's status as a foreign person, the final 
regulations require the participating FFI to retain a record of a U.S. 
TIN and, if necessary, a valid and effective waiver described in 
section 1471(b)(1)(F)(i) to establish an account holder's status as a 
U.S. person. The final regulations allow a participating FFI to retain 
a record of a U.S. TIN by any means (that is, not exclusively by 
retaining a record of a Form W-9).
    The final regulations also provide alternative identification and 
documentation procedures for certain cash value insurance or annuity 
contracts. Comments noted that when a group life insurance contract or 
group annuity contract is issued to an employer and individual 
employees are the insured/beneficiaries, the insurance company does not 
have a direct relationship with the employee/certificate holders at 
inception of the contract. In response, the final regulations do not 
require the insurance company to document each employee until the date 
on which an amount is payable to an employee/certificate holder or 
beneficiary if the participating FFI obtains a certification from an 
employer that no employee/certificate holder (account holder) is a U.S. 
person and certain other conditions are satisfied (for example, that 
the number of employees covered under the contract exceeds 25). 
Comments also requested relief from the requirement to identify and 
document beneficiaries of cash value insurance contracts. In response, 
the final regulations provide that a participating FFI may presume that 
an individual beneficiary (other than the owner) receiving a death 
benefit with respect to a life insurance contract that is a cash value 
insurance contract is a foreign person, and is therefore not required 
to retain a record of documentation from such person, unless the 
participating FFI has actual knowledge or reason to know that the 
beneficiary is a U.S. person. A participating FFI has reason to know 
that a beneficiary of a cash value insurance contract is a U.S. person 
if the information collected by the participating FFI and associated 
with the beneficiary contains U.S. indicia.
b. Preexisting Accounts
    Comments requested clarification with regard to procedures for 
identifying and documenting preexisting accounts. In response to these 
comments, the final regulations provide a more detailed explanation of 
the application of these rules. For example, the final regulations 
expressly provide that a participating FFI is not required to retain a 
record of documentation from the account holder until there is a change 
in circumstances if the identification and documentation procedure 
specified for preexisting accounts is applied and no U.S. indicia are 
identified. In addition, the final regulations expressly provide that 
for preexisting accounts, a participating FFI may apply the 
identification and documentation procedure for either new accounts or 
preexisting accounts.
    The proposed regulations did not coordinate the rules in Sec.  
1.1471-3(e) (covering standards of knowledge) with the documentation 
requirements under Sec.  1.1471-4(c) to establish an account holder's 
foreign status when U.S. indicia are associated with the account. To 
provide such coordination, Sec.  1.1471-4(c) incorporates by reference 
the standards of knowledge in Sec.  1.1471-3(e).
c. Presumption of Status for Individual Accounts
    Comments noted that the proposed regulations were unclear 
concerning the application of the presumption rules to individual 
account holders of participating FFIs. In response to these comments, 
the final regulations clarify that the presumption rules of Sec.  
1.1471-3(f) do not apply to individual account holders of a 
participating FFI. A participating FFI must complete the requisite 
identification and documentation procedures with respect to each 
account within the time period provided by Sec.  1.1471-5(g)(3) (start 
of recalcitrant account holder status), or, if unable to do so, must 
treat such account as held by a recalcitrant account holder.
d. Preexisting Individual Accounts Previously Documented
    With respect to the exception to the preexisting account 
identification procedure (other than the relationship manager inquiry) 
for an account documented as held by foreign individuals for purposes 
of chapter 61 or the QI, WP, or WT agreement, the final regulations 
clarify that an individual account holder's foreign status has been 
documented under chapter 61 if the participating FFI has retained a 
record of the documentation required under chapter 61 to establish the 
individual's foreign status and the account received a reportable 
payment (as defined under section 3406(b)) in any prior year. With 
respect to QIs, WPs, and WTs, an account holder's foreign status has 
been documented if the QI, WP, or WT has met the relevant documentation 
requirements of its agreement with respect to an account holder that 
received a reportable amount in any year in which the agreement was in 
effect.
e. Certifications of Responsible Officer
    The final regulations retain the requirement in the proposed 
regulations for a responsible officer to certify, to the best of his/
her knowledge after conducting a reasonable inquiry, that the 
participating FFI does not have any formal or informal practices or 
procedures in place to assist account holders in avoiding chapter 4, 
such as advising account holders to split up their accounts to avoid 
reporting as high-value accounts. Comments requested additional 
examples of policies that violate the certification. The final 
regulations provide such additional examples, including: advising that 
account holders of U.S. accounts close, transfer, or withdraw from 
their account to avoid reporting; intentional failures to disclose a 
known U.S. account; or advising that an account holder remove U.S. 
indicia from its account information. In response to comments, the 
final regulations also provide that an email requiring responses from 
relevant

