- By now, any “financial institution” (as the man on the Clapham Omnibus would understand that term) would need to have had its head in the sand in order not to be aware of the impact of FATCA and its need to comply with this new regime. However, the definition of “financial institution” for the purposes of the FATCA rules is much broader than what the man on the Clapham Omnibus would imagine it to be.
- It includes, for example:i. professional trustees (other than individuals);
ii. trusts;
iii. family offices; and
iv. Nominees (other than individuals). - Some financial institutions within these classes may therefore be forgiven for being unaware that they might have any obligations under FATCA. For example,i. It is quite possible that a family trust, managed by individual family members and holding a portfolio of stocks and shares that are managed on a discretionary basis by an investment management firm, would have no idea that they are within the scope of this new US regime – even though they may have nothing whatsoever to do with the US.
- The FATCA regime COMES into force from 1 July 2014. As of that date:i. all financial institutions must have identified whether they have any “US account holders”
ii. Financial institutions will have to start recording details of any payments that they make to any US account holders, or to account holders who are “non-compliant”. This information will then be reported on an annual basis either directly to the IRS, or to the financial institution’s local revenue authority (depending on what jurisdiction the financial institution is in); and
iii. Payments of US source income (and, in future years, capital gains) to non-compliant account holders will be subject to 30 per cent US withholding tax.
- Banks, investment funds and investment managers have therefore, in order to be compliant with their obligations under FATCA, been carrying out a review of all of their clients in order to identify where they might have US account holders.i. To do this, where the account is held in the name of an “entity” which means
i. any person other than an individual, so includes a trust, a partnership, a company or a charitable entity – to name a few,
ii. The banks and investment managers have been asking their account holders to complete a form identifying what sort of entity they are for FATCA purposes (the answer to which may not be entirely obvious) and, potentially, whether they have any US owners.
i. This form might be the first time that many “unexpected” financial institutions have even heard of FATCA.
- There are two types of entity for the purposes of FATCA:i. Foreign Financial Institutions (FFIs) – this includes not only obvious types of non-US financial institutions such as banks, investments funds and investment managers, but also any entity that holds, manages, administers or invests money or financial assets on behalf of other people if either
i. (i) the entity carries on this activity as its business; or
ii. (ii) Even if the entity itself is not “in business”, the entity or its assets are managed by another financial institution. There are multiple sub-categories of FFI.ii. Non-Financial Foreign Entities (NFFEs) – this category covers all entities which are not within the definition of an FFI. There are only two sub-categories of NFFE:
i. ‘Active” NFFEs – these broadly, are NFFEs that are carrying on a trading business. There is no need to identify any US owners of an active NFFE;
ii. “Passive” NFFEs – these are all other types of NFFE. It will be necessary for a passive NFFE to be able to identify whether it has any US owners. - The principal difference between an FFI and an NFFE isi. that an FFI will, in theory, have reporting obligations under FATCA,
ii. Whereas an NFFE will not (it merely needs to be able to identify any US owners it might have). - Exactly what the reporting obligations of an FFI will be depends on what sub-category of FFI it falls into. For example,i. the following types of FFI do not need to file annual reports under
- FATCA:i. FFIs that are exempt from any reporting obligations – this includes government entities, regulated pension funds and similar; and
ii. FFIs that are deemed compliant with FATCA without having to undertake any reporting – this includes charities (who have no reporting obligations), but also includes certain categories of FFI that are only deemed compliant with FATCA because another financial institution has taken on the
- FATCA reporting obligation on their behalf.i. In this note, we review some of the more common entity types that we encounter, and their FATCA classification and reporting obligations.
- TRUSTEESi. Trustees may be financial institutions for the purposes of FATCA, but only if they are “entities” and they are “in business”.
ii. An individual acting as a trustee, whether or not in a professional capacity, is not an “entity” and will not therefore be a financial institution. As such the individual will have no reporting obligations under FATCA (although he may have to report on behalf of the trust of which he acts as trustee – see below).
iii. Trustees that are entities, on the other hand, will be financial institutions if they are “in business” as trustees (i.e. they charge for their services, and that is primarily what their business involves). Such trustees will therefore have reporting obligations under FATCA.
- TRUSTSi. A trust is considered as a separate entity from its trustees for the purpose of FATCA.
ii. The trust is an entity, and is therefore capable of being a financial institution if, broadly:
i. it holds a majority of “financial assets” (broadly stocks, shares, financial instruments etc.); and
ii. Either the trust, or its assets, are professionally managed by an entity which is itself a financial institution (e.g. a professional trust company, or a discretionary investment manager).’iii. A small family trust could, therefore, be a financial institution for the purpose for FATCA, and therefore have FATCA reporting obligations.
- NOMINEESi. Any entity in the business of acting as a nominee for others will be a financial institution, and will therefore have reporting obligations under FATCA.
- FAMILY OFFICESi. Where a family office assists in the management or administration of financial assets on behalf of others, it will be a financial institution, and will therefore have reporting obligations under FATCA.
