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Cook Islands: FATCA’s impact – this paper applies to many other offshore centres

ATL-Editor 27 April 2015
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April/May 2015[1]

 

Impact of FATCA on Cook Islands Entities[2]

TABLE OF CONTENTS

  1. Background
    1. The key differences between FATCA and IGA Models 1 and 2
  2. What does FATCA Mean for Cook Island Entities
  • When Will a CI Entity be Classified as a Foreign Financial Institution
    1. Hedge Funds and Private Equity Funds
    2. CI Managers and Advisors of Hedge Funds and Private Equity Funds
    3. CI Holding Companies and Joint Ventures
    4. CI Securitization vehicles
    5. Financing SPVs
    6. Trusts with a CI Trustee
    7. Insurance Companies
    8. Branches and Foreign Subsidiaries
    9. Excepted Beneficial Owners and Deemed-Compliant FFIs
  1. CI Entities that are Not FFIs
  2. What Does a CI FFI Need to Do to Comply With FATCA
    1. Minimum Threshold for Reporting a US Financial Account for FFIs
    2. US Indicia
  3. Simplified Reporting for Groups of FFIs
  • Miscellaneous Issues
    1. Key Dates and Grandfather Rules
    2. Good Faith – Transactional relief under FATCA
    3. Documentation of Entities
    4. Documentation of Individuals
  • Conclusion
  1. General Rules of Trust Taxation in the U.S.
  2. Acronyms
  3. Definitions

 

  1. Background

The Foreign Account Tax Compliance Act (“FATCA”) is a U.S. federal law that aims to reduce tax evasion by U.S. persons that was enacted in 2010 by Congress to target US taxpayers using foreign accounts to avoid taxation. It became effective July 1, 2014 with a phased in implementation timeline (VII. Miscellaneous Issues – below) with phasing in over 2.5 years. FATCA has significant extraterritorial implications and, most notably, requires foreign financial institutions (“FFIs”, discussed further below) to report information on accounts of U.S. taxpayers to the U.S. Internal Revenue Service (“IRS”). If an FFI fails to enter into the necessary reporting arrangements with the IRS, a 30{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} withholding tax is imposed on U.S. source income and other U.S. related payments of the FFI.

 

FATCA will impose a new withholding tax of 30{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} on US source dividends, interest, and various other ‘fixed, determinable, annual or periodic’ (“FDAP”) payments as well as gross proceeds from the sale or disposition of assets that generate such payments (such as sales of US stock).

Withholding on US source FDAP payments will begin for payments made after December 31, 2013. However, withholding will not be required on ‘foreign passthru payments’ or on gross proceeds from sales or dispositions of property (including stock in a US corporation) before January 1, 2017.

Subject to significant exceptions under both the final regulations (the “Regulations”’) and bilateral intergovernmental agreements (“IGAs”), this new US withholding tax will apply to payments:

  •  to FFIs that do not comply with certain identification and information reporting requirements regarding their US accountholders (including certain US settlors, beneficiaries, fiduciaries, and owners of non-US entities such as trusts and companies) either under an agreement with the IRS (“FFI Agreement”) or under the terms of an applicable IGA; and
  •  to NFFEs unless they provide certain information regarding any ‘substantial United States owners’ they have directly to withholding agents.

 

FATCA can be viewed to override treaties, since the effect of FATCA is to impose a new condition for reduced withholding rates otherwise granted by the treaty. For example, under the US Model, there is no withholding on interest payment sourced in the United States paid to a qualified resident in the other contracting state. Once FATCA takes effect, however, the result may change, depending on the status of the recipient. If the recipient of the interest payment is an FFI, the FFI must also comply with FATCA (which is outside the scope of the treaty), in order to enjoy the withholding exemption on interest. It is not enough that the FFI is a qualified resident.

It is not clear whether FATCA IGAs can provide a remedy of the override described above. At least one commentator noted that IGAs are executive agreements that could not be read to pre-empt a full-fledged treaty that was subject to the Senate’s consent and ratification process. Other commentatiors, however, noted that it is also possible to view IGAs as valid treaty-based agreements, aimed at interpreting existing treaties. For example, IGAs could be viewed as an action of the contracting states’ competent authorities, which is explicitly sanctioned by mutual agreement procedures.[3]

The key differences between FATCA and IGA Models 1 and 2
There are 3 regimes and each non-US entity will be subject to one of the 3 regimes based on its country of residence. Certain definitions and obligations imposed on FFIs under the IGAs may vary in important respects from those described in the Regulations.

For example, for a financial institution which meets its obligations under, say, the US-Guernsey IGA: US withholding tax of 30{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} will not be imposed on US source payments received by that financial institution; the financial institution will not be required to withhold US tax at 30{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} on payments that it makes to non-participating financial institutions; the financial institution will not be required to close the accounts of recalcitrant account holders; and due diligence requirements are more closely aligned to existing anti-money laundering procedures undertaken by the financial institution in its own jurisdiction in compliance with international standards recommended by the Financial Action Task Force (“FATF”).

FATCA Regulations IGA Model 1 IGA Model 2
Applicable if the entity resides in a jurisdiction that has not signed an IGA.
To become compliant the FFIs register with IRS as Participating FFI and enter into a FFI Agreement with the IRS which includes additional requirements.		 Most commonly applied IGA is Model 1A and it requires its local so-called Reporting FIs to report to local tax authorities who will in turn report to the IRS. Model 2 FFIs have to sign a FFI Agreement with the IRS and comply with the FATCA regulations (almost similar to Participating FFIs in non-IGA countries), except to the extent expressly modified by their IGA.
PFFIs are required to withhold 30{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} tax on US source payments made to non-compliant account holders, to request the US accountholder to waive the privacy or secrecy rights, to close the account if a waiver is not provided and to provide a certification of compliance by a responsible officer Model 1A also includes reciprocity of exchanging information of residents in IGA countries with US bank accounts. The non-reciprocal version is Model 1B Under Model 2 the local Reporting FIs report on US accounts directly to the IRS.

The Cook Islands (“CI”) have not signed a Model 1 or Model 2 U.S. IGA, and will fall into column one above.

 


 

  1. What does FATCA Mean for Cook Island Entities?

The impact FATCA will have on a CI entity fundamentally depends on one key question: is the CI entity an FFI? While FATCA has significant implications for CI entities that are FFIs—such as banks, custodians, hedge funds, private equity funds, trust companies, trusts[4] and other regulated entities.[5]
Accordingly, the first step a CI entity needs to take is to determine its FATCA classification and in particular whether or not it is an FFI – an FI that is tax resident in CI, and one which has a permanent establishment in CI, through which it conducts business. For trusts, if any of the trustees are resident in CI, even if there are no CI resident settlors, beneficiaries or protectors. For partnerships, if the business of the partnership is managed and controlled in CI. A broad summary of how to determine whether a CI entity is an FFI, and a description of the steps that must be taken if the CI entity is an FFI, are addressed in sections III and V below.
Any CI entity that is not an FFI[6] will be a non-financial foreign entity (a “NFFE”) for the purposes of FATCA. CI NFFEs are not generally subject to registration or reporting requirements under FATCA, but they will be required to self-certify their status to financial institutions and other withholding agents with whom they maintain accounts to avoid FATCA withholding.
This is discussed further in section IV below.
III. When Will a CI Entity be Classified as a Foreign Financial Institution?
FATCA is very complex and a detailed analysis is required in each case to determine if a CI company is in fact a financial institution.