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customer on-boarding and management personnel as to whether they 
engaged in any such practices is considered a reasonable inquiry for 
purposes of the certification.
    Comments requested specific timing for making the certifications 
regarding completion of required due diligence. The final regulations 
respond to these comments and also simplify and consolidate the 
certifications. The final regulations provide that these certifications 
may be made concurrently and no later than 60 days following the date 
that is two years after the effective date of the FFI agreement. See 
section V.F.3 of this preamble for a discussion of a responsible 
officer's periodic certification requirements.
    Comments also requested clarification on a responsible officer's 
responsibilities if he/she could not make the required certification. 
The final regulations provide that a responsible officer may make a 
qualified certification stating why the general certification cannot be 
made and that corrective actions will be taken by the responsible 
officer.

D. Account Reporting

1. In General
    As in the proposed regulations, the final regulations indicate that 
the FFI that maintains an account is generally responsible for 
reporting the account in accordance with the reporting rules under 
Sec.  1.1471-4(d). The final regulations add in Sec.  1.1471-5 a rule 
to determine if an FFI is treated as maintaining an account.
    The final regulations describe the reporting responsibilities of a 
sponsoring entity that has agreed to fulfill the reporting requirements 
of a sponsored FFI and generally require the sponsoring entity to 
report accounts of the sponsored FFI in the manner the sponsored entity 
would otherwise be required to report if it were a participating FFI.
2. Account Balance or Value
    In response to comments generally requesting that the final 
regulations accommodate current business practices of FFIs, the final 
regulations provide that a participating FFI must report the average 
balance or value of the account to the extent that the FFI reports 
average balances or values to the account holder for a calendar year 
and otherwise to report the balance or value of the account as of the 
end of the calendar year.
3. Payments
    The final regulations clarify that any distribution (including a 
distribution that would be considered a redemption) made to an account 
holder with respect to a cash value insurance contract or annuity 
contract must be reported under Sec.  1.1471-4(d)(4)(iv)(C) without 
regard to the U.S. tax treatment.
4. Section 953(d) Insurance Companies and Reporting in a Manner Similar 
to Section 6047(d)
    Comments requested that a foreign insurance company that has made 
an election under section 953(d) be excluded from the definition of an 
FFI. The final regulations do not adopt this comment when the foreign 
insurance company is not licensed to do business in the United States. 
How a foreign insurance company and its United States shareholders are 
taxed is immaterial to the need for reporting with regard to insurance 
or annuity contracts issued by the insurance company to its customers. 
Therefore, the final regulations provide that the term U.S. person does 
not include an insurance company that has made an election under 
section 953(d) if the company is not licensed to do business in any 
State. However, a foreign insurance company that has made an election 
under section 953(d) and is licensed to do business in the United 
States would be considered, for purposes of chapter 4, a U.S. person 
and, therefore, would remain subject to reporting with respect to its 
life insurance and annuity contracts under section 6047(d), not chapter 
4.
    Comments also requested that a foreign insurance company be 
permitted to satisfy its chapter 4 reporting obligations by reporting 
under section 6047(d). Permitting a foreign insurance company that is 
not licensed to do business in the United States to report only the 
information required under section 6047(d) would provide insufficient 
reporting for FATCA purposes because section 6047(d) reporting applies 
only to distributions made under a contract issued by an insurance 
company licensed to do business under the laws of a State.
    In response to the comments, however, the final regulations permit 
an insurance company participating FFI that is not licensed to do 
business in the United States to elect to report its chapter 4 account 
information with respect to its life insurance and annuity contracts in 
a manner similar to section 6047(d) reporting. Under this election, an 
insurance company participating FFI reports the sum of: (1) a cash 
value or annuity contract's account balance or value; and (2) any 
amount paid under the contract as a ``gross distribution'' in Box 1 of 
Form 1099-R. The participating FFI could then check box 2b to indicate 
the taxable amount is not determined.
5. Special Reporting for Calendar Year 2013
    The final regulations incorporate the reporting requirements in 
Announcement 2012-42, 2012-47 I.R.B. 561 with respect to calendar year 
2013. The final regulations provide that if an FFI agreement has an 
effective date that is on or before December 31, 2014, the 
participating FFI is required to report U.S. accounts that it 
maintained during 2013 that are outstanding on December 31, 2013. The 
final regulations adopt the streamlined reporting rules provided in the 
proposed regulations. The final regulations also eliminate the proposed 
regulations' requirement for reporting by September 30, 2014, and 
instead permit participating FFIs to report for both calendar years 
2013 and 2014 on or before March 31, 2015.

