The Foreign Account Tax Compliance Act (FATCA) is a new US law enacted on March 18, 2010, as part of the HIRE Act. Final FATCA regulations were issued January 17, 2013 and provide various clarifications and alignments. Meanwhile, intergovernmental agreements (IGAs) are also being concluded with various countries to eliminate legal barriers and to facilitate execution of FATCA in these partner countries. FATCA will become effective January 1, 2014, so now it is time to prepare. FATCA impacts not only US persons (individuals or entities) but may also necessitate extra disclosure and compliance requirements of non-US entities and individuals. The probable impact of FATCA and IGAs on trusts and investment entities is covered below.
Goal and Key Aspects of FATCA
The purpose of FATCA is to enforce tax compliance by US taxpayers who hold financial assets outside the US, and to ensure that US authorities can identify and collect the appropriate tax from these US persons.

FATCA will achieve this by imposing a new 30% withholding tax on payments of US source income (withholdable payments) to the following parties that do not comply with certain requirements:
  • Foreign (non-US) financial institutions (FFIs) that are not deemed compliant or excepted should register with the IRS as a participating FFI. The FFI agreement with the IRS requires the performance of specified due diligence procedures to identify financial accounts held by specified US persons or US-owned foreign entities, annual reporting of certain information about these US accounts, and withholding of 30% on certain pass-through payments. If the FFI remains non-compliant it is called a non-participating FFI.
  • Non-financial foreign entities (NFFEs) should disclose to the withholding agent certain information (name, address, and tax ID number) on any substantial US owners (generally over 10 percent) or should certify that they have no substantial US owners. If an NFFE does not comply, it becomes a recalcitrant account holder;
  • Individuals (US or non-US) should disclose to the withholding agent certain required details of their tax status; if they fail to comply, they become a recalcitrant account holder.
Further details regarding FATCA categorization, requirements and exceptions are given below. Under an IGA concluded by the US with a partner country these requirements are amended to reduce the administrative burden for the parties involved (see IGA section). FATCA will incorporate local AML/KYC documentation practices and will co-exist with other tax laws and reporting requirements.

Withholdable Payments under FATCA
Withholding tax will be imposed on payments including:
  • Payments from interests, dividends, premiums, annuities, etc., and other periodic (FDAP) payments from US sources.
  • Gross proceeds from the sale or disposition of property that can produce interest or dividends from sources within US.
Withholding Agent
All persons, in whatever capacity acting, having the control, receipt, custody, disposal, or payment of any withholdable payment are categorized as withholding agents under FATCA.