 

The term “foreign financial institution” means any financial institution that is any foreign entity not formed under the laws of the United States, even if the investment managers for the foreign entity are in the United States.[7] The term “foreign entity” means any entity that is not a U.S. person.[8]

 

The regulations split the world of financial institutions into two parts and provide that a FFI is any entity that is (1) a financial institution (as defined under the regulations) that is not resident in a country that has in effect a Model 1 IGA or Model 2 IGA; or (2) treated as a financial institution under a Model 1 IGA or Model 2 IGA.[9]

 

Because a USFI[10] means a financial institution that is a U.S. person rather than a foreign entity, by definition it cannot be an FFI.[11] However, USFIs will register their foreign branches through the FATCA portal in some circumstances. A USFI that has a Model 1 FFI branch must register on behalf of the branch and obtain a GIIN to comply with its FATCA partner reporting obligations for that branch. Similarly, a USFI with a foreign branch that is a QI and seeks to maintain QI status must register through the FATCA portal to renew its QI status for the branch regardless of whether the branch is a Model 1 FFI. A USFI with non QI branch operations in a Model 2 IGA jurisdiction or in a non IGA jurisdiction is not required to register with the IRS.[12] A territory financial institution also is not an FFI.[13]

 

The application of these rules can be illustrated with the following examples:

 

  1. Foreign entity not residing in a Model 1 IGA or Model 2 IGA country. If foreign company XYZ is a tax resident of the Cook Islands (based on the Cook Islands’ tax law), where the Cook Islands has not entered into a Model 1 IGA or Model 2 IGA and XYZ is treated as a financial institution under the regulations, XYZ will be an FFI and should register to obtain a GIIN to avoid FATCA withholding.

 

  1. Foreign entity resident in a Model 1 IGA and Model 2 IGA country. If foreign company ABC is

resident in the United Kingdom, a Model 1 IGA country, because it is centrally managed or controlled in the United Kingdom[14] and is treated as a financial institution under the U.K. Model 1 IGA, ABC will be treated as an FFI in the United Kingdom. If ABC is also a resident in Switzerland because it is organized in Switzerland and is treated as a financial institution under the Swiss Model 2 IGA, it will also be an FFI in Switzerland. Since ABC is a resident in both the United Kingdom and in Switzerland, to avoid FATCA withholding, ABC should register and obtain a separate GIIN for payments to its location(s) in the United Kingdom, and another GIIN for payments to its location(s) in Switzerland.

 

  1. U.S. entity and global branches. X Co. is a domestic entity and is treated as a financial institution under the regulations. X has several hundred branches, which are located and managed in Model 1 IGA, Model 2 IGA, and non IGA jurisdictions throughout the world. Because X is a USFI, it will not have to register or obtain a GIIN to avoid FATCA withholding for its foreign branches, unless it has a foreign branch located in a Model 1 jurisdiction or a QI that is acting as an intermediary that seeks to renew its QI status on the FATCA portal.[15] A USFI with non QI branch operations in a Model 2 jurisdiction or a foreign branch in a non IGA jurisdiction is not required to register with the IRS and obtain a GIIN.[16]

 

  1. U.S. entity and its CFCs. Same facts as Example 3. Assume X Co. owned several hundred CFCs, which are treated as financial institutions in the Model 1 IGA countries, Model 2 IGA countries, and non IGA jurisdictions in which the CFCs are tax resident. X, as a sponsoring entity, or the CFCs individually, would register the CFCs as FFIs and obtain separate GIINs to avoid FATCA withholding on payments to them. Presumably, if any CFC had one or more foreign branches, GIINs would have to be obtained if those foreign branches were located or maintained outside the CFC’s country of tax residence.

 

  1. Foreign entity branch maintained in a Model 1 IGA country. If foreign entity DEF is a U.K. incorporated company and has several hundred branches located and maintained throughout the United Kingdom, all of which are treated as financial institutions under the U.K. Model 1 IGA, to avoid FATCA withholding, DEF would register only once and obtain a GIIN that could be used for payments to its branches located within the United Kingdom.

 

  1. Foreign entity branch maintained in a Model 1 IGA and Model 2 IGA country. If foreign entity GHI is organized in Switzerland, a Model 2 IGA country, and is a financial institution under the Model 2 IGA and also has a Branch J located and maintained in the United Kingdom, and Branch J is a financial institution under the Model 1 IGA, both GHI and its Branch J would each have to obtain GIINs for their respective jurisdictions to avoid FATCA withholding in each jurisdiction.

 

  1. Foreign entity branch maintained in a Model 1 IGA and non IGA country. Assume foreign entity KLM is a U.K. incorporated company and is a financial institution under the U.K. Model 1 IGA. Also assume KLM has Branch N, which is located and maintained in Hong Kong, a non IGA

jurisdiction, where it is treated as a tax resident under local tax law and is a financial institution under the regulations. Both KLM and Branch N would have to obtain GIINs for payments to the U.K. or Hong Kong to avoid FATCA withholding in each jurisdiction.

 

  1. Investment Manager, a U.S. entity, is an investment entity: Investment Manager organizes and registers Fund A in Country A. Investment Manager is authorized to facilitate purchases and sales of financial assets held by Fund A in accordance with Fund A’s investment strategy. In every year since it was organized, Fund A has earned more than 50 percent of its gross income from investing, reinvesting, or trading in financial assets. Accordingly, Fund A is an investment entity under reg. section 1.14714(e)(i)(B).

 

  1. Foreign real estate investment fund that is managed by an FFI: The facts are the same as in 8, except that Fund A’s assets consist solely of non debt, direct interests in real property located within and without the United States. Fund A is not an investment entity, even though it is managed by Investment Manager, because less than 50 percent of its gross income is attributable to investing, reinvesting, or trading in financial assets.

 

  1. Trust managed by an individual: X, an individual, establishes Trust A, a non grantor foreign trust for the benefit of X’s children, Y and Z. X appoints Trustee A, an individual, to act as the trustee. Trust A’s assets consist solely of financial assets, and its income consists solely of income from those financial assets. Under the terms of the trust instrument, Trustee A manages and administers the assets of the trust. Trustee A does not hire an entity as a third party service provider to perform any of the activities described in reg. section 1.14714(e)(4)(i)(A). Trust A is not an investment entity under reg. section 1.14714(e)(4)(i)(B) because it is managed solely by Trustee A, an individual.

 

  1. Trust managed by a trust company: The facts are the same as in 10, except that X hires Trust Co., an FFI, to act as trustee on behalf of Trust A. As trustee, Trust Co. manages and administers the assets of Trust A in accordance with the terms of the trust agreement for the benefit of Y and Z. Because Trust A is managed by an FFI, Trust A is an investment entity under reg. section 1.14714(e)(4)(i)(B) and an FFI under reg. section 1.14715(e)(1)(iii).

 

  1. Individual introducing broker: IB, an individual introducing broker, provides investing advice to her clients and uses the services of a foreign entity to conduct and execute trades on behalf of her clients. IB has earned 50 percent or more of her gross income for the past three years from her services as an investment adviser. Because IB is an individual, she is not an investment entity under reg. section 1.14714(e)(4).

