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Implications of US Witholding Tax Duty Changes


The US Foreign Account Tax Compliance Act, 'FATCA', likely to be implemented as of 2013, will have considerable effects on the withholding tax duty of the profits and income, contract documentation and investment structures relating to investments made in the US. The purpose of FATCA is to prevent US investors from avoiding US taxation by making investments in the US via companies tax resident abroad. Taxand Finland discusses FATCA and how this new tax act affect multinationals in the US.

The most crucial consequence of the implementation of FATCA is the withholding tax imposed to a foreign financial institution ("FFI") at the rate of 30 per cent based on the income and profit derived from the US, indirectly or directly. The concept of the FFI is deemed to cover e.g. entities accepting deposits in the ordinary course of banking or similar business and entities, the substantial business of which consists of holding financial assets for the account of others. Consequently, e.g. Finnish investment funds, fund management companies and investment banks may be subject to said regulation. Currently, it seems that the withholding tax duty will be applied to payments made as of the beginning of 2014. For example, currently, dividends received by a Finnish bank from a US company has been subject to withholding tax of 15 per cent. As of the implementation of FATCA, the respective dividends may be subject to withholding tax of 30 per cent.

Taxand Finland discusses the implementation of FATCA

Taxand's Take

Based on the recent announcement by IRS, the publication of the proposed regulation version of FATCA will be postponed to take place in 2012. However, the implementation of FATCA should be taken into account already now in case a taxpayer has or plans to make direct or indirect investments in the US. Evaluation of the effects of FATCA may be of a great importance for e.g. funds with investments in US, including funds of funds investing in the US indirectly through other funds. In addition, the final form of the regulation regarding exempted FFIs, i.e, what types of entities are exempted, if any, will affect the position of foreign investors.

Your Taxand contacts for further queries are:
Janne Juusela
T. +358 9 6153 3431

Paulus Hid?n
T. +358 9 6153 3436

Taxand's Take Author