FATCA IGA between the Netherlands and the US
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Allen & Overy Online Services Page 1 of 5
23rd December 2013
FATCA IGA between the
Netherlands and the US
Speed read
On December 18, 2013, the US and the Netherlands announced the signing of an agreement
setting out the reporting and withholding requirements applicable to Dutch financial institutions
under FATCA. An important advantage is that Dutch financial institutions no longer need to
conclude agreements with the US Internal Revenue Service separately. Instead, each nation’s
tax authorities will exchange the data. In this e-alert we discuss the key features of the
agreement and the impact on loan documentation.
CONTENTS
Introduction | Background | Key Elements of the NL IGA | Impact on loan
documentation | Circular 230
Introduction
On December 18, 2013, the US and the Netherlands announced the signing of a bilateral
agreement (the NL IGA ) setting out the reporting and withholding requirements applicable to
Dutch financial institutions under the Foreign Account Tax Compliance Act (FATCA). The NL
IGA is based on the reciprocal version of the model 1 intergovernmental agreement released in
July 2012 (the reciprocal model 1 IGA ) and resembles, for example, the US-UK IGA in that
respect. An important advantage of the NL IGA is that Dutch financial institutions no longer need
to conclude agreements with the US Internal Revenue Service separately. Instead, each
nation’s tax authorities will exchange the data. Dutch legislation will be adapted to that end. The
Netherlands plans to present the NL IGA to its parliament for its approval in 2014 and, to
propose implementing legislation with the goal of having the NL IGA enter into force in Dutch
domestic law by September 30, 2015. In anticipation of this legislation, as of December 18,
2013, the date of signature of the NL IGA, the United States Department of the Treasury intends
to treat each Netherlands Financial Institution as complying with, and not subject to FATCA
withholding during such time as the Netherlands is pursuing the necessary internal procedures
for entry into force of the NL IGA. Beginning in September 2015, the Dutch Tax Administration
will automatically exchange data with the US Internal Revenue Service. The Dutch Tax
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Administration will in return receive data relating to Dutch taxpayers from the US Internal
Revenue Service.
Background
FATCA imposes a 30% US withholding tax on certain payments (generally, US-source
payments and certain as-of-yet-undefined "foreign passthru payments") to foreign financial
institutions (FFIs) that do not comply with FATCA (nonparticipating FFIs), with the goal of
compelling FFIs to report US account information to the US government. The model 1 IGA was
developed as an alternative to compliance with FATCA's statutory requirements, since those
requirements in many instances conflict with local bank secrecy, data protection, and other
laws. A discussion of the IGA framework can be found here. The remainder of this eAlert
discusses the key features of the NL IGA and the impact on loan documentation.
Key Elements of the NL IGA
FATCA-EXEMPT INSTITUTIONS AND PRODUCTS
The NL IGA contains an annex (Annex II) that carves specified entities and financial products
with a low potential for US tax avoidance out of FATCA's reporting and withholding regime. Very
generally, the Annex establishes that Netherlands governmental organizations, certain
international organizations which are exempt for Dutch tax purposes, certain pension and
retirement funds and investment entities wholly owned by exempt beneficial owners will be
treated as "exempt beneficial owners" for FATCA purposes, and therefore will not be subject to
FATCA withholding. FATCA withholding similarly will not apply to Netherlands financial
institutions with local client bases (a category that is generally defined to include organizations
that are licenced and regulated in the Netherlands and provide financial services only within the
Netherlands to Netherlands or European Union residents) or certain Netherlands non-profit
organizations (including so called ANBI’s and SBBI’s), certain labour union funds, certain
investment advisors and investment managers and certain collective investment vehicles as the
Annex provides that these entities will be treated as "deemed-compliant FFIs". The Annex also
excludes from the definition of "financial account" a list of retirement accounts and tax-
advantaged financial products, all of which are already subject to some form of regulation in the
Netherlands. The effect of this exclusion is that such accounts will not be subject to the due
diligence and reporting requirements imposed by FATCA or the NL IGA upon FFIs with respect
to financial accounts.
The Annex is subject to revision by the mutual agreement of US and Netherlands tax
authorities, as necessary, to include or remove entities, accounts or products based on their
potential for US tax avoidance.
WITHHOLDING PENALTY FOR SIGNIFICANT NON-COMPLIANCE
An FFI or branch of an FFI that is a resident of, or is located in the Netherlands that does not
qualify for one of the exceptions found in Annex II (a Reporting NL FFI) will still be eligible for an
exemption from FATCA withholding, subject to fulfilling reporting requirements towards the
Netherlands Tax Administration that track closely the corresponding provisions of the model 1
IGA. A Reporting NL FFI that does not comply with its obligations will be subject to FATCA
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withholding only if its non-compliance is "significant" and has not been resolved within 18
months.
MOST-FAVOURED NATION CLAUSE
The NL IGA ensures that the Netherlands will receive the benefit of any more favourable terms
afforded to any other jurisdiction that signs an intergovernmental agreement with the US,
provided such other jurisdiction commits to the same obligations undertaken by the
Netherlands.