 

  1. Entity introducing broker: The facts are the same as in Example 7, except that IB is a

foreign entity and not an individual. Because IB is an entity that conducts investment activities and its gross income is primarily attributable to those investment activities, IB is an investment entity under reg. section 1.14714(e)(4)(i)(A) and reg. section 1.14715(e)(1)(iii).

 

 

Generally, the following five categories of CI entities will be FFIs and be directly affected by FATCA’s registration and reporting requirements:

 

  • Investment Entities: Under the FATCA regulations an Investment Entity is an entity:
  • That primarily (at least 50{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e}) conducts as a business: trading in market instruments, portfolio management, or otherwise investing, administering, or managing funds, for or on behalf of a customer (Class A);
  • Whose gross income is primarily (at least 50{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e}) attributable to investing, reinvesting or trading in financial assets,[17] and the entity is managed (which means any of the activities described in A are performed on behalf of the managed entity) by a FFI that is a depository institution, custodial institution, specified insurance company or Class A investment entity (Class B); or
  • That functions or holds itself out as a fund – collective, mutual fund, private equity fund, hedge fund, or similar investment vehicle with an investment strategy of investing, reinvesting or trading in financial assets (Class C).

Testing of FATCA compliance for trusts, foundations and private investment entities:

Based on the above definitions and the examples in the FATCA regulations one could conclude that the non-US investment entities may be classified under the FATCA regulations as a FFI, provided they meet the dual test:

  • Gross Income testis met if the entity’s gross income is primarily (at least 50{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e}) attributable to investing, reinvesting or trading in financial assets. This 50{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} test is an alignment to the FATCA regulations The “50{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} gross income test” is to be measured during the shorter of the three-year period ending on 31 December of the year preceding the year in which the determination is made, or the period during which the entity has been in existence.
  • Managed By testis met if the entity is managed by, or the financial assets are managed by, another FFI that is a depository or custodial institution, specified insurance company or Class A investment entity.
  • Custodial Institutions: An entity that holds, as a substantial portion of its business (broadly, more than 20{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} of gross revenues), financial assets for the account of others. A custodial institution holds, as a substantial portion of its business, financial assets for the benefit of one or more other persons. A custodial institution holds financial assets for the account of others as substantial portion of its business “if the entity’s gross income attributable to holding financial assets and related financial services” equals or exceeds 20 percent of the entity’s gross income during the shorter of (1) the three year period ending on December 31 of the year preceding the year in which the determination is made; or (2) the period during which the entity has been in existence before the determination is made.[18]
  • Depository Institutions: An entity that accepts deposits in the ordinary course of a banking or similar business and regularly engages in one or more of the following activities (a) provision of credit; (b) trades in receivables, notes or similar instruments; (c) issues letters of credit; (d) provides trust or fiduciary services; (e) finances foreign exchange transactions; or (f) deals in finance leases or leased assets.
  • Specified Insurance Companies: An insurance company (or its holding company) that issues, or is liable under, certain cash value or annuity contracts.

 

Holding company or treasury center as part of a financial group. A holding company or treasury center is an entity that (1) is part of an EAG[19] that includes a depository institution, custodial institution, insurance company, or investment entity; or (2) is formed in connection with or engaged by a collective investment vehicle, mutual fund, exchange traded fund, private equity fund, hedge fund, venture capital fund, leveraged buyout fund, or any similar investment vehicle established with an investment strategy of investing, reinvesting, or trading in financial assets. An entity is a treasury center if its primary activity is to enter into investment, hedging, and financing transactions with or for members of its EAG for purposes of (1) managing the risk of price changes or currency fluctuations for property that is held or to be held by the EAG (or any EAG member); (2) managing the risk of interest rate changes, price changes, or currency fluctuations for borrowings made or to be made by the EAG (or any EAG member); (3) managing the risk of interest rate changes, price changes, or currency fluctuations for assets or liabilities to be reflected in financial statements of the EAG (or any EAG member); (4) managing the working capital of the EAG (or any EAG member) by investing or trading in financial assets solely for the account and risk of that entity or any member of its EAG; or (5) acting as a financing vehicle for borrowing funds for use by the EAG (or any EAG member). 321 An entity is not a treasury center if any equity or debt interest in it is held by a person that is not a member of the entity’s EAG and the redemption or retirement amount or return earned on that interest is determined primarily by reference to (1) the investment, hedging, and financing activities of the treasury center with members outside its EAG; or (2) any member of the group that is an investment entity or passive NFFE (as described in reg. section 1.14715(b)(3)(vi) for either entity). 322[20]
Set out below are categories of CI entities alongside some basic guidance on whether such CI entities will be FFIs. In cases where such entities may be FFIs, consideration is also given as to whether any exemption to registration and reporting may be available.

  1. Hedge Funds and Private Equity Funds

Almost all hedge funds and private equity funds will be Investment Entities and therefore qualify as FFIs under FATCA. The one exception is that funds where more than 50{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} of the gross revenues are from real estate (or other non-financial assets) will generally fall outside the definition of Investment Entity (and therefore FFI) for the purposes of FATCA.[21] There are some other limited exemptions available to hedge funds and private equity funds, but these are expected to be of limited practical utility for the vast majority of such funds.

 

In section VI the possibility of using a “Sponsoring Entity” or “EAG” to facilitate FATCA compliance for structures with multiple FFIs is discussed.

 

  1. CI Managers and Advisers of Hedge Funds and Private Equity Funds

CI entities that act as managers and advisers of hedge funds and private equity funds will typically have to to register and report as FFIs in the category of Investment Entities.[22]

 

Private investment entities, including partnerships, if managed by an FFI or where their financial assets are professionally managed by investment managers (based on discretionary mandate) who themselves are FFI’s will likely be categorized as an FFI, otherwise as NFFE.

 

Mutual funds, hedge funds, or similar funds with an investment strategy of investing, reinvesting or trading in financial assets are to be classified as FFIs. There is no gross income test or “managed by” test for funds.

Private investment entities that are not professionally managed by an FFI (for example managed by an individual) are generally treated as passive NFFEs rather than as FFIs. Investment Entity whose assets are non-financial (real property or land), even if managed by another FFI would not be an Investment Entity.

Had there been a U.S. IGA, although managers and advisers fall within the definition of Investment Entity (and therefore FFI), the U.S. IGA contains an exemption (which would not apply in the CI) for FFI that qualifies as an Investment Entity solely because it (a) renders investment advice to, and acts on behalf of, or (b) manages portfolios for, and acts on behalf of, a customer for the purposes of investing, managing, or administering funds deposited in the name of the customer with a participating FFI. Accordingly, had CI signed a U.S. IGA, these managers and advisers would generally not be required to register with the IRS and report on their own account.

  1. CI Holding Companies and Joint Ventures

A typical CI non financial holding company or joint venture vehicle that owns assets on its own account and does not operate as an investment fund would not generally be expected to be an FFI for the purposes of FATCA. Rather, this type of CI holding company will generally be an NFFE, as discussed in section IV below.
However, the directors of a CI holding company that has or wishes to open a bank or securities account will still need to consider its FATCA classification carefully. Such a CI holding company will likely be required to certify its status to the relevant financial institution to avoid withholding, as discussed in section IV below.

  1. CI Securitization vehicles

A typical CI securitization vehicle will normally be an Investment Entity and therefore an FFI for the purposes of FATCA, subject to limited transitional relief for pre-existing vehicles.

