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Home » Chapter 4 Withholding
Chapter 4 of the Foreign Account Tax Compliance Act (FATCA) outlines the provisions on the withholding and reporting requirements for foreign financial institutions (FFIs) and non-financial foreign entities (NFFEs). It offers clear guidelines on when a withholding agent is required to withhold tax and when the withholding doesn’t apply.
In simpler terms, Chapter 4 sets the rules for both withholding and exemption from withholding. It offers clear guidelines for FFIs and NFFEs on what they need to do to prevent withholding.
Under Chapter 4, Foreign Financial Institutions (FFIs) need to report information about U.S. account holders to the IRS. This includes both individual and entity accounts. It is necessary to submit details such as the account holder’s name, address, TIN, account balances, and income.
FFIs must first register with the IRS in order to be issued a Global Intermediary Identification Number (GIIN). This number will serve as proof of compliance with FATCA rules. They can avoid withholding tax on payments from U.S. sources using this identification number.
Non-Financial Foreign Entities (NFFEs) are also covered under Chapter 4. These entities must report to the IRS whether or not they have U.S. account holders or U.S. owners.
There are two types of NFFEs: active and passive. The majority of an NFFE’s revenue comes from passive sources like interest or dividends. While active, NFFEs generate income primarily from operational activities. Between the two types, passive NFFEs are subject to stricter reporting requirements.
Both NFFEs and FFIs that fail to meet FATCA requirements may be subject to a 30% withholding tax. This includes payments such as interest, dividends, and other income derived from U.S. sources.
In order for the withholding to not apply, the FFI or NFFE must meet certain requirements, such as registering with the IRS and providing the proper documentation to show they are compliant with FATCA. A non-compliant NFFE that receives a withholdable payment is also not entitled to a refund or credit of the withheld tax, unless it comes under an income tax treaty.