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New Rules For Foreign (Non-American) Banks with American Clients

On Behalf of | Feb 10, 2012 | Firm News

With the publication on February 8, 2012 of the FATCA bank withholding regulations, it is clear that the FATCA train has left the station.  The 400 pages of new Regulations would apply to almost every non-American bank in the world if they wish to continue to do business with American clients and financial institutions.

The IRS also announced that non-American banks have until January 1, 2013, to file an application to enter into an agreement with the IRS to avoid a burdensome 30% withholding tax if they are determined by the IRS to be a Nonparticipating Foreign Financial Institution. (NFFI)

How FATCA works in a nutshell.  The impact of the new law is two-fold. Americans with assets outside the United States starting with their 2011 tax returns, now have to disclose to the IRS, all of their foreign financial assets exceeding a specified dollar threshold, including their non-American bank accounts.

For non-American banks with American clients, they must agree to become a “withholding agent” of the United States government through the IRS, agree to an IRS review of their internal procedures, file an annual tax information return with the IRS disclosing the names and ID numbers of all their American clients, and if the American client refuses to cooperate with the bank, close the account immediately.

As part of a worldwide effort to stop Americans from using offshore banks and other financial institutions to cheat on their taxes, it was also announced on February 8,  that five European countries including Spain, are working toward sharing certain data bases so that the European countries can benefit from FATCA and catch their own people who are cheating on their taxes, as well as European bankers and advisers who have been counseling American investors about how to evade taxes by using European banks and other entities. What is significant about the European announcement is the FATCA concept that participating European banks in those five countries will soon be able to give their information on American account holders TO THEIR GOVERNMENTS instead of directly to the IRS. Banks in those countries may soon be relieved of the requirement of entering into a separate agreement with the IRS.  Their governments will turn over their records on their Americans and their banks will not have to deal with the IRS.  We believe this creates a huge advantage for banks in those countries and we predict a scramble in other western countries to become part of that elite group of countries which are working hard to implement FATCA.


The Regulations published on February 8, 2012, reflect the IRS response to the many comments the IRS has received from banks all over the world over the past several months.  Most banks today have been very busy making changes to their IT systems to identify their American customers and comply with the new FATCA rules.

The IRS announced a formal comment period on the proposed Regulations which closes on April 30 of this year.  Banks with concerns about the implementation of FATCA should participate in this process by submitting comments. Following the comment period, there will be a public forum on May 15 in Washington, D.C., at which time banking institutions will have another opportunity to talk directly with the IRS and raise any concerns they may have on how the processes are supposed to work.

Some foreign bank compliance officers with whom I have spoken have confirmed they are busy revamping their systems to get ready for the new rules which will be summarized below.
Foreign banks which are inactive, waiting for further direction from domestic ministries or fiscal agencies are losing precious time and are doing so at their extreme peril. Moreover, even if the deadline to apply to be a withholding agent for the IRS is postponed again, those foreign banks who are late getting in their paperwork are going to cost their shareholders and owners money because of lost business, direct liability for the taxes they should have withheld, and attorney and accounting fees to straighten the mess out with the IRS once the bank fully complies.

Here is what each foreign bank must do if it wishes to continue doing business in the United States’ financial arena

A participating bank must agree to become a withholding agent of the IRS and

(1)      Report certain information on an annual basis to the IRS with respect to each U.S. account and other accounts controlled by Americans and to comply with requests for additional information with respect to any U.S. account.

(2)      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) the gross receipts and gross withdrawals or payments from the account .

(3)       The bank must obtain a signed waiver of its American clients’ privacy rights, if any, in that foreign country.

(4)      If the American depositor refuses to cooperate, the bank must close the account.

All banks which decline to participate in the program will be at risk for a 30% withholding tax on certain defined transfers of US source income to themThis includes pass through payments of US source income to,  or from other foreign banks who the IRS determines  are non-Participating Foreign Financial Institutions.


In today’s world, a banker cannot do his job properly if he does not ask whether or not FATCA applies to every single transfer of funds involving US Source Income to or from a bank which is not a U.S. bank.

I have extensive information on the implementation dates, the rules for identifying Americans from amongst other depositors,  streamlined rules for affiliates and branches of banks,  the circumstances of how a bank might qualify as a “deemed compliant” bank which permits certain relief from some of the administrative burdens,  key definitions, record keeping requirements,  how the Anti-Money Laundering and Know Your Customer rules operate within this arena,  the treatment of certain life insurance policies, and the potential liability of the banks themselves for the payment of withholding taxes which were not correctly reported.

The newly-published rules also announced a relaxation of the threshold for rules which are specifically targeted toward Private Banking and personally against Private Bankers.

Banks all over the world have realized that compliance with FATCA is simply the cost
of doing business in today’s computerized, modern financial environment. Please
feel free to share my summary of the new regulations contained herein as you
deem appropriate. Additionally, I am available for consultation, which can be
arranged by contacting my office.

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