  1. Financing SPVs

CI entities that are established solely for the purpose of borrowing or granting security in relation to the provision of debt finance to an underlying business typically will not be FFIs. Similarly, CI entities which are established to own and finance aircraft, ships or other form of moveable asset of a similar nature would not typically fall within the definition of an FFI.

  1. Trusts with a CI Trustee

The treatment of trusts under FATCA is complex. CI FATCA rules only apply to a trust if a trustee is a CI entity or is an individual resident in the CI. Subject to some complex optionality for trustees, the majority of trusts that have a CI trust company acting as trustee will likely be FFIs for FATCA purposes. The typical offshore corporate trustees are likely to be classified as FFI, under Class A of Investment Entities. This can be concluded from examples in the FATCA Regulations and the available guidance.

 

A foreign non-US trust which is managed by a trustee company (as this trustee is a FFI), or where trustee engages an FFI to manage the trust, or whose investments are discretionary managed by investment managers who themselves are FFI, will likely be classified as FFI, provided the trust holds financial assets. However, a trust may be considered an NFFE if the trustee is an individual and the investments of the trust are not managed by an investment manager entity that is a FFI. A foreign Trust that is treated as an FFI would have to provide details of its US owners, mandatory beneficiaries (each year) and even of its discretionary beneficiaries (in the year of distribution).
In the case of Owner-Documented FFI or Sponsored FFI (see below) for trusts (and funds and investment companies) that qualify as FFI-Investment Entities, there are basically a few ways to avoid (or defer) registration with the IRS and/or reduce the administrative burden of FATCA including the following classifications:

Trustee Documented Trust Registered sponsored FFI Certified sponsored FFI Owner-Documented FFI
In case of trusts whose trustees are Reporting FFI, Participating FFI or Reporting USFI, these trustee FFI agree and undertake to perform all FATCA obligations on behalf of the Trust. The Trust itself will be treated as a Non-Reporting FFI and will not be required to register with the IRS. This facility is only available under IGAs Model 1 and 2, but not under the FATCA Regs. The Sponsored FFI entities (trusts, funds, PICs, LLPs) will be deemed compliant provided that the sponsoring entity (trust company, asset manager, family office, director, managing partner) agrees to report on their behalf the information that the fund, trust or family investment entity would have been required to report under the IGA or the FFI agreement. The Sponsored FFI must be a closely held vehicle, i.e. owned by maximum 20 individual investors. The sponsor must be a compliant FFI. The sponsored FFI will be certified deemed compliant and is not required to register with the IRS, provided that the sponsoring FFI agrees and undertakes to perform all FATCA obligations that the sponsored FFI would have been required under the IGA or the FFI agreement. The entity is not required to register with the IRS, but is required to provide to any withholding agent all required documentation regarding its owners, to certify on IRS Form W-8 that it meets the requirements of its deemed-compliant category. The withholding agent then agrees to report to the IRS (or to LTA) the information re Substantial US Owners or the controlling US Persons.

 

Private trust companies (“PTCs”) are also likely to be FFIs for the purposes of FATCA, although this needs to be considered in each case. In particular, if the PTC and its directors are not remunerated for acting as trustee, the PTC and the underlying trust may conclude that it does not meet the definition of an FFI on the basis that the PTC is not conducting business.

  1. Insurance Companies

Only insurance companies that issue or are required to make payments with respect to a cash value insurance contract or an annuity contract will be FFIs pursuant to FATCA. Captive insurers and insurance companies that do not write annuities or whole life insurance products will generally be NFFEs.

  1. Branches and Foreign Subsidiaries

Branches of entities are treated separately for FATCA purposes. An overseas branch of a CI FFI must consider the rules applicable in that branch’s jurisdiction, whether under an IGA or the U.S. regulations.
A foreign subsidiary of a CI FFI must also comply with the FATCA rules in its home jurisdiction.

 

  1. Excepted Beneficial Owners and Deemed-Compliant FFIs

Certain categories of FFIs and NFFEs are excepted from identification and reporting requirements if, in general they present a relatively low risk of being used for tax evasion by US Persons. They are categorized as Excepted Beneficial Owners and Deemed Compliant FFI (“DC FFIs “) and a list of FFIs that qualify under each category is provided in FATCA regulations and IGAs.

Deemed-compliant FFIs (DC FFIs) need to enter into a FFI agreement and they will not be subject to the 30{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} withholding on US source income provided they meet certain conditions and fulfill certain obligations. In general, there are 2 types of DC FFIs:

  • A registered deemed-compliant FFI is required to register with the IRS and is required to confirm to the IRS every three years that it meets the condition to qualify as deemed-compliant.  Reporting FIs resided in IGA Model 1 countries are also treated as deemed-compliant but to maintain that status they have to fulfill the various identification and reporting steps as defined in the applicable IGA.
  • A certified deemed-compliant FFI is generally not required to register with the IRS, but will be required to certify to any withholding agent on IRS Form W-8BEN-E or similar form that it meets the requirements of its deemed-compliant category.
  1. CI Entities that are Not FFIs

As noted above, any CI entity that is not an FFI[23] will be an NFFE. Although NFFEs are not generally subject to registration or reporting requirements, they will still be required to self-certify their status to financial institutions with whom they maintain financial accounts to avoid FATCA withholding.
In this regard, the U.S. W8BENE form has recently been amended to require entities to confirm their FATCA classification to U.S. withholding agents and provide related information with respect thereto. CI entities that hold accounts with financial institutions can certainly expect to complete these W8BENE forms and provide other FATCA related certifications.
There are two categories of NFFE, listed below.

 

(1)     Active NFFE: The criteria which would qualify an NFFE as being an Active NFFE are numerous, and include where less than 50{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} of its gross income for the preceding calendar year is passive income (such as dividends, interest, royalties, annuities and rent) and less than 50{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} of the assets held during the preceding calendar year or other appropriate reporting period are assets that produce or are held for the production of passive income. For Active NFFEs, completion of the W8BENE Form essentially only requires completing the information on the first page, ticking “Active NFFE” on question 5 and then certifying that the entity is an Active NFFE in question 39.[24]
(2)     Passive NFFE: Broadly, a Passive NFFE is an NFFE that is not an Active NFFE. For Passive NFFEs, the W8BENE also requires the NFFE to certify whether or not it has any substantial U.S. owners (broadly, a U.S. person with a 10{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} or more interest).[25] To the extent it has substantial U.S. owners, the name address and U.S. taxpayer identification number of each substantial U.S. owner must be provided.

It is important each CI NFFE establishes which category it falls into so it can provide the necessary certification to financial institutions with which it maintains accounts.

  1. What Does a CI FFI Need to Do to Comply With FATCA?

If a CI entity is an FFI for which an exemption is not available, the following steps will need to be taken.

 

(1)     Obtain a Global Intermediary Identification Number (“GIIN”): Any CI reporting FFI (or “registered deemed compliant” FI required to be registered with the IRS) should liaise with its primary U.S. FATCA advisers to register via the IRS portal and obtain a GIIN as soon as possible, to minimize any risk of incurring U.S. withholding tax on payments it receives.
(2)     Identify Reportable Accounts: FATCA impose an obligation on CI Reporting FFIs to identify and report details of “reportable accounts” to the IRS. “Reportable accounts” are financial accounts where the account holder is either a “Specified U.S. Person” (broadly, any U.S. person or person liable to pay U.S. tax with some exceptions) or is a non-U.S. entity the controlling persons of which include one or more Specified U.S. persons. Financial accounts include any depositary or custodial accounts and also, in the case of certain Investment Entities, any debt or equity holdings in the FFI. In the case of CI funds, the relevant account is the shares each investor holds in the fund.

