Grandfathered obligation

FATCA

Grandfathered obligations [§1.1471-2(b)]

1-2(b)(1) Grandfathered treatment of outstanding obligations [§1.1471-2(b)(1)]

Notwithstanding §1.1473-1(a), a withholdable payment does not include any payment made under a grandfathered obligation described in paragraph (b)(2)(i)(A) of this section, or any gross proceeds from the disposition of such an obligation. Notwithstanding §1.1471-5(h), a foreign passthru payment does not include any payment made under a grandfathered obligation described in paragraph (b)(2)(i)(A) or (B) of this section, or any gross proceeds from the disposition of such an obligation. A premium paid with regard to an insurance contract or annuity contract that is a grandfathered obligation is treated as a payment made under a grandfathered obligation.

1-2(b)(2) Definitions [§1.1471-2(b)(2)]

The following definitions apply solely for purposes of this paragraph (b).

(2)(i) Grandfathered obligation [§1.1471-2(b)(2)(i)]

(i)(A) The term grandfathered obligation means[§1.1471-2(b)(2)(i)(A)]

(1) [Reserved]. For further guidance, see §1.1471-2T(b)(2)(i)(A)(1). [§1.1471-2(b)(2)(i)(A)(1)]

Any obligation outstanding on July 1, 2014;

(2) Any obligation that gives rise to a withholdable payment solely because the obligation is treated as giving rise to a dividend equivalent pursuant to section 871(m)[1] and the regulations thereunder, provided that the obligation is executed on or before the date that is six months after the date on which obligations of its type are first treated as giving rise to dividend equivalents; and [§1.1471-2(b)(2)(i)(A)(2)]

(3) Any agreement requiring a secured party to make a payment with respect to, or to repay, collateral posted to secure a grandfathered obligation. If collateral (or a pool of collateral) secures both grandfathered obligations and obligations that are not grandfathered, the collateral posted to secure the grandfathered obligations must be determined by allocating (pro rata by value) the collateral (or each item comprising the pool of collateral) to all outstanding obligations secured by the collateral (or pool of collateral). [§1.1471-2(b)(2)(i)(A)(3)]

(i)(B) Solely for purposes of a foreign passthru payment, the term grandfathered obligation also includes any obligation that is executed on or before the date that is six months after the date on which final regulations defining the term foreign passthru payment are filed with the Federal Register. [§1.1471-2(b)(2)(i)(B)]

(2)(ii) Obligation [§1.1471-2(b)(2)(ii)]

(ii)(A) Except as otherwise provided in paragraph (b)(2)(ii)(B) of this section, the term obligation means any legally binding agreement or instrument. An obligation for purposes of this paragraph (b)(2)(i) includes, for example[§1.1471-2(b)(2)(ii)(A)]

(1) A debt instrument (for example, a bond, guaranteed investment certificate, or term deposit); [§1.1471-2(b)(2)(ii)(A)(1)]

(2) An agreement to extend credit for a fixed term (for example, a line of credit or a revolving credit facility), provided that the agreement as of its issue date fixes the material terms (including a stated maturity date) under which the credit will be provided; [§1.1471-2(b)(2)(ii)(A)(2)]

(3) A derivatives transaction entered into between counterparties under an ISDA Master Agreement that is evidenced by a confirmation; [§1.1471-2(b)(2)(ii)(A)(3)]

(4) [Reserved]. For further guidance, see §1.1471-2T(b)(2)(ii)(A)(4). [§1.1471-2(b)(2)(ii)(A)(4)]

A life insurance contract under which the entire contract value is payable no later than upon the death of the individual(s) insured under the contract but, in the case of a life insurance contract that contains a provision that permits the substitution of a new individual as the insured under the contract, only until a substitution occurs; and

(5) An immediate annuity contract payable for a period certain or for the life of the annuitant. [§1.1471-2(b)(2)(ii)(A)(5)]

(ii)(B) An obligation for purposes of this paragraph (b)(2)(ii) does not include any legal agreement or instrument that[§1.1471-2(b)(2)(ii)(B)]

(1) Is treated as equity for U.S. tax purposes; [§1.1471-2(b)(2)(ii)(B)(1)]

(2) [Reserved]. For further guidance, see §1.1471-2T(b)(2)(ii)(B)(2). [§1.1471-2(b)(2)(ii)(B)(2)]

Lacks a stated expiration or term (for example, a savings deposit or demand deposit, a deferred annuity contract, or an annuity contract that permits a substitution of a new individual as the annuitant under the contract);

