The U.S. Department of the Treasury (“Treasury”) and the U.S. Internal Revenue Service (the “IRS”) on April 8, 2011 issued Notice 2011-34, their second installment of written guidance under the Foreign Account Tax Compliance Act (“FATCA”). The following discussion highlights those areas of particular interest to non-U.S. investment funds.

Background

Included as a revenue offset in the Hiring Incentives to Restore Employment Act enacted on March 18, 2010 (the “HIRE Act”), FATCA adds new chapter 4 (sections 1471-1474) to the U.S. Internal Revenue Code of 1986, as amended (the “Code”). Chapter 4 of the Code imposes new information reporting and withholding requirements on “foreign financial institutions” (“FFIs,” which term includes most non-U.S. investment funds, including UCITS funds, hedge funds and private equity funds)1 with respect to certain U.S. investors or account holders (“U.S. accounts”).2 Compliance is enforced through a new 30% withholding tax on certain income and gross sales proceeds derived from U.S. sources (referred to as “withholdable payments”)3 by non-compliant FFIs, effective January 1, 2013.

On August 27, 2010, Treasury and the IRS published Notice 2010-60, which provided very preliminary initial guidance and requested comments on a number of issues relating to the implementation of FATCA. In particular, Notice 2010-60 identified non-U.S. collective investment vehicles that prohibit the sale of their interests to certain U.S. persons as a potential category of FFI that, subject to certain additional requirements, could possibly be deemed to be FATCA-compliant, and requested comments on a number of related points. In response, many commentators, including a number of asset management industry groups, submitted proposals to Treasury detailing various conditions under which non-U.S. investment funds could be either exempt from or deemed compliant with any FATCA obligations.