 

Minimum Threshold for Reporting a US Financial Account for FFIs
The FATCA regulations set out specific due diligence requirements and thresholds with respect to individual accounts and entity accounts, and also for pre-existing accounts and new accounts. All US financial accounts of individuals with an aggregated value of US $50,000 or more must be reported to the IRS. Preexisting entity accounts of US $50,000 or less are exempt from review. Enhanced review is required for high value accounts as of US $1,000,000.

 

US Indicia
In case during the due diligence process of the FFI an account holder with the following US Indicia is found the person is assumed a US Person:

 

  1. Citizenship or residency in US;
  2. US place of birth;
  3. US residency address or mailing address;
  4. US telephone number;
  5. any standing instructions to transfer funds to a US account;
  6. any power of attorney or other signatory authority to any person with a US address; or
  7. Whether the account holder has provided any verified “in-care” or “hold mail” address with the US.

 

When persons with US Indicia are identified it is required to cure items 2-7 with specific described counter evidence in order to remain treatment as a non US person.
Identifying Reportable Accounts involves two separate processes, one for existing accounts and one for new accounts:
(a)     Existing accounts: FFIs will also need to perform due diligence on “financial accounts” that they maintained as at June 30, 2014 (subject to certain de minimis thresholds for small accounts). Specifically, accounts that are reviewed must be searched for prescribed U.S. indicia, including U.S. place of birth and U.S. address. If the account holder is a Specified U.S. Person, details of their account must be reported (as described below). If the account holder is not a Specified U.S. Person but there are U.S. indicia in relation to its account, the CI FFI must take steps to “cure” the U.S. indicia. In particular, self-certification by the account holder and further documentation evidencing the person is not a Specified U.S. Person is likely required. If the account holder does not respond or it is not otherwise possible to cure the U.S. indicia, the account should be treated as reportable. The deadline for completing due diligence on existing accounts depends on a number of factors, including the balance of the account. Most critically, remediation of U.S. indicia needs to be completed on all accounts over $1 million by June 30, 2015.

(b)     New account procedures and due diligence: For new accounts opened with the FFI after July 1, 2014,[26] it is necessary to carry out due diligence and obtain self-certification regarding whether the account holder is a Specified U.S. Person. If U.S. Indicia are found that suggest the person may be a U.S. taxpayer, prescribed steps will need to be taken to confirm this. For accounts opened by another participating FFI, the FFI’s GIIN should be obtained and verified against the publicly available IRS FFI list. In general terms, all CI FFIs should be revising their account opening forms and/or subscription agreements to ensure they comply with FATCA rules in relation to new accounts. For funds, it is also important to update offering and constitutional documents to ensure FATCA is appropriately addressed.
(3)     Reporting: On or before June 30, 2015, CI FFIs must make their first report to the IRS in relation to accounts held by Specified U.S. Persons or a non U.S. entity with one or more controlling persons that are Specified U.S. Persons. From 2016 onwards, the reporting deadline will be May 31. As the CI is a non-IGA jurisdiction will require the following reporting directly to the IRS by Form 8966. The information required to be reported will include:

 

  • Name, address, US Tax Identification Number (TIN), account number and account balance
  • If account holder is a NFFE or Owner Documented-FFI, details of its Substantial US owners would need to be reported
  • Income and withdrawals (as of FY 2015)
  • Gross proceeds (as of FY 2016)

 

The reporting requires the balance or value of the relevant account held by the Specified U.S. Person to be reported. Expanded information is required for the subsequent reporting period ending May 31, 2016.

 

There will also be documentation and compliance verification by the IRS. A Participating FFI (“PFFI”) must appoint a Responsible Officer (“RO”) who must establish (and periodically review) a compliance program that includes policies, procedures and processes sufficient for the PFFI to comply with the FATCA requirements. The RO is required to certify that the FFI has complied, to provide details of procedures and to report results and any material failures/events of default. The RO is also required to submit to IRS review, if required, and respond to requests for additional information from the IRS. The RO can assign Point of Contacts (“POCs”) to assist.

 

If the CI had a signed Model 1 U.S. IGA then the reporting would have been done to the CI Reporting Authority who would then pass the reported information to the IRS.
 

  1. Simplified Reporting for Groups of FFIs

If a group has one or more eligible Investment Entities, the group may elect to register one “Sponsoring Entity” for FATCA reporting purposes. The appointment of a Sponsoring Entity effectively allows all FATCA compliance and reporting to be delegated to one entity in the group. To appoint a Sponsoring Entity:

 

  • the Sponsoring Entity must be authorized to act on behalf of the sponsored Investment Entities and agree to carry out all due diligence and reporting obligations on behalf of the sponsored Investment Entities;
  • the Sponsoring Entity has to register and obtain a sponsoring GIIN; and
  • if the sponsored Investment Entities hold reportable accounts, the Sponsoring Entity will ultimately be required to register each Sponsored Investment Entity that it manages.

A Sponsoring Entity must report all reportable accounts of its sponsored CI Investment Entities.

 

An expanded affiliated group (“EAG”) is defined in Treas. Regs. §1.1471-5(i)(2). Except as otherwise provided in paragraph (i), an expanded affiliated group is defined in accordance with the principles of section 1504(a) to mean one or more chains of members connected through ownership by a common parent entity if the common parent entity directly owns stock or other equity interests meeting the requirements of paragraph (i)(4) of this section in at least one of the other members (for purposes of this paragraph (i), the constructive ownership rules of section 318 do not apply). Generally, only a corporation shall be treated as the common parent entity of an expanded affiliated group, unless the taxpayer elects to follow the approach described in paragraph (i)(10).

 

One or more chains of includible corporations connected through stock ownership with a common parent corporation which is an includible corporation, but only if the common parent owns directly stock in at least one of the other includible corporations totaling more than 50 percent of the total voting power of the stock of such corporation, and with a value equal to more than 50 percent of the total value of the stock of such corporation, and if stock meeting these vote and value requirements in each of the includible corporations (except the common parent) is owned directly by one or more of the other includible corporations. A partnership or any entity other than a corporation shall be treated as a Member FI of EAG if such entity is controlled (within the meaning of section 954(d)(3), without regard to whether such entity is foreign or domestic) by Member FIs of such EAG (including any entity treated as a Member FI of such EAG by reason of this sentence).

 

A Lead FI means a USFI, FFI, or a Compliance FI that will initiate the FATCA registration process for each of its Member FIs that is a PFFI, RDCFFI, or Limited FFI and that is authorized to carry out most aspects of its Member FIs’ FATCA registrations. A Lead FI is not required to act as a Lead FI for all Member FIs within an EAG. Thus, an EAG may include more than one Lead FI that will carry out FATCA registration for a group of its Member FIs. A Lead FI will be provided the rights to manage the online account for its Member FIs. NOTE: a FFI seeking to act as a Lead FI cannot have Limited FFI status in its country of residence.