- So I’m an “unexpected” financial institution. What does that mean?i. The first step to take for any unexpected financial institution is to assess whether or not they need to register with the IRS in order to obtain a “global intermediary identification number” (or GIIN)
i. These are the requirements under the IGAS – the definitions under the US Domestic FATCA regulations are slightly different.
ii. Any financial institution which will be undertaking FATCA reporting on its own behalf will need to obtain a GIIN, whether or not it has any US accounts to report.
iii. This is done via the IRS portal at: http://www.irs.gov/Businesses/ Corporations/FATCA-Registration
iv. The deadline for registering with the IRS in time to obtain a GIIN by 1 July 2014 (when the FATCA rules come into force) was 5 May 2014.ii. However, there is some breathing room for FFIs who are in jurisdictions which have entered into Model 1 inter-governmental agreements (IGAs) with the US
iii. FFIs in these jurisdictions do not need a GIIN until 1 January 2015, for which the deadline for registration is 25 October 2014:
- Do I have to undertake reporting on my own behalf? Can I appoint someone else to do this?i. the good news.
i. All trusts in the territories which have entered into Model 1 inter-governmental agreements (IGAs) with the US (in addition to Austria, Bermuda, Chile, Japan or Switzerland) which have one or more trustee that
is itself a financial institution (i.e. a professional trust company) will automatically qualify as a “trustee documented trust”, and the FATCA reporting obligation falls on the trustees, not the trust.ii. The trust will not need to obtain a GIIN, or register with the IRS.
ii. However,
i. all other types of financial institution will only be able to appoint a third party to report on their behalf if:
1. They appoint a “sponsor”.
2. The sponsor must be another financial institution which is
a. already engaged in the management of the first financial institution or its assets (e.g. its trustee or discretionary investment manager or another person authorised to enter into contracts on behalf of the financial institution, so not including a custodian);
b. registered as a “sponsoring entity” with the IRS; and
c. Willing to act as sponsor for the financial institution in question.3. They engage an unconnected third party financial institution to report on their behalf as an “owner documented FFI”
a. (which requires the financial institution in question to provide the unconnected third party financial institution with all necessary information to enable it to make the appropriate reports).
- IF I have to undertake FATCA reporting – What do I have to report?i. The FATCA reporting requirements are that the identity of any “US account holders” (US persons – which includes any US citizen – and certain US entities) and the value of their “accounts” (plus, in the future, details of any profits in these “accounts”) must be reported, either direct to the IRS or to the financial institution’s local revenue authority.
- Where an “account holder” is an entity, then the question becomes – what type of entity is it?i. Financial institution – if the account holder is a financial institution that is FATCA compliant (i.e. it either does not have to undertake FATCA reporting, or it satisfies its FATCA reporting requirements) then no report needs to be made.
1. However, if the account holder is a financial institution that is not FATCA compliant, then this needs to be reported.
ii. NFFE – if the account holder is an active NFFE, then no report needs to be made.
1. However, if the account holder is a passive NFFE, then a report needs to be filed if the NFFE has any US owners or “controlling persons”.
2. This will include:
- Where the NFFE is a trust – any US settlor, trustee, beneficiary (generally only if they have a greater than 10 per cent interest – direct or indirect – in the trust assets although this threshold may be higher depending on the jurisdiction) or protector.
- Where the NFFE is a partnership – any US person with a greater than 10 per cent interest – direct or indirect – in the partnership (this threshold may be higher, depending on the jurisdiction).
- Where the NFFE is a company – any US person with a greater than 10 per cent interest – direct or indirect – in the company (this threshold may be higher, depending on the jurisdiction).
- I have no US account holders. Does that mean I don’t have to file any reports under FATCA?i. That depends.
i. In the UK, according to the UK domestic legislation any reporting financial institution needs to file an annual FATCA return with HMRC, even if they have no US Accounts to report.
ii. It seems practice may vary from jurisdiction to jurisdiction. - I have US account holders. What do I need to report?i. The first FATCA report filing deadline is 31 March 2015 (31 May 2015 in the UK).
i. Reporting must be done annually.
ii. The information that needs to be reported includes
i. the name,
ii. address and
iii. US taxpayer identification number of the accountholder,
iv. as well as certain details of the account. - What are the penalties for non-reporting?i. Non-compliance with FATCA will result in 30 per cent withholding tax on US source payments with effect from 1 July 2014.
ii. It may also, from 2017, result in 30 per cent withholding on payments from non-US sources that are made by payors in receipt of US source income or gains.
iii. There are also penalties for reporting FFIs that are in breach of their reporting obligations under FATCA. These may vary from jurisdiction to jurisdiction. - SUMMARYi. FATCA is truly global in its reach, and even those financial institutions,i. NFFEs or individuals with no US assets and no US connections are affected by it.
ii. Where a financial institution has no US account holders, compliance with FATCA should not be particularly onerous.
i. Registration with the IRS in order to obtain a GIIN is relatively easy, and any annual reporting requirements should be easily satisfied if there are no US account holders to report.
iii. FATCA should not be ignored, and professional advice should be sought where necessary.
http://www.macfarlanes.com/media/1688/fatca-the-unexpected-financial-institutions.pdf
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