E. Expanded Affiliated Group Requirements

    The final regulations do not incorporate comments suggesting the 
sunset date for limited branches and limited FFIs be extended beyond 
December 31, 2015. The final regulations also do not adopt suggestions 
to relax the requirement that all members of an expanded affiliated 
group be participating FFIs, deemed-compliant FFIs, or limited FFIs. 
The Treasury Department and the IRS believe that IGAs are the 
appropriate vehicle to address these concerns.

F. Verification

1. In General
    The final regulations include the verification and certification 
requirements for participating FFIs. These verification procedures rely 
on a responsible officer (or designee) to establish a compliance 
program that includes policies, procedures, and processes sufficient 
for the participating FFI to satisfy the requirements of the FFI 
agreement. The participating FFI must subject its compliance program to 
periodic review. The responsible officer may be any officer of any 
participating FFI or reporting Model 1 FFI in the participating FFI's 
expanded affiliated group with sufficient authority to fulfill the 
duties of a responsible officer described in the final regulations. The 
responsible officer may designate others to implement and oversee the 
compliance with the verification requirements, but must make any 
required certifications to the IRS (as described below).

[[Page 5885]]

2. Consolidated Compliance Program
    In response to comments supporting the approach set forth in Notice 
2011-34 for an optional consolidated compliance program, the final 
regulations provide for such a program. Under the final regulations, a 
participating FFI, reporting Model 1 FFI, or U.S. financial institution 
(compliance FI) may agree to establish and maintain a consolidated 
compliance program and perform a consolidated periodic review on behalf 
of one or more FFIs in the same expanded affiliated group that elect 
this option (the consolidated compliance group). The consolidated 
compliance group is not required to include every FFI in the expanded 
affiliated group, and an expanded affiliated group may have multiple 
consolidated compliance groups organized under different or the same 
compliance FI. The final regulations also require a sponsoring entity 
to act as the compliance FI for all of the FFIs that it sponsors 
(including any certified deemed-compliant FFIs that it sponsors).
    It is anticipated that additional guidance will be provided in 
either the instructions to the registration system or the FFI agreement 
for an electing FFI to identify itself as part of a consolidated 
compliance group and procedures for the responsible officer of the 
compliance FI to make the required certifications on behalf of the 
consolidated compliance group.
3. Certification of Compliance
    The final regulations require the responsible officer, on behalf of 
the participating FFI, to periodically certify to the IRS that the FFI 
is in compliance with the requirements of the FFI agreement. Such 
certification is required once every three years. In advance of such 
certification, a participating FFI is required to review its compliance 
program and its compliance with the requirements of the FFI agreement. 
In consideration of the results of this review, the responsible officer 
is required to certify to the IRS that it maintains effective internal 
controls and that there were no material failures during the 
certification period, or any material failures that did occur were 
corrected. A material failure is a failure of the participating FFI to 
fulfill the requirements of the FFI agreement if the failure was the 
result of a deliberate action by the participating FFI to avoid the 
requirements of the FFI agreement or was an error attributable to a 
failure to implement sufficient internal controls. The final 
regulations provide that a material failure that occurs in limited 
circumstances will not result in an event of default. If a material 