 

A Member FI is a FFI that is registering as a Member of an EAG that is not acting as a Lead FI and that is registering as a PFFI, RDCFFI, or Limited FFI. For purposes of registration, a Member FI may also include a foreign branch of a USFI that is treated as a Reporting FI under a Model 1 IGA, or that is renewing its QI Agreement. A Member FI will need to obtain its FATCA ID from its Lead FI. The FATCA ID is used to identify the Member FI for purposes of registration and is not the same number as the GIIN. A GIIN is issued to FIs, other than Limited FFIs or Limited Branches, after the FATCA registration is submitted and approved. The IRS will permit the same financial institution to have multiple GIINs. For example, an FFI may be both a lead FFI (or EAG member) and a sponsoring entity. It would be required to have separate GIINs for its role as a lead FFI (or member) and as a sponsoring entity.

 

In general, all FFIs (other than exempt beneficial owners or Certified Deed-Compliant FFIs “CDCFFIs”)[27] that are part of the same EAG must be registered. For registration purposes, an EAG may have more than one lead FFI and may organize itself into subgroups under different lead FFIs. For example, an EAG of 20 FFIs may decide to select two different lead FFIs, lead FFI 1 and lead FFI 2. Lead FFI 1 can carry out FATCA registration on behalf of four of its members, and lead FFI 2 can carry out FATCA registration on behalf of its other 16 members. All 20 FFIs with the same EAG will be registered, even though they are registered under two different lead FFIs.

 

An organization needs to determine which entity (or entities) will take on the role(s) of the lead FFI in an EAG. It does not necessarily have to be the home office or headquarters entity. In fact, any member of an EAG can be a lead FFI, as well as an organization’s USFI. For this purpose, the same entity can be a lead FFI, as well as a sponsoring entity, but that status would require the entity to register twice and obtain two separate GIINs one for each role that permits the IRS to relate the entity either as a lead FFI to the members of its EAG or as a sponsoring entity to the sponsored FFIs.

 

In contrast, an FFI that is a sponsored FFI and also a member of an EAG will not register twice and obtain two GIINs. If the FFI registers as a member of the EAG and obtains its own GIIN, its registration is complete.

 

VII. Miscellaneous Issues

 

The IRS extended certain implementation deadlines under the Regulations to harmonise these with the implementation deadlines under the IGAs.

  •  All accounts in existence prior to January 1, 2014, will be treated as ‘pre-existing accounts,’ and withholding agents will have until December 31, 2015, to document accountholders and payees that are not ‘prima facie FFIs.’
  •  The effective date of FFI Agreements entered into with the IRS will be December 31, 2013 for all participating FFIs that apply prior to January 1, 2014. The first information reporting by participating FFIs, with respect to the 2013 and 2014 calendar years, will be due on March 31, 2015.
  •  Withholding will not be required on ‘foreign passthru payments’ or on gross proceeds from sales or dispositions of property before January 1, 2017.
  •  The ‘sunset’ date for the relief afforded to ‘limited’ branches and affiliates, by which all members of an expanded affiliated group will be required to be participating FFIs or deemed-compliant FFIs has not been extended, and remains December 31, 2015.

 

Key Dates and Grandfather Rules
FATCA is generally effective from 1 July 2014. However, a phased implementation schedule is established addressing four key areas:

Date Implementation Schedule
31 December 2013 The QI Agreement that would otherwise expire on 31 December 2013 will be automatically extended until 30 June 2014.
01 January 2014 FFIs can start registration at the IRS Portal as of January 1, 2014
05 May 2014 Deadline to register to be on the first published FFI list of IRS.
01 July 2014 Start of identification of US Persons, as well as start of Withholding on US source payments. New individual account due diligence procedures commences July 1, 2014; accounts maintained prior to July 1, 2014 are pre-existing accounts. For entity accounts, any entity opened between July 1, 2014 and January 1, 2015 will be subject to enhanced review.
22 December 2014 FFIs resided in IGA countries are recommended to register by 22 December 2014 to obtain a GIIN, be published on the FFI list per December and to avoid withholding as of 1 January 2015.
31 December 2014 Documentation of Prima Facie FFIs and high value individual account holders by December 31, 2014, respectively June 30, 2015, deadline for other accounts is June 30, 2016.
31 March 2015 The first reporting year is 2014. The deadline for information reporting on US accounts for FY 2014 is March 31, 2015, while for Reporting FI in IGA countries the deadline for such reporting is September 30, 2015.
01 January 2017 Withholding on foreign pass-through payments or on gross proceeds from sales or dispositions of property starts January 1, 2017

Various grandfather rules apply. The most important ones are:

  • Obligations outstanding on June 30, 2014 are exempt from FATCA withholding.
  • Certain obligations that may give rise to dividend equivalent or foreign pass-through payments under future regulations once issued are also exempted, provided that these obligations are outstanding six months prior to the release of implementing regulations.

Good Faith – Transactional relief under FATCA
On May 2, 2014, the US Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) announced in Notice 2014-33 (the Notice) that calendar years 2014 and 2015 will be regarded as a transition period for purposes of IRS enforcement and administration with respect to the implementation of the Foreign Account Tax Compliance Act during which the IRS will not impose penalties for withholding agents making “good faith efforts” to comply with FATCA.

This relief means that the IRS will take into account the extent to which withholding agents, foreign financial institutions (FFIs), and other entities are making a good faith effort to comply with FATCA and the modifications to existing information reporting and withholding obligations until calendar year 2016.

Documentation of Entities

  • In general entity accounts opened between July 1 and December 31, 2014 do not need to be documented for FATCA until July 1, 2016.
  • Entities identified as “prima facie FFIs” must still be documented for FATCA by December 31, 2014.  This category now includes accounts opened between July 1 and December 31, 2014.
  • Entity accounts opened on or after January 1, 2015 must be documented and classified for FATCA purposes, or they will be subject to 30{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} FATCA withholding.

Documentation of Individuals

  • Individual accounts held by PFFIs opened after July 1, 2014 must be documented under FATCA (FATCA does not apply to individuals for USFIs – US Financial Institutions).
  • Individuals may provide either the 2006 or 2014 version of Forms W-8BEN and W-8ECI until August 31, 2014.
  • Forms signed after this date must be the 2014 version of the form.  CTI currently is discussing with the IRS whether the effective date of the 2006 forms will be extended until the end of 2014.
  • For accounts opened after July 1, 2014, the withholding agent must review the account records for new U.S. indicia under FATCA (e.g. U.S. telephone numbers, U.S. place of birth).

The Notice states that the transition period and other guidance described in the Notice are intended to facilitate a smooth and orderly transition for withholding agents and FFIs to comply with FATCA’s requirements.

VIII. Conclusion
FATCA is a controversial piece of legislation, not least because it imposes a significant compliance burden on FFIs. However, the automatic exchange of information and increased transparency introduced by FATCA looks to become the global standard. In addition to FATCA, 47 countries have committed to implement the OECD’s Common Reporting Standard (the “CRS”). The CRS, which is based on FATCA and requires the automatic exchange of information on assets and income of citizens of all signatory countries, will likely be bought into force around 2017. Accordingly, the implementation of robust systems by CI FFIs to comply with FATCA can be viewed as important preparation for what is likely to be a new global standard on information exchange.
For the majority of CI companies which are not FFIs, it is very much a case of “business as usual”. Other than having to determine their FATCA classification and certify/evidence their status to financial institutions with which they hold accounts, FATCA should hopefully have a limited impact on day-to-day operations.