A US financial institution (USFI) acting as a withholding agent will need to determine whether an FFI or an NFFE is compliant or non-compliant for withholding purposes while making payments/disbursements. Likewise, an FFI can also be a withholding agent with respect to other FFIs or NFFEs to determine the withholding on any pass-through payments.
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Categorization of Entities as FFI or NFFE
FFIs act as intermediaries for investments of US taxpayers. FFIs are therefore considered to be in the best position to identify and report with respect to their US customers. The definition of FFI includes the following categories:
  1. Depository Institution: accepts deposits in the ordinary course of a banking or similar business, including financial lease, trust or fiduciary services;
  2. Custodial Institution: holds as a substantial portion (20% or more) of its business, financial assets for the account of others (custody, broker, related financial services, clearance and settlement);
  3. Investment entity: Class A, B or C (described below);
  4. Specified insurance company: issues or is obligated to make payments with respect to certain cash value insurance or annuity contracts;
  5. Holding company or treasury center, as part of a financial group.
An investment entity is an entity:
  1. That primarily (at least 50%) conducts as a business the following activities on behalf of a customer: trading in market instruments, portfolio management, or otherwise investing, administering, or managing funds, for or on behalf of a customer (Class A)
  2. whose gross income is primarily (at least 50%) attributable to investing, reinvesting or trading in financial assets, and the entity is managed (which means any of the activities described in A. are performed on behalf of the managed entity) by an FFI that is a depository institution, custodial institution, specified insurance company or Class A investment entity (Class B), or
  3. 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)
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Deemed-Compliant FFI
The FATCA regulations except certain categories of FFIs and NFFEs from these identification and reporting requirements. These are called deemed-compliant FFIs (D-C FFIs), which in general present a relatively low risk of being used for tax evasion:
  • A registered deemed-compliant FFI generally is required to register with the IRS through the IRS portal every three years in order to declare its status as deemed-compliant
  • A certified deemed-compliant FFI or owner-documented FFI generally is not required to register with the IRS, but will be required to certify to any withholding agent on IRS Form W-8 that it meets the requirements of its deemed-compliant category
Also under mentioned IGAs, certain categories will be excepted from these requirements.
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Guidelines for Trust, Funds and Family-owned Investment Entities
Based on the above categorization, the following entities will probably be considered as FFIs:
  • Mutual funds, hedge funds, or similar funds with an investment strategy of investing, reinvesting or trading in financial assets
  • A trust which is professionally managed by a trust company or whose investments are professionally managed by investment managers. A trust may be considered an NFFE if the trustee is an individual and the investments of the trust are not professionally managed
  • Family-owned investment entities, including partnerships, if professionally managed by a trust company or family office or if its investments are professionally managed by investment managers. Please note that entities managed by individuals and whose investments are not professional managed are not likely to be considered as FFIs but instead as NFFEs.
This categorization will likely be clarified further in the next few weeks. This categorization is important since an FFI (unless deemed compliant or a Model 1 IGA FFI) has in general more reporting and documentation requirements (see below) compared to an NFFE. A trust that is treated as an FFI would have to provide details of its US owners, mandatory beneficiaries and even discretionary beneficiaries in the year of distribution. In case a trust will be classified as an NFFE this detailed information is to be provided for its substantial US owners and beneficiaries (i.e. more than 10%) and under IGAs for controlling persons (i.e. more than 25%).
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Owner-Documented FFI or Sponsored FFI
For investment entities that qualify as FFIs but have solely investments and do not act as intermediaries, there are basically two ways to comply and reduce the administrative burden of FATCA and IGAs:
  1. Owner-Documented FFI: 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 and to agree to notify the withholding agent regarding any change in circumstances. The withholding agent agrees to report to the IRS (or, if a Model 1 IGA, to the relevant foreign government) the information required with respect to any specified US persons that own a direct or indirect equity interest in the FFI.
  2. A new “sponsoring/sponsored FFI” mechanism may be applied under which these sponsored FFI entities (trusts, funds) and underlying entities should be deemed compliant provided that the sponsoring FFI (trust company, family office, or the management investment company) is either itself a participating FFI or a Model 1 IGA FFI, and agrees to report on their behalf the information that the fund, trust or family investment entity would have been required to report under an FFI agreement
Both mechanisms and its practicalities are expected to be clarified in more detail in the next few weeks.
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Requirements of Participating FFIs
An FFI that is not excepted or deemed compliant can comply to FATCA as a participating FFI by concluding an FFI agreement with the IRS that includes the following requirements:
  1. Performing specified due diligence procedures (with detailed thresholds on the average account value and presumptions) on new and existing accounts to identify US accounts, which are financial accounts (holders, investors, customers) held by:
    • US persons (individual, entity, partnership, US trustee), or
    • US-owned foreign entities (substantial US owner >10%)
  2. Annual reporting to the IRS of information on US account holders and the foreign account’s income and assets. The most detailed information required to be reported will include:
    • Name, address, US Tax Identification Number (TIN), account number and account balance
    • Income and withdrawals
    • Gross proceeds
  3. Withholding 30% on certain pass-through payments to recalcitrant account holders and non-participating FFIs; after a certain period the FFI must close the foreign accounts of recalcitrant account holders
  4. Documentation and compliance verification by the IRS
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IRS Registration Portal
  • The IRS portal will be the primary means for FFIs to interact with the IRS to complete and maintain their FATCA registrations, agreements and certifications
  • The portal will be accessible to FFIs by July 15, 2013. At that time, FFIs will be able to register as participating FFIs, sponsoring entities or as limited FFIs or registered deemed compliant FFIs
  • Once an FFI has registered, the IRS will approve and issue a GIIN (Global Intermediary Identification Number) to each participating FFI and registered deemed compliant FFI
  • A GIIN will be assigned as of October 15, 2013, and will be used as the ID number for satisfying the FFI’s reporting obligations and identifying its status to a withholding agent
  • The IRS will electronically post the first IRS list of participating FFIs and registered D-C FFIs (including Model 1 FFIs) on December 2, 2013, and will update the list on a monthly basis
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Minimum Threshold for Reporting a US Financial Account for FFIs
All US financial accounts with an aggregated value of US $50,000 or more must be reported to the IRS. Preexisting entity accounts of US $250,000 or less are exempt from review. Enhanced review is required for high value accounts as of US $1,000,000.
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Key Dates and Grandfather Rules
The final FATCA regulations provide delayed time frames for various actions:
  • Agreement with the IRS: Effective date will be December 31, 2013, for all participating FFIs that apply and receive a GIIN prior to January 1, 2014. It is recommended to file before 25 October 2013 to receive the GIIN in time
  • New account due diligence procedures commence January 1, 2014; accounts maintained prior to January 1, 2014 are pre-existing accounts
  • Account holder documentation is delayed until December 31, 2015, for other than prima facie FFIs and high value individual account holders.
  • First information reporting of US accounts on Form 8966: Before March 31, 2015, with respect to both fiscal years 2013 and 2014
  • Commencement of withholding: will not be required on foreign pass-through payments or on gross proceeds from sales or dispositions of property before January 1, 2017
Note: These dates are for compliance with FATCA reporting and the commencement of withholding in general. There are different timelines for reporting different thresholds starting from $50,000 and also for different types of accounts (existing, new, etc.).

