IRS Explains Intermediaries’ Obligations on Foreign Tax-Free Savings Accounts


The IRS has revised its frequently asked questions (FAQs) on Qualified Intermediaries (QIs), Withholding Foreign Partnerships (WPs), and Withholding Foreign Trusts (WTs), in relation to the Foreign Account Tax Compliance Act (FATCA).

The changes are aimed at providing guidance on a QI’s obligations under the 2017 and 2014 QI Agreements with respect to certain tax-free savings accounts formed as trust arrangements.

The Hiring Incentives to Restore Employment Act of 2010 added Chapter 4 to the Internal Revenue Code, which generally requires withholding agents to deduct 30% from certain payments made to a foreign financial institution (FFI) unless the institution:

  • Is a participating FFI that has entered into an FFI agreement to report, among other things, certain information with respect to U.S. accounts,
  • Is deemed to meet these requirements, or
  • Is treated as an exempt beneficiary owner.

Chapter 4 also imposes withholding, documentation and reporting requirements on withholding agents with respect to certain payments made to certain nonfinancial foreign entities.

Simplifying Withholding and Reporting Requirements

A QI is an eligible person that submits an application and enters into a QI agreement with the IRS. Generally, a QI agreement simplifies the U.S. tax withholding and reporting obligations for payments of income made to an account holder through one or more foreign intermediaries (for example, an FFI).

WP and WT agreements simplify withholding and reporting obligations for payments to partners of a WP and beneficiaries or owners of a WT. The agreements are tailored to fit the situations of foreign partnerships and trusts in much the same way the QI Agreement is designed to meet the needs of FFIs.

The IRS has on its website several FAQs that provide FATCA guidance but if you can’t find the answer to your question call the IRS-AUDIT-GROUP for assistance. The FATCA ― FAQs General section provides answers that contain information for financial institutions, withholding agents, and intermediaries on a variety of topics, including compliance, reporting, registration and QI/WP/WT issues.

In “Provisions for 2017 QI Agreement,” FAQ No. 4, the IRS discusses what a QI’s obligations are under the 2017 and 2014 QI Agreements when it comes to tax-free savings accounts formed as trust arrangements under applicable non-U.S. law.

Qualifications to Meet

The IRS states that a QI is permitted to treat the beneficiary of the trust arrangement as a direct account holder of the QI where all of the following apply:

  • The trust is registered with the applicable government as a tax-free plan.
  • The applicable foreign law mandates that, where the plan holds assets in a brokerage account, a trust be established for the account holder that is the sole beneficiary.
  • The account holder maintains general control over investments in the plan and can withdraw the funds at any time.
  • The QI is required to document the account holder under applicable regulations or procedures.
  • The trust itself is not eligible for a reduced rate of withholding under an applicable income tax treaty.

More FAQs can be found here. Consult with your tax advisor if you have further questions about your responsibilities under FATCA.