 

  1. General Rules of Trust Taxation in the U.S.[28]

 

The Code has several regimes for taxing trusts, depending upon whether they are “grantor,” simple or complex trusts. In addition, there are several special rules applicable to foreign trusts or trusts having non-U.S. grantors.

 

If a trust is a grantor trust (within the meaning of sections 673 through 679 of the Code), its income and gains generally will be taxed to the grantor.17 A trust having a U.S. grantor will be considered a grantor trust if, inter alia, the grantor or another non-adverse party retains certain interests or powers over the trust property. A foreign trust established by a U.S. person that has, or may have, U.S. beneficiaries will also be considered a grantor trust, even if the grantor has retained no interests in or powers over the trust.18 In addition, a foreign trust established by a non-U.S. person who becomes a U.S. person within five years of transferring property to the trust, directly or indirectly, will be a grantor trust if, at the grantor’s residency starting date, the trust has a U.S. beneficiary.19

 

If a trust (whether domestic or foreign) has a grantor that is not a U.S. person, more limited rules, introduced by the 1996 Small Business Act, apply in determining whether the trust will be treated as a grantor trust.20 In such a case, a trust generally will be treated as a grantor trust only if: (i) it is revocable by the grantor (either alone or with the consent of a related or subordinate party who is subservient to the grantor); or (ii) distributions (whether of income or corpus) may be made only to the grantor or the grantor’s spouse during the grantor’s lifetime.21 Trusts that were established on or before September 19, 1995 that were grantor trusts under the general rules of sections 676 (revocable trusts) or 677 (income for benefit of grantor or spouse)22 are “grandfathered” as grantor trusts, provided that if any amounts were transferred to such trusts after September 19, 1995, 23 the portion of the trust attributable to such transfers is separately accounted for.24

 

In contrast, a non-grantor trust (whether domestic or foreign) is a separate taxpayer for U.S. federal income tax purposes. A non-grantor trust is generally taxed in the same manner as individuals, with certain modifications.25 Thus, like a U.S. citizen or resident, a domestic trust will pay U.S. tax on its worldwide income and capital gains. Items of ordinary income (including, for example, rents, royalties, certain dividends and interest) generally are taxed at graduated rates of up to 35{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e}, after the allowance of certain deductions and credits. Gains from the sale or exchange of capital assets (such as stock) held for more than 12 months generally are taxed at a long-term capital gain rate of 20{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e}. Gains arising from the sale or exchange of capital assets held for twelve months or less are generally taxed at the trust’s ordinary income tax rate. Like a nonresident alien, a foreign trust will pay U.S. income tax only on its income and certain gains from U.S. sources and on income or gain that is “effectively connected” to a U.S. trade or business.26

 

  1. § 671.
  2. § 679.
  3. This rule, for so-called “pre-immigration trusts,” was added to the Code by the 1996 Small Business Act. It is effective for transfers of property occurring after February 6, 1995. Prior to the addition of this rule, a foreign trust established by a nonresident alien, who later became a U.S. person, was not a grantor trust under § 679, absent a post-residence transfer in trust or the inclusion of provisions that would make the trust a grantor trust under other sections.
  4. See generally§ 672(f).
  5. § 672(f)(2).
  6. Not including trusts that were grantor trusts under § 677(a)(3) (regarding application of trust income to insurance premiums on lives of grantor or spouse).
  7. 1996 Small Business Act § 1904(d)(2).
  8. SeeNotice 97-34, 1997-1 C.B. 422.
  9. § 641(b).
  10. § 872(a).

 

 

 

 

 


 

  1. Acronyms

FATCA: Foreign Account Tax Compliance Act
HIRE Act: Hiring Incentives to Restore Employment Act
FFI: Foreign Financial Institution
NFFE: Non-Financial Foreign Entity
USFI: United States Financial Institution
IRS: Internal Revenue Service of the US
GIIN: Global Intermediary Identification Number


 

  1. Definitions

US Account: 

  • Any financial account held by one or more specified US persons or US-owned foreign entities, with certain exceptions.

Financial Account:

  • Depository account
  • Custodial account
  • Equity or debt interest in an investment entity: investors, beneficiaries
  • Insurance and annuity contracts (some are excluded)

Financial Assets:

Financial assets include securities, partnership interests, commodities, insurance or annuity contracts, or any related interest in these, but do not include real estate.

Account holders of Investment Entities

  • The account holders of investment entities are the holders of equity and debt interest. The definition is depending on Investment or type of Financial Institutions.
    • Partnership: Equity Interest means capital or profit interest in the partnership
    • Fund and Investment Companies: the account holders are the equity investors
    • Trust: Equity interest means interest held by Persons treated as settlor or the beneficiaries of all or portion of the trust, while under IGA this also includes any other natural person exercising ultimate effective control over the trust.
    • A beneficiary of a foreign trust include persons who have the right to receive directly or indirectly a mandatory distribution or may receive, directly or indirectly, a discretionary distribution from the trust.

Foreign Financial Institution (FFI)

  • See detailed definition and categorization above

Non-Financial Foreign Entity (NFFE)

  • Any foreign entity which is not a foreign financial institution

Excepted NFFEs

  • Include publicly traded corporations and affiliates, territory NFFEs that are directly or indirectly wholly owned by bona fide US territory residents in the NFFE’s country of organization or active NFFEs.
  • These types of entities generally will not be likely vehicles for US persons to hide their assets because of the nature of their activities.

Active NFFEs

  • Entities that conduct an actual business activity other than holding assets that produce investment income such as interest, dividends, rents, etc.
  • Any entity may be classified as an Active NFFE if:
  • Less than 50 percent of its gross income for the preceding calendar year is passive income; and
    • Less than 50 percent of the weighted average percentage of assets (tested quarterly) held are assets that produce or are held for the production of passive income.

Passive NFFEs

  • Any NFFE that is not otherwise excepted or active NFFE will be a passive NFFE and must provide withholding agents with a certification regarding its substantial US owners (if any), or if none exist, with a certification to that effect.

Substantial US owner

  • Includes any “specified US person” who holds more than 10{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} interest in the entity. Under the Model IGAs, the term threshold is replaced by “controlling persons”, which is more than 25{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} control threshold, based on AML/KYC standards.

Recalcitrant Account

  • Fails to comply with reasonable requests for required information necessary to determine if the account is held by a US person;
  • Fails to provide the name, address, and TIN of each specified US person and each substantial US owner of a US owned foreign entity; or
  • Fails to provide a waiver of any foreign law that would prevent a FFI from reporting the required information to the IRS.

US Person

  • A citizen or resident of the United States
  • A domestic partnership
  • A domestic corporation
  • Any estate (other than a foreign estate within the meaning of 7701(a)(31)), or
  • Any trust if:
  • A court within the United States is able to exercise primary supervision over the administration of the trust, and
  • One or more US persons have authority to control all substantial decisions of the trust
  • Any other person that is not a foreign person.

Withholding Agent

  • All persons, in whatever capacity acting, having the control, receipt, custody, disposal, or payment of any withholdable payment
  • US financial institution (USFI) acting as a withholding agent will need to determine whether a FFI or a NFFE is compliant or non-compliant for withholding purposes while making payments/disbursements. Likewise, a FFI can also be a withholding agent.

