On February 8, 2012, the Internal Revenue Service (“IRS”) issued proposed regulations (the “Proposed Regulations”) which will implement the provisions of the Foreign Account Tax Compliance Act (“FATCA”). FATCA was enacted in 2010 as part of the Hiring Incentives to Restore Employment Act. FATCA requires a “foreign financial institution” (“FFI”) to enter into an agreement with the IRS to report information about “financial accounts” held by U.S. taxpayers or by certain foreign entities in which U.S. taxpayers hold an ownership interest (collectively, “Reportable Accounts”).¹ For this purpose, an FFI includes an investment fund formed under the laws of a foreign country (a “Fund”), and a “financial account” includes an equity interest in such a Fund. If an FFI, such as a Fund, does not enter into such an agreement, the FFI will be subject to a 30% U.S. withholding tax on any “withholdable payment,” including U.S. source dividends and interest and gross proceeds from the sale of U.S. securities. The FATCA withholding provisions are effective for payments made to an FFI after December 31, 2013.

In order to avoid the FATCA withholding tax, a Fund must enter into an agreement with the IRS (an “FFI Agreement”) to identify Reportable Accounts, report certain information to the IRS regarding such Reportable Accounts, and withhold tax on certain payments to (i) FFIs that have not entered into FFI Agreements (“Nonparticipating FFIs”) and (ii) account holders who are unwilling to provide the required information.

The Proposed Regulations provide a phased implementation timeline for FATCA and delayed the dates for complying with its requirements as follows:

• The IRS has indicated that it will publish a model FFI Agreement in the late summer or early autumn of 2012;
• The IRS has indicated that it will make available an online process for entering into an FFI Agreement no later than January 1, 2013;
• An FFI will be required to enter into an FFI Agreement by June 30, 2013 in order to ensure that it can be identified as an FFI with respect to which an FFI Agreement is in full force and effect (a “Participating FFI”) in time to avoid the imposition of the FATCA withholding tax;
• Participating FFIs will be required to disclose the identity of holders of Reportable Accounts with respect to 2013 beginning in 2014;
• Payments of U.S. source interest and dividends to Nonparticipating FFIs become subject to 30% withholding effective January 1, 2014;
• Payments to Nonparticipating FFIs of gross proceeds from the sale of U.S. securities become subject to 30% withholding effective January 1, 2015;
• Participating FFIs will be required to disclose income associated with Reportable Accounts with respect to 2015 beginning in 2016; and
• Participating FFIs will be required to report Passthru Payments² beginning January 1, 2015 but will not be required to withhold on Passthru Payments prior to January 1, 2017.

The first deadline that FFIs should be focusing on now is the mid-2013 deadline to enter FFI Agreements with the IRS over sharing information on their Reportable Accounts so as to avoid 30% withholding on payments to them of U.S. source interest and dividends in 2014.

We note that the Proposed Regulations are in proposed form and that the IRS still has a fair amount of work to do in terms of FATCA implementation. For example, the IRS (i) will be required to finalize revised Forms W-8 to comport with FATCA requirements,³ (ii) must release a standard FFI Agreement, (iii) must create the FFI registration system, and (iv) must finalize the Proposed Regulations after taking into account industry comments. It is expected that final regulations will be issued in early autumn 2012, at which time we will provide further guidance. Although Fund managers should begin to familiarize themselves with the steps that will be necessary to comply with FATCA, the concrete work of performing account due diligence will have to wait until the IRS completes some of the above steps.

Most private Funds are offered only to U.S. tax-exempt investors and non-U.S. investors. In order to determine whether it has any Reportable Accounts, a Fund will generally be required to determine the FATCA Status⁴ of each of its investors (who are referred to herein as “account holders”). In order to make this determination, a Fund generally will be required to obtain a Form W-9 from its U.S. account holders or Form W-8 from its non-U.S. account holders on which the account holder will certify its FATCA Status under penalties of perjury.⁵ In the event that the Form W-8 provided by the account holder to the Fund or other information collected by the Fund as part of its account opening process contains indicia that the account holder may be a U.S. person (e.g, the Form W-8 has a U.S. address or there is an indication of a U.S. place of birth), the Fund also will be required to obtain additional documentary evidence to confirm that the account holder is not a U.S. person.

Seward & Kissel has prepared a more detailed memorandum describing the procedures that a Fund that enters into an FFI Agreement should take in order to comply with the account identification and documentation requirements of the Proposed Regulations.

If you have any questions regarding this Memorandum, please contact Dan Murphy (212-574-1210), Ron Cima (212-574-1471), or Jim Cofer (212-574-1688).

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¹ In general, a “financial account” held by a foreign entity would be treated as a Reportable Account if a Specified U.S. Person (as defined below) owns more than 10% of the interests in such foreign entity. However, if the foreign entity is an investment fund, a “financial account” held by such foreign entity would be treated as a Reportable Account if a Specified U.S. Person owns any interest in such foreign entity. The Proposed Regulations require certain foreign entities that are not FFIs to provide a statement regarding their U.S. ownership to a Fund. A “Specified U.S. Person” is a U.S. person other than (i) a corporation the stock of which qualifies as “regularly traded”; (ii) an affiliate of a corporation described in clause (i); (iii) a tax-exempt organization or an IRA; (iv) the United States or a wholly owned agency or instrumentality thereof; (v) a State, the District of Columbia, a U.S. possession, a political subdivision of any of the foregoing, or a wholly owned agency or instrumentality of any of the foregoing; (vi) a bank; (vii) a REIT; (viii) a regulated investment company or an entity registered with the SEC under the Investment Company Act of 1940; (ix) a common trust fund; (x) a charitable remainder trust; (xi) a securities, commodities or derivatives dealer that is registered as such under federal or state law; and (xii) a broker.

² A “Passthru Payment” is any withholdable payment or other payment to the extent attributable to a withholdable payment.

³ The IRS may also revise Form W-9 to enable a U.S. person to certify that it is not a Specified U.S. Person (and therefore that an account held by such U.S. person is not subject to FATCA reporting).

⁴ A persons “FATCA Status” means such a person’s status under FATCA (for example, as a U.S. person, a foreign individual, a Participating FFI, a Nonparticipating FFI).

⁵ A U.S. person uses a Form W-9 (Request for Taxpayer Identification Number and Certification) to certify, among other things, its U.S. status. A non-U.S. person uses a Form W-8 to certify, among other things, its non-U.S. status. There are several types of Form W-8. The most frequently encountered in the Fund context are Form W-8BEN (Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding) and Form W-8IMY (Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U.S. Branches for United States Tax Withholding).