(3) Is a brokerage agreement, custodial agreement, investment linked insurance contract, investment linked annuity contract, or similar agreement to hold financial assets for the account of others and to make and receive payments of income and other amounts with respect to such assets; or [§1.1471-2(b)(2)(ii)(B)(3)]

(4) Is a master agreement that merely sets forth standard terms and conditions that are intended to apply to a series of transactions between parties but that does not set forth all of the specific terms necessary to conclude a particular transaction. [§1.1471-2(b)(2)(ii)(B)(4)]

(2)(iii) Date outstanding [§1.1471-2(b)(2)(iii)]

Except as provided in the following sentence, an obligation that constitutes indebtedness for U.S. tax purposes is outstanding on the date provided in paragraph (b)(2)(i) if it has an issue date before such date. In all other cases, including an agreement described in paragraph (b)(2)(ii)(A)(2) of this section, an obligation is outstanding on the date provided in paragraph (b)(2)(i) if a legally binding agreement establishing the obligation was executed between the parties to the agreement before such date. Any material modification of an outstanding obligation will result in the obligation being treated as newly issued or executed as of the effective date of such modification.

(2)(iv) Material modification [§1.1471-2(b)(2)(iv)]

[Reserved]. For further guidance, see §1.1471-2T(b)(2)(iv).

In the case of an obligation that constitutes indebtedness for U.S. tax purposes, a material modification is any significant modification of the debt instrument as defined in §1.1001-3(e). For life insurance contracts, a material modification includes any substitution of the insured under the contract. In all other cases, whether a modification of an obligation is material is determined based on the facts and circumstances.

1-2(b)(3) Application to flow-through entities [§1.1471-2(b)(3)]

(3)(i) Partnerships [§1.1471-2(b)(3)(i)]

A payment made under a grandfathered obligation includes a payment made to a partnership with respect to such obligation and a payment made with respect to a partnership’s disposition of such obligation. A payment made under a grandfathered obligation also includes the income from such obligation that is includible in the gross income of a partner with respect to a capital or profits interest in the partnership and the gross proceeds allocated to a partner from the disposition of such obligation as determined under §1.1473-1(a)(5)(vii).

(3)(ii) Simple trusts [§1.1471-2(b)(3)(ii)]

A payment made under a grandfathered obligation includes a payment made to a simple trust with respect to such obligation, including a payment made with respect to a simple trust’s disposition of such obligation. A payment made under a grandfathered obligation also includes income from such obligation that is includible in the income of a beneficiary and further includes a beneficiary’s share of the gross proceeds from a disposition of such obligation as determined under §1.1473-1(a)(5)(vii).

(3)(iii) Grantor trusts [§1.1471-2(b)(3)(iii)]

A payment made under a grandfathered obligation includes a payment made to a grantor trust with respect to such obligation, including a payment made with respect to the trust’s disposition of such obligation. A payment made under a grandfathered obligation also includes income from such obligation that is includible in the gross income of a person that is treated as an owner of the trust and the gross proceeds from the disposition of such obligation to the extent such owner is treated as owning the portion of the trust that consists of the obligation.

1-2(b)(4) Determination by withholding agent of grandfathered treatment [§1.1471-2(b)(4)]

(4)(i) In general [§1.1471-2(b)(4)(i)]

A withholding agent other than the issuer of the obligation (or agent of the issuer) may, absent actual knowledge, rely on a written statement by the issuer of the obligation to determine if such obligation meets the requirements for grandfathered treatment provided under this paragraph (b).

(4)(ii) Determination of material modification [§1.1471-2(b)(4)(ii)]

[Reserved]. For further guidance, see §1.1471-2T(b)(4)(ii).

For purposes of paragraph (b)(2)(iv) of this section (defining material modification), a withholding agent, other than the issuer of the obligation (or an agent of the issuer), is required to treat a modification of the obligation as material only if the withholding agent has actual knowledge thereof, such as in the event the withholding agent receives a disclosure indicating that there has been or will be a material modification to such obligation. The issuer of the obligation (or an agent of the issuer) that is a withholding agent is required to treat a modification of the obligation as material if the withholding agent knows or has reason to know that a material modification has occurred with respect to the obligation.

(4)(iii) Record retention [§1.1471-2(b)(4)(iii)]

A withholding agent that relies on a document provided by the issuer of an obligation as described in paragraph (b)(4)(i) or (ii) of this section must retain such document in its records for the applicable period of limitations on assessment and collection with respect to amounts paid under the obligation or from disposition of the obligation.

[1] http://www.law.cornell.edu/uscode/text/26/871#m

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s