Private Equity Alert

Transcription

1 March 1, 2013 Private Equity Alert Final FATCA Regulations Released Impact on Private Investment Funds On January 17, 2013, the US Treasury and the IRS released final regulations under the Foreign Account Tax Compliance Act (FATCA). The final regulations differ, among other ways, from the proposed regulations issued February 8, in that they attempt to reduce administrative burdens and to clarify the interaction of the regulatory regime and intergovernmental agreements (IGAs). In general, FATCA imposes a 30% withholding tax on payments to foreign financial institutions (FFIs) and certain nonfinancial non-u.s. entities (NFFEs) of US-source interest, dividends, rents, royalties, and certain other types of fixed or determinable annual or periodic income, and on payments of gross proceeds on stocks, securities, and debt instruments that produce US-source interest or dividends (withholdable payments). Under FATCA, a private investment fund organized in a non-us jurisdiction will generally be classified as an FFI, and, unless covered by an IGA, must enter into an FFI Agreement with the IRS to avoid withholding on certain payments made to it. A domestic private investment fund is not required to enter into an FFI Agreement, but may serve as a US withholding agent under FATCA, and thus would generally be required to withhold 30% on withholdable payments made to any foreign partner or other foreign person that fails to provide the fund with required documentation. Entities Subject to FATCA An FFI includes an investment entity. The final regulations revised the definition of investment entity to more closely track the language found in IGAs, which now includes any foreign entity that primarily engages in trading, portfolio management, or investing, administering, or managing funds, money, or certain financial assets on behalf of customers. As a result, a non- US fund manager generally will be an FFI, whereas passive foreign entities that are not professionally managed (e.g., certain family offices) are generally treated as passive NFFEs (not FFIs). To reduce some of the compliance burdens created by FATCA, the final regulations introduce the concept of sponsoring entities and sponsored entities. If a sponsoring entity agrees to perform the due diligence, withholding, reporting, and other required undertakings on behalf of a Weil, Gotshal & Manges LLP

2 Weil News Weil was ranked #1 in announced global private equity deals for 2012 with approximately 16.3% market share and $67 billion in deal value according to Bloomberg Weil was one of only three firms ranked in the top band for private equity in Chambers Global 2012 and one of only three firms ranked in the top band for private equity buyouts in IFLR 2013 Weil advised Advent International in its acquisition of a majority interest in AOT Bedding Super Holdings, the parent company of National Bedding Company and Simmons Bedding Company Weil advised AMC Entertainment Holdings (a portfolio company of Apollo Global Management, Bain Capital, the Carlyle Group, CCMP Capital Advisors, and Spectrum Equity Investors) in connection with its $2.6 billion sale to Dalian Wanda Group Weil advised Centerbridge Partners in connection with its $1.1 billion take private acquisition of P.F. Chang s China Bistro Weil advised CVC Capital Partners in connection with its acquisition of a majority stake of Cunningham Lindsey, a major global loss adjusting and claims management firm, in a recapitalization transaction Weil advised Getty Images (a portfolio company of Hellman & Friedman) in connection with its $3.3 billion sale Weil advised Goldman Sachs Capital Partners in connection with the $2.3 billion sale of its portfolio company USI Insurance Services Weil advised Lion Capital in connection with its 1.2 billion sale of a 60% interest in Weetabix Food Co. to China s Bright Food Group Weil advised Ontario Teachers Pension Plan (through its private equity group, Teachers Private Capital) in connection with its acquisition of a majority interest in Heartland Dental Care sponsored FFI over which it has control, the latter will be deemed compliant with FATCA and will not have to enter into an FFI Agreement with the IRS. A sponsoring entity need not be a participating FFI, but it must register with the IRS as a sponsoring entity, including by registering each entity that it sponsors, and it generally must manage, and have the authority to enter into contracts on behalf of, each such sponsored entity. A sponsored entity remains liable under FATCA for noncompliance by the sponsoring entity. In addition, a sponsoring entity may lose its qualification as such in the event of noncompliance with participating FFI requirements by its sponsored entities. In response to concerns that nonfinancial groups could be subject to FATCA through the use of holding companies and similar entities that further the nonfinancial business of the group, the final regulations provide an exemption from FFI status for certain holding companies. The exemption is generally not available if such entity is formed or availed of by a private investment fund. As a result, a holding company formed by a private investment fund to facilitate its investment structure may be an FFI subject to FATCA compliance even where such company solely holds an interest (direct or indirect) in a single nonfinancial operating subsidiary. While such an entity may qualify for sponsored entity treatment discussed in the immediately preceding paragraph, it remains unclear how helpful such rules will be to funds that implement multijurisdictional structures that are sensitive to tax residence and other similar considerations that may be impacted by another person s ability to enter into contracts on its behalf. Interaction of IGAs with the Final Regulations In certain instances, foreign law may prevent an FFI from complying with FATCA (e.g., by preventing disclosure directly to the IRS). As a result, Treasury has collaborated with foreign governments to develop two alternative model IGAs Model 1 and Model 2 to facilitate the implementation of FATCA. Treasury has engaged with more than 50 countries in discussions regarding IGAs; however, as of the date of this alert, Weil, Gotshal & Manges LLP March 1,

