With FATCA, the U.S. Internal Revenue Service ("IRS") will be able to identify and collect tax from "US persons" who invest in US assets through non-US entities.
FATCA requires FFIs to identify, document and report on all US persons to the IRS. In addition, FFIs must withhold, and pay to the IRS, 30% of any payments relating to US-sourced income where the payment is made to either:
A non-participating FFI
Recalcitrant account holders i.e. those who have not provided sufficient information to determine whether or not they are US persons or substantially owned by US persons
Such “withholdable payments” include any sources of US income that is a fixed and determinable annual or periodical payment (FDAP), for example wages, dividends, interest, rents, royalties, or the gross proceeds from the sale of US property that is capable of producing interest or dividends.
The 30% withholding tax also applies to any withholdable payment paid to a passive NFFE unless the NFFE identifies each substantial US person that owns a direct or indirect interest (generally owners with more than 10% interest), or certifies that it has no such substantial US owners. Passive NFFEs are Non Financial Foregin Entities, which derive at least 50% of their income from passive income (e.g. interest, dividends, rents and royalties) or at least 50% of their assets are assets that are held to produce such income.
In general, in order to avoid 30% FATCA withholding, a passive NFFE (other than an excepted NFFE) must provide the withholding agent with either:
A certification that the NFFE does not have any substantial US owners (generally owners with more than 10% interest); or
The name, address, and US Taxpayer Identification Number (TIN) of each substantial US owner.
Where the passive NFFE provides information in regard to substantial US owners, the withholding agent must report that information to the IRS.
FATCA has a staggered implementation timetable, with some requirements commencing in 2013.