failure occurring during the certification period has not been 
corrected, or if an event of default has occurred, the final 
regulations provide that a responsible officer may instead make a 
qualified certification.
4. IRS Review of Compliance
    Comments requested guidance on the standards the IRS would apply 
when requesting additional information from a participating FFI to 
determine its compliance with its FFI agreement. The final regulations 
provide for general inquiries under which the IRS contacts the 
participating FFI to request additional information regarding the 
information reported on the returns filed by the participating FFI, and 
for inquiries when the IRS determines in its discretion that there may 
have been substantial non-compliance with an FFI agreement. The IRS 
expects that inquiries regarding substantial non-compliance will not be 
made on a routine basis. If a determination that there may have been 
substantial non-compliance is made, the IRS may inquire as to the FFI's 
compliance with certain requirements of the FFI agreement and may 
request information necessary to verify the participating FFI's 
compliance with the FFI agreement, such as a description of the 
participating FFI's procedures for conducting its periodic review. The 
IRS may also request the performance of specified review procedures 
(including an external audit). If the IRS determines, based upon its 
review, that the FFI has not substantially complied with the 
requirements of an FFI agreement, it will deliver a notice of event of 
default.

 G. Event of Default

    The final regulations define an event of default of the FFI 
agreement and describe procedures for a participating FFI to remediate 
an event of default. Comments expressed concern that any failure to 
comply with an FFI agreement would result in termination of that 
agreement. In response to these comments, the final regulations clarify 
that an event of default does not result in automatic termination of 
the FFI agreement. The final regulations provide that if the IRS 
becomes aware of an event of default, it will deliver a notice of 
default to the participating FFI and allow the participating FFI to 
develop a plan to remediate the event of default. If the participating 
FFI fails to respond to the notice of default or comply with an agreed-
upon remediation plan, the IRS may terminate the FFI's participating 
FFI status within a reasonable period of time, subject to an FFI's 
request for reconsideration of termination by written request to the 
LB&I Director for Foreign Payments Practice.

H. Collective Refunds

    The final regulations provide that a participating FFI (or a 
reporting Model 1 FFI) may file a collective refund claim on behalf of 
its account holders and payees that were overwithheld upon under 
chapter 4, subject to certain conditions and procedural requirements.

I. Legal Prohibitions on Reporting U.S. Accounts and Withholding

    In response to comments requesting clarification on whether an FFI 
can enter into an FFI agreement if foreign law imposes prohibitions on 
the FFI's ability to report or withhold, the final regulations clarify 
that an FFI may enter into an FFI agreement if it can meet the 
requirements of Sec.  1.1471-4(i). The final regulations require, 
however, that if foreign law prohibits a participating FFI from 
fulfilling its withholding obligations with respect to an account, the 
participating FFI must close the account within a reasonable time or, 
if local law prohibits closing the account, the participating FFI must 
block or transfer the account. Similarly, if a participating FFI is 
prohibited by foreign law, absent a waiver, from reporting information 
on an account that it must treat as a U.S. account, the final 
regulations provide that the participating FFI must request a waiver of 
foreign law from such account holder and if such waiver is not obtained 
within a reasonable period of time, the participating FFI must close or 
transfer such account.

