Foreign to Foreign payments and FATCA | KPMG | UK
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Foreign to Foreign payments and FATCA

Foreign to Foreign payments and FATCA

Insurance companies should be aware of the ending of a transitional clause applying to US source Fixed Determinable Periodic Payments.


Partner, Operational Taxes

KPMG in the UK


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Well over 100 countries have now signed up to Intergovernmental Agreements (IGAs) with the US to implement the Foreign Account Tax Compliance Act (FATCA) and a significant number of these have been implemented into local law. Whilst there is still the question of what will happen to those agreements which have not yet been implemented into domestic law, it is worth pausing to reflect that the agreements only implement FATCA for Foreign Financial Institutions (FFI) and not Non-Financial Foreign Entities (NFFEs).

So what?  Well, from a US Treasury perspective all NFFEs should comply with the US Treasury Regulations. Unfortunately, from 1 January 2017, this means more than just considering which set of regulations should be complied with when certifying the tax status for FATCA purposes to a US entity or a FFI.

Foreign to Foreign payments

The US Treasury Regulations include a transitional clause which when read in context means that, until 1 January 2017, insurance premiums over a US risk (i.e. US Source Fixed Determinable Periodic Payment (also known as FDAP)) that were paid between two non-US insurance companies were excluded from Chapter 4 (i.e. the FATCA section) of the US Treasury Regulations.

To understand the implications of this transitional clause ending requires a quick refresher of FATCA.


FATCA applies to US sourced FDAP income. The definition includes insurance premiums to the extent US source risk is being insured, thus, although insurance premiums are not necessarily all ‘Fixed or Periodic’, they are all considered to be FDAP income and therefore caught under the FATCA rules.

There is a question as to when a premium covers US sourced risk, and the quick answer is when the insured property or person is based in the US. However, it is recognised that some property or people are moveable which complicates the matter somewhat (e.g. travel insurance). It therefore seems reasonable to assume that if the insured person or property is ever present in the US, an element of the premium paid will cover US risk.

For example, a French payer of a premium, via an insurance broker to a German insurance company, must ensure that the recipient of the premium is FATCA compliant, i.e. they should obtain evidence of the FATCA tax status of all non-US insurance companies to whom they are paying premium income that covers US risk.

Consequences of non-compliance

Under the US Treasury Regulations if an entity’s status cannot be determined they are presumed to be a Non-Participating FFI.  In the example above, if the German insurance company does not certify its FATCA status, the French company’s insurance broker should withhold 30 percent of the premium payable as the German company is presumed to be a Non-Participating FFI. The insurance broker is then required to report to the IRS and pay across the 30 percent FATCA tax withheld.


The ending of the transitional rule will require insurance premiums that cover US source risk to be treated as US source FDAP income. Recipient insurance companies will be presumed to be Non-Participating FFIs and subject to the 30 percent FATCA withholding tax unless evidence is provided to refute this status. The paying company must then report and pay over this sum to the IRS (and consequently may choose to do business elsewhere).

Although it is expected that it will be the global insurance brokers of US insurance brokers that implement this requirement first, others are expected to follow.

It should also be noted that HM Treasury and other countries’ equivalents as well as industry bodies have written to the US Treasury to ask for an extension (at least) to the transitional arrangements. However, to date there has been no response.

Should you have any questions on this matter or wish to discuss it further please contact your usual KPMG contact or Peter Grant or Jeanette Cook.


For further information please contact :

Peter Grant

Jeanette Cook

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