Various grandfather rules apply. The most important are:
  • Obligations outstanding on January 1, 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
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Advantages of FATCA Compliance for Participating FFIs
The general advantages of being compliant with FATCA include:
  • Helping to avoid 30% withholding tax on all received US source payments
  • Helping to avoid any 30% withholding that might arise in future for the investments in US assets and in any pass-through payments
  • Helping to avoid unwanted attention from the IRS, which might infer that the account holder is trying to evade taxes
There is a possibility of other countries introducing legislation similar to FATCA, which would allow automatic exchange of information relating to their citizens or corporations.
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Intergovernmental Agreements (IGA) and their Implications
FATCA has raised a number of issues, including that FFIs established in some countries may not be able to comply with reporting, withholding, and account disclosure requirements because of legal restrictions. Eight countries (USA, France, Germany, Italy, Spain United Kingdom, Switzerland and Japan) have made joint statements to enter into intergovernmental agreements.

In recent months, the UK, Mexico, Denmark, Ireland and Switzerland have concluded agreements to facilitate FATCA disclosure and reporting, all based on reciprocity, except for the Swiss IGA. 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 50 countries.
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Key IGA Features
  • Enhances compliance and facilitates enforcement to benefit all parties
  • Addresses legal impediments to compliance, such as data privacy, bank secrecy laws, etc.
  • Simplifies implementation and reduces costs
  • FFIs to be categorized as deemed compliant as long as they are fulfilling their obligations
  • FFIs to disclose information on its financial account holders to the local tax authorities, local authorities to pass the information to IRS
  • No withholding tax applicable as long as FFIs are fulfilling their obligations under IGA
  • The substantial owner test is “controlling,” which means 25% (instead of 10% under FATCA)
  • IGA Model I will in principle include a reciprocal arrangement of collection and automatic exchange of information for residents in the partner countries, but there will also be a Model 1 IGA without such reciprocity.
More countries are expected to eventually enact laws like FATCA, which would have similar obligations.
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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
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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 a financial institution
  • Insurance and annuity contracts (some are excluded)
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
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 an 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.
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The rules and procedures in the IRS notices may change in the final regulations. This document is prepared for general information purposes only. Amicorp Group does not provide tax or legal advice to its clients. Any opinions contained herein should not be construed or interpreted as advice provided by Amicorp Group.

For more information or clarifications on FATCA, please write to:
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