The borrower bears any FATCA risk associated with grandfather loans where (1) the agreement is a transaction between the parties or (2) the borrower/parent is either able (a) to control the changes and/or changes to the debtor group under the loan agreement, so that the grandmother is not lost; or (b) to control the status of each debtor, i.e. to check that no debtor is (or will be) a U.S. entity whose payments are considered (or would be considered a source or FFI) of the United States (one FATCA debtor each). The Loan Market Association (“LMA”) has not added FATCA provisions as a standard to its types of loan agreements. However, it has published three types of standard clauses that can treat FATCA as a borrower or lender. The latest versions of the latter were published on 23 January and are intended for use in stores completed in 2013. There is also some market discussion on the LMA`s interpretation of FATCA. FATCA asks foreign financial institutions (i.e. not in the United States) to sign agreements with the Internal Revenue Service (IRS) to provide details of their account holders in the United States. If they do not, they should expect a 30% penalty if, in the case of lenders, all “withheld payments” made to them by a U.S. borrower or a U.S. source are made with interest and charges (as of January 1, 2014) and capital (from January 1, 2017). This would affect the payments of such a borrower to a non-participating lender or FFI representative and, through a participating representative, to a non-participating FFI lender.
Payments to “foreign non-financial enterprises” may also be affected, but this does not matter for current purposes. However, if there is no U.S. debtor or FFI borrower and there is no source of payment (or perspective from any source) under a facility, FATCA should generally be irrelevant. FATCA`s disclosure and compliance requirements must be taken into account at the strategic level. But the question many parties to syndicated loans (particularly new syndicated loans) are asking is simple: could payments made under this facility agreement (including payments from agents and other financial parties) be subject to FATCA withholding? John L. Harrington and Adam Pierce summarize the key factors that may determine the answer to this question. This summary is based on regulations proposed by the U.S. government in February of this year. These rules can change. Final regulations, forms and standard agreements are expected to be published before the end of the year.