"Passthrough Payments" Under FATCA: U.S. Withholding Tax on Non-U.S. Source Income

By Caroline Rule
Journal of Tax Practice & Procedure
October - November 2011 Edition

Caroline Rule discusses how withholding by participating FFis on "passthrough payments" to nonparticipating FFis is required even on non-U.S. source payments.

After 2015, it may be virtually impossible for foreign financial institutions (FFls) to avoid the reach of the Foreign Account Tax Compliance Act (FATCA),1 even if they have no United States presence nor any direct U.S. investments. This is because, beginning sometime after January 2015, FFls that have entered into agreements with the IRS under FATCA to dis­close their U.S. accountholders (i.e., "participating FFls") will be required to withhold a 30-percent tax on so-called "passthrough payments" made to FFls that have not entered into such agreements (i.e., nonparticipating FFls). In this global economy, it is almost inevitable that nonparticipating FFls will have investment relationships with participating FFls. Withholding by participating FFls on "passthrough payments" to nonparticipating FFls is required even on non-U.S. source payments.

read more