3 Weil News (continued) Weil advised Providence Equity Partners in connection with the C$1.1 billion acquisition of Canadian data center operator Q9 Networks by an investor group comprised of Providence, Ontario Teachers Pension Plan, Madison Dearborn Partners, and BCE Weil advised Providence Equity Partners in connection with the acquisition by News Corporation of a 49% equity stake in the YES Network Weil advised Silver Lake Partners and Partners Group in connection with their n1.0 billion acquisition of Global Blue Weil advised Thomas H Lee Partners in connection with its acquisition of a majority stake in Party City Holdings in a recapitalization transaction valued at $2.7 billion the US has signed or initialed just eight IGAs. The IRS will publish a list identifying all countries that are treated as having in effect a Model 1 IGA or a Model 2 IGA. An FFI formed in a Model 1 jurisdiction will be deemed compliant (i.e., not subject to FATCA withholding) and thus not required to enter into an FFI Agreement or comply with the final regulations. Such FFIs are not required to directly report information to the IRS. Rather, the information is reported to their own government, which in turn has agreed to the automatic exchange of information with the IRS. Local law will control the identification and reporting of US accounts in accordance with the terms of the IGA. An FFI formed in a Model 2 jurisdiction must enter into an FFI Agreement with the IRS and generally must comply with the final regulations and report information directly to the IRS. However, with respect to certain recalcitrant account holders (i.e., account holders that refuse to provide the required information to the FFI, or that refuse to consent to disclosure of certain information required to be reported by the FFI), FFIs covered by a Model 2 IGA must report account information with respect to such account holders to its own government on a pooled basis, which will exchange such information with the IRS. FFIs with branches in several countries may need to comply with both the final regulations and model IGAs. Nonfinancial Foreign Entity (NFFE) An investor in, and a portfolio company of, a private investment fund may be an NFFE. An NFFE is not required to enter into an FFI Agreement; however, a withholdable payment made to an NFFE is subject to FATCA withholding unless the NFFE is treated as exempt or (i) certifies to the payor that it does not have any substantial US owners (which generally includes 10%+ owners) or (ii) provides the payor with the name, address, and tax identification number of each substantial US owner. Under the Code, publicly traded corporations, foreign governments, and international organizations are generally exempt from the NFFE rules. In addition to clarifying such exemptions under Weil, Gotshal & Manges LLP March 1,

4 the Code, the final regulations expand the list of NFFEs that are exempt to include Active NFFEs. An NFFE is active if less than 50% of its gross income is passive income (generally dividends, interest, rents, and royalties) and less than 50% of the weighted average percentage of its assets produce, or are held for the production of, passive income. To the extent that an investor in a fund is an NFFE that is not otherwise exempt, the fund will be required to report to the IRS any information it receives with respect to such NFFE s substantial US owners. A non-us portfolio company may be a non-exempt NFFE, which may be subject to withholding on withholdable payments it receives from third parties unless it provides the relevant certification or information to the payor. Gross Proceeds Withholding FATCA withholding generally applies to payments of gross proceeds from the sale or other disposition of property that can produce US-source interest or dividends. Thus, on exit of a US corporate portfolio investment, a non-us fund generally will be subject to a 30% withholding tax unless the fund enters into an FFI agreement or is covered by an IGA. A US fund that sells US stocks or securities would presumably be required to withhold under FATCA on the distribution of the gross proceeds of such sale to any investor in the fund that is not compliant with, or otherwise exempt from, FATCA. It is unclear whether a disposition of an interest in a fund by such a noncompliant foreign partner would also lead to similar withholding obligations on the part of the purchaser of such interest. Fortunately, the final regulations have delayed gross proceeds withholding until January 1, 2017, which will give the IRS and taxpayers time to work through some of the complicated issues presented by gross proceeds withholding, especially in the context of third-party sales. Extension of Grandfathering Rules Under the final regulations, FATCA withholding generally does not apply to payments on or with respect to, or any gross proceeds from the disposition of, any obligation (and associated collateral) outstanding on January 1, This grandfather exception is a one-year extension of the grandfather date in the proposed regulations. The final regulations contain various technical requirements that must be satisfied in order to qualify for, and maintain, grandfathered status. A discussion of those requirements is beyond the scope of this PE Alert. Registration and Future Guidance The IRS is developing an online FATCA registration portal that will, among other things, enable FFIs to enter into an FFI Agreement and facilitate communication with the IRS. The portal is expected to be accessible no later than July 15, No later than October 15, 2013, the IRS plans to assign to participating FFIs, registered deemed-compliant FFIs, and Model 1 FFIs a newly created global intermediary identification number (GIIN) to be used for FATCA purposes. Although they are generally not otherwise required to comply with the final regulations or enter into an FFI Agreement, Model 1 FFIs will need to register with the IRS to obtain a GIIN. Treasury and the IRS expect to publish a revenue procedure that sets forth the terms of an FFI Agreement and various other administrative matters, including with respect to termination, renewal, and modification of an FFI Agreement. The IRS also plans to release new withholding forms (e.g., a new W-8BEN-E) so that taxpayers can certify as to their FATCA status (drafts were released in mid-2012). A withholding agent may rely upon pre- FATCA withholding forms (e.g., a W-8EXP from a foreign government or international organization) in lieu of obtaining an updated version in certain circumstances. Weil, Gotshal & Manges LLP March 1,