IGAs

  • Model I IGA signed per July 1 by 34 jurisdictions, including Canada, Cayman Islands, BVI, Guernsey, Ireland, Isle of Man, Italy, Jersey, Malta, Mauritius, Mexico, The Netherlands, Spain, and the U.K.
  • Model 2 IGA signed per July 1 by: Switzerland, Japan, Austria, Chile and Bermuda.
  • Per July 1, 2014 in total 60 IGAs are substantively agreed, for details: http://www.treasury.gov/resource-center/tax-policy/treaties/Pages/FATCA-Archive.aspx
  • The US announced that it is in the process of finalizing IGAs, or is actively engaged in dialogue and working on exploring options for IGAs, with circa 40 more countries.

 

[1] Presented by Prof. Dr. Daniel N. Erasmus, BA (law) BProc H Dip Tax Law PhD (law) US Tax Court Practitioner, enrolled as an EA to practice before the IRS, www.TaxRiskManagement.com +1.561.568.7115, Daniel@TaxRiskManagement.com.

[2] Sources: http://www.amicorp.com/Aminews/Aminews{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e}20FATCA/English.html ; and, Tax Planning International Review: News Archive > 2015 > Latest Developments > Tax Treaties > Tax Treaties: Impact of FATCA on BVI Entities.

[3] IBFD Departures from the OECD Model and Commentaries – Part Four: Chapter 17: United States, par 17.2.2.8.

[4] What makes a trust a foreign or domestic trust for U.S. tax purposes under IRC Section 7701(a)(30)(e) is a big issue. IRC Section 7701(a)(30)(e):
(A) a citizen or resident of the United States,

(B) a domestic partnership,

(C) a domestic corporation,

(D) any estate (other than a foreign estate, within the meaning of paragraph (31)), and

(E) any trust if–

(i) a court within the United States is able to exercise primary supervision over the administration of the trust, and

(ii) one or more United States persons have the authority to control all substantial decisions of the trust.

(31) Foreign estate or trust

(A) Foreign estate

The term “foreign estate” means an estate the income of which, from sources without the United States which is not effectively connected with the conduct of a trade or business within the United States, is not includible in gross income under subtitle A.

(B) Foreign trust

The term “foreign trust” means any trust other than a trust described in subparagraph (E) of paragraph (30).The regulations contain a “safe harbor” test under which a trust is considered to meet the court test if:

  1. the trust deed does not direct that the trust be administered outside the United States;
  2. the trust is, in fact, administered exclusively in the United States; and
  • the trust is not subject to an automatic “flee clause” pursuant to which the trust migrates from the United States in the event that a U.S. court attempts to assert jurisdiction over the trust’s administration.

 

[5] a typical CI holding company or joint venture vehicle will not generally be an FFI and should not be materially affected by FATCA.

[6] such as a typical CI holding company.

[7] Section 1471(d)(4). The registration user guide defines an FFI to mean a financial institution that is not located in the United States, including (1) an FFI treated as a reporting financial institution under a Model 1 IGA, including foreign branches of a USFI or territory organized financial institution; (2) an FFI treated as a reporting financial institution under a Model 2 IGA; and (3) a foreign branch of a USFI or a territory organized financial institution that a QI agreement is in effect.

[8] Section 1771(5).

[9] Reg. section 1.1471-5(d).

[10] The registration user guide defines a USFI as U.S. financial institution that is a resident of the United States.

[11] Reg. section 1.1471-1(b)(27).

[12] Preamble to T.D. 9610, 78 F.R. at 5897.

[13] Reg. section 1.1471-5(d).

[14] One of the tests for tax residence is central management and control. Also consider the “permanent establishment” principles.

[15] Section 1471(a); reg. section 1.14713(a)(3)(vii). Preamble to T.D. 9610, 78 F.R. 5897.

[16] Preamble to T.D. 9610, 78 F.R. 5897.

[17] Reg. section 1.14715(e)(4)(ii) – The regulations define the term “financial assets” to mean a security (as defined in section 475(c)(2) without regard to the last sentence thereof), partnership interest, commodity (as defined in section 475(e)(2)), notional principal contract (NPC) (as defined in reg. section 1.4463(c)), insurance contract or annuity contract, or any interest (including a futures or forward contract or option) in a security, partnership interest, commodity, NPC, insurance contract, or annuity contract. The term “Financial Asset” does not include a non-debt, direct interest in real property.

 

[18] Reg. section 1.14715(e)(1)(ii). The term “custodial account” means an arrangement for holding a financial instrument, contract, or investment (including a share of stock in a corporation, a note, bond, debenture, or other evidence of indebtedness, a currency or commodity transaction, a credit default swap, a swap based on a nonfinancial index, a notional principal contract as defined in reg. section 1.4463(c), an insurance or annuity contract, and any option or other derivative instrument) for the benefit of another person. Reg. section 1.14715(e)(3)(i)(A)(2).

[19] An expanded affiliated group (“EAG”) is defined in Treas. Regs. §1.1471-5(i)(2).

[20] Footnotes reference to Book 2 – Tax Analysts.

[21] In the private equity context, this “gross revenues” test may also exempt some CI portfolio companies from being Investment Entities.

[22] Page 41, BOOK 4 US FATCA BNA Detailed analysis.pdf.

[23] such as a typical CI holding company.

[24] This is to allow the IRS to monitor PFIC compliance in the U.S. and the filing of Form 5471 – http://www.irs.gov/pub/irs-pdf/i5471.pdf; Form 8938 will most likely also have to be filed in the U.S. – http://www.irs.gov/instructions/i8938/ch01.html; Filing Form 8938 does not relieve you of the requirement to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), if you are otherwise required to file the FBAR. See FinCEN Form 114 and its instructions for FBAR filing requirements. See Comparison of Form 8938 and FBAR Requirements, available at www.irs.gov/Businesses/Comparison-of-Form-8938-and-FBAR-Requirements, for a chart comparing Form 8938 and FBAR filing requirements.

[25]This is to allow the IRS to monitor PFIC compliance in the U.S. and the filing of Form 8621 – http://www.irs.gov/pub/irs-pdf/i8621.pdf; Form 8938 will most likely also have to be filed in the U.S. – http://www.irs.gov/instructions/i8938/ch01.html; Filing Form 8938 does not relieve you of the requirement to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), if you are otherwise required to file the FBAR. See FinCEN Form 114 and its instructions for FBAR filing requirements. See Comparison of Form 8938 and FBAR Requirements, available at www.irs.gov/Businesses/Comparison-of-Form-8938-and-FBAR-Requirements, for a chart comparing Form 8938 and FBAR filing requirements.

 

[26] Although it should be noted that IRS Notice 2014-33 generally allows FFIs to treat new accounts opened before January 1, 2015 as “preexisting”, subject to certain modifications of the compliance rules for such accounts.

 

[27] A CDCFFI is an FFI described in reg. section 1.14715(f)(2)(i) through (iv) that has certified its status as

a DCFFI by providing a withholding agent the documentation required under the regulations. A CDCFFI

includes a non registering local bank, FFIs with low value accounts, sponsored closely held investment vehicles, and limited life debt investment entities. The IRS may also treat certain exempt beneficial owners as FFIs who not have to register or obtain GIINs. Reg. section 1.14716(b).

[28] Extract from Calin & Drysdale: Foreign Trusts: Everything You Wanted to Know About the Taxation of Foreign Trusts But Were Afraid to Ask.

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