The Loan Syndications and Trading Association and the Securities Industry and Financial Markets Association have jointly developed a pair of proposals to help collateralized loan obligations comply with the U.S.'s new Foreign Account Tax Compliance (FACTA) tax regulations.
The proposals were contained in a letter addressed to Alasdair Robertson, a partner at law firm Maples who is based in the Cayman Islands. It was written by Erika Nijenhuis , a partner at the law firm Cleary, Gottlieb Steen & Hamilton on behalf of the LSTA and SIFMA.
The first proposal is language to be included in an inter-governmental agreement (IGA) between the U.S. and the Cayman Islands that provides potential relief for CLOs.
The trade groups have also proposed a technical amendment to the Internal Revenue Service’s final rules that would more properly make existing CLOs compliant with FACTA.
Under the FATCA provisions found in the U.S. Internal Revenue Code, investment vehicles organized in the Cayman Islands, including CLOs, will be subject to U.S. withholding tax based on interest and other payments on loans by U.S. borrowers that they hold, unless they provide certain information about their investors.
According to the letter written by Nijenhuis, many CLO issuers do not have contractual provisions that allow them to comply with these requirements.
Hamilton wrote that the final regulations under FACTA include a provision on "Limited Life Debt Investment Entities" ("LLDIEs") that is supposed to address that problem. However, the LLDIE definition is very narrow and would not apply to most CLO issuers or other Cayman Islands structured finance vehicles.
This is the reason why the trade associations have proposed a similar, albeit broader, provision in the U.S.-Cayman Islands IGA. Nijenhuis said that the proposed language would apply both to new and existing CLO issuers and similar entities.
In this light, both trade groups also submitted a joint letter to the U.S. Treasury and the IRS on the proposed technical solution to the the LLDIE definition.