5 At this time it remains unclear when Treasury and the IRS will publish the additional guidance and revised forms referred to above. We continue to monitor these new developments and are available to discuss the foregoing and any questions that you may have about FATCA and its impact on your business. Certain Key FATCA Dates January 1, 2013 July 15, 2013 October 25, 2013 December 2, 2013 January 1, 2014 January 1, 2014 January 1, 2017 January 1, 2017 Accounts become subject to FATCA information reporting. Reports with respect to 2013 and 2014 will be due no sooner than March 31, Portal available for FFIs to enter into FFI Agreements. Deadline to register using portal to make first IRS FFI List. First IRS FFI List released (applies to 2014 withholding). Withholding begins on payments of US-source interest, dividends, rents, royalties, and certain other types of fixed or determinable annual or periodic income. Obligations issued before this date are exempt from FATCA. Withholding begins on payments of gross proceeds. Withholding may begin on foreign passthru payments. The final regulations reserve on the definition of foreign passthru payment (similar to the proposed regulations). 1 Prior Private Equity Alerts discussing FATCA are available here on our website: November 2009 issue, December 2009 issue, and March 2012 issue. Weil, Gotshal & Manges LLP March 1,

6 Private Equity Alert is published by the Private Equity Group of Weil, Gotshal & Manges LLP, 767 Fifth Avenue, New York, NY 10153, , The Private Equity Group s practice includes the formation of private equity funds and the execution of domestic and cross-border acquisition and investment transactions. Our fund formation practice includes the representation of private equity fund sponsors in organizing a wide variety of private equity funds, including buyout, venture capital, distressed debt and real estate opportunity funds, and the representation of large institutional investors making investments in those funds. Our transaction execution practice includes the representation of private equity fund sponsors and their portfolio companies in a broad range of transactions, including leveraged buyouts, merger and acquisition transactions, strategic investments, recapitalizations, minority equity investments, distressed investments, venture capital investments and restructurings. Editors: Doug Warner (founding editor) doug.warner@weil.com Michael Weisser michael.weisser@weil.com If you have questions concerning the contents of this issue, or would like more information about Weil s Private Equity practice, please speak to your regular contact at Weil, to the editors, or to the contributing authors: Contributing Authors: Robert Frastai (NY) robe rt.frastai@weil.com Stanley Ramsay (NY) stan.ramsay@weil.com Kimberly Blanchard (NY) kim.blanchard@weil.com David Bower (DC) david.bower@weil.com Russell Stein (Boston) russell.stein@weil.com Jonathan Macke (Dallas) jonathan.macke@weil.com JoonBeom Pae (NY) joonbeom.pae@weil.com Lane Morgan (Dallas) lane.morgan@weil.com This communication was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein Weil, Gotshal & Manges LLP. All rights reserved. Quotation with attribution is permitted. This publication provides general information and should not be used or taken as legal advice for specific situations that depends on the evaluation of precise factual circumstances. The views expressed in these articles reflect those of the authors and not necessarily the views of Weil, Gotshal & Manges LLP. If you would like to add a colleague to our mailing list or if you need to change or remove your name from our mailing list, please log on to or send an to subscriptions@weil.com. Weil, Gotshal & Manges LLP March 1,