EFFECTIVE DATE
The NL IGA takes effect on the date of the Netherlands’ written notification to the United States
that the Netherlands has completed its necessary internal procedures for its entry into force in
Dutch domestic law and will continue in force until terminated. In anticipation of the completion
of these internal procedures and as of 18 December 2013, the date of signature of the NL IGA,
the United States Department of the Treasury intends to treat each Netherlands Financial
Institution as complying with, and not subject to FATCA withholding during such time as the
Netherlands is pursuing the necessary internal procedures for entry into force of the NL IGA (for
the letter, click here ). The Netherlands Ministry of Finance intends to contact the United States
Department of the Treasury as soon as it is aware that there might be a delay in the
Netherlands internal approval process for entry into force of the NL IGA which would result in
the Netherlands being unable to provide its notification prior to September 30, 2015. If following
consultation with the Netherlands, the United States Department of the Treasury receives
credible assurances that such a delay is likely to be resolved in a reasonable period of time, the
United States Department of the Treasury may decide to continue to apply FATCA to
Netherlands Financial Institutions in the manner described above as long as the United States
Department of the Treasury assesses that the Netherlands is likely to be able to send its
notification by September 30, 2016. Should the NL IGA enter into force after September 30,
2015, any information that would have been reportable under the NL IGA thereafter (and prior to
its entry into force) had the NL IGA been in force by September 30, 2015, is owed on the
September 30 next following the date of entry into force.
The Netherlands has announced that beginning in September 2015, the Dutch Tax
Administration will automatically exchange data with the US Internal Revenue Service and that
the Dutch Tax Administration will in return receive data relating to Dutch taxpayers from the US
Internal Revenue Service.
Impact on loan documentation
In practical terms, the signing of the NL IGA means that as of December 18, 2013 each
Reporting NL FFI will no longer suffer FATCA withholding on payments made to it (except in the
limited case noted above where such Reporting NL FFI has failed to comply with its reporting
obligations). In finance transactions where there is a perceived risk of FATCA withholding due to
the FATCA status of the obligors or the facility or security agent, FATCA withholding will no
longer pose a concern for the Reporting NL FFIs.
On bilateral or syndicated lending transactions signed before 1 July 2014 which would attract
grandfathering protection under the FATCA regime, where the lenders are all Reporting NL FFIs
or “deemed-compliant FFIs”, we expect to see (and indeed are already starting to see) the
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incorporation of the Loan Market Association “Rider 3” wording - whereby the lenders assume
the risk of any FATCA withholding (for the various Loan Market Association riders, click here).
This follows the trend currently seen in the London finance market for transactions involving
only FFIs or branches of FFIs that are resident of, or located in a jurisdiction which has an
intergovernmental agreement in place.
From a purely Reporting NL FFI perspective, arguably language allocating the risk of FATCA
withholding would not be necessary in these circumstances however it is helpful to ensure that
the FATCA position is clear for any non-FATCA-exempt lender to whom such Reporting NL FFI
may transfer or sub-participate its role, and we would expect borrowers to require this wording
to cater for the situation where FATCA withholding does arise as a result of a failure of the
Reporting NL FFI to fulfil its reporting obligations. The common provisions proposed by the Loan
Market Association should also be included to allow an on-going flow of information on each
party’s FATCA status.
On syndicated transactions which involve a combination of Reporting NL FFIs and other FFIs,
the appropriate FATCA protection to select will depend on the risk factors to those other lenders
who do not benefit from an intergovernmental agreement with the US and are therefore not
FATCA exempt. Prior to the announcement of the signing of the NL IGA, the Dutch market
showed a preference for the Loan Market Association “Rider 2” solution whereby non-FATCA-
exempt lenders could be prepaid out of the facility prior to FATCA withholding arising. We are
in the infancy of the Netherlands as a FATCA compliant jurisdiction so the position is not yet
clear but it is foreseeable that there may now be increased pressure on those non-FATCA-
exempt lenders to move away from the so-called borrower-risk “Rider 2” position on deals in the
Dutch finance market, as these solutions pose a credit risk on the borrower which the Reporting
NL FFIs may no longer be willing to accommodate.
The signing of the NL IGA is a welcome development in the Dutch finance market as this will
simplify the FATCA position for “all Dutch” syndicates and in this regard, could perhaps make
Reporting NL FFIs more attractive than non-FATCA-exempt FFIs to those borrowers looking for
finance in the European market.
Circular 230
Circular 230 disclosure: To ensure compliance with requirements imposed by the Internal
Revenue Service, we inform you that the US federal tax discussion contained herein (1) was not
intended or written to be used, and cannot be used, for the purpose of avoiding US federal tax-
related penalties under the Internal Revenue Code and (2) was not written to support the
promotion or marketing of any transaction. Taxpayers should seek the advice of their own
independent tax advisers based on their own particular circumstances.
Contact information
Stephen Fiamma +44 20 3088 3657
Partner US Tax, London stephen.fiamma@allenovery.com
John Brouwer +31 20 674 1541
Partner Tax, Amsterdam john.brouwer@allenovery.com
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Femke Bierman +31 20 674 1507
Partner Banking, Amsterdam femke.bierman@allenovery.com
Jack Heinberg +1 212 610 6383
Partner Tax, New York jack.heinberg@allenovery.com
David Lewis +1 212 756 1147
Partner Tax, New York david.lewis@allenovery.com
This ePublication is for general guidance only and does not constitute definitive advice.
© Allen & Overy 2014
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