VI. Comments and Changes to Sec.  1.1471-5--Definitions Applicable to 
Section 1471

A. U.S. Account

    Comments requested additional exceptions from the definition of 
U.S. account for low-value accounts other than preexisting accounts and 
the depository account exception provided by section 1471(d)(1)(B). In 
response to these comments, the Treasury Department and the IRS have 
provided a $50,000 exception for cash value insurance contracts by 
amending the definition of financial account, discussed below.

B. Account Holder

    Comments requested clarification of whether an entity that is 
disregarded as an entity separate from its owner under Sec.  301.7701-
2(c)(2)(i) (disregarded entity)

[[Page 5886]]

is treated as an account holder. In response to these comments, because 
the definition of person excludes a disregarded entity, the final 
regulations clarify that an account held by a disregarded entity shall 
be treated as held by the person owning such entity.
    Comments expressed concern regarding the identification of the 
account holder of insurance and annuity contracts. The final 
regulations provide that an insurance or annuity contract that is a 
financial account is treated as held by each person that can access the 
contract value (for example, through a loan, withdrawal, or surrender) 
or change a beneficiary under the contract. If no person can access the 
contract value or change a beneficiary under the contract, then the 
contract is treated as held by both the person(s) named in the contract 
as the owner(s) of the contract and each beneficiary under the 
contract. When the obligation to pay any benefit under the contract 
becomes fixed, the person entitled to such benefit is treated as a 
holder of the contract.

C. Financial Accounts

1. Depository Accounts
    In response to comments, the final regulations limit the scope of 
the term depository account in a number of ways. For example, the final 
regulations exclude certain escrow accounts established for commercial 
transactions from treatment as financial accounts. The final 
regulations also exclude negotiable debt instruments that are traded on 
a regulated market or over-the-counter market and distributed through 
financial institutions. In response to comments, the final regulations 
also clarify the meaning of ``any other similar instrument'' in the 
definition of a depository account. The final regulations limit the 
scope of a depository account to an account for the placing of money 
(as opposed to the holding of property) in the custody of an entity 
engaged in a banking or similar business. The final regulations also 
clarify that a credit balance with respect to a credit card account 
issued by a credit card company is a depository account.
    Comments requested guidance regarding the specific circumstances in 
which an amount held by an insurance company would be treated as a 
depository account. The final regulations provide that a depository 
account includes an amount that an insurance company holds under a 
guaranteed investment contract or under a similar agreement to pay or 
credit interest thereon. The final regulations also provide that a 
depository account does not include an advance premium or premium 
deposit received by an insurance company, provided the prepayment or 
deposit relates to an insurance contract for which the premium is 
payable annually and the amount of the prepayment or deposit does not 
exceed the annual premium for the contract. Such amounts are also 
excluded from cash value for purposes of determining whether a contract 
is a cash value insurance contract.
2. Equity and Debt Interests
    With regard to equity or debt interests in investment entities, the 
final regulations revise the financial account definition to correspond 
to the changes discussed below to the definition of FFI for investment 
entities. Accordingly, the final regulations generally remove from the 
financial account definition debt or equity interests in investment 
entities that are described solely in Sec.  1.1471-5(e)(4)(i)(A), which 
are generally investment advisors or asset managers. This treatment 
parallels the treatment of equity and debt interests in entities that 
act solely as depository institutions or custodial institutions.
    Comments requested that bank holding companies should be treated 
like depository institutions for purposes of the financial account 
exclusion for non-regularly traded debt and equity interests to cover 
cases in which the holding company raises funds for its subsidiaries. 
Comments noted that these interests are often held through custodial 
institutions that are in a better position to document the holders and 
report and withh