FATCA obligations affect entities such as trusts

Mon 14 Jul 2014

“FATCA”, the USA’s Foreign Account Tax Compliance Act, applies to many types of ‘Financial Institution’ (FI), but more entities can be classed as ‘financial institutions’ for this purpose than you might imagine.

FATCA is a piece of US federal law designed to stop US persons (citizens and certain US residents and former residents) avoiding tax by failing to disclose their worldwide income. As such they have similar objectives to the UK’s transfer of assets abroad rules but are much more akin to the UK-Swiss agreement in that they impose a 30% withholding tax (WHT) on any funds transferred from a US-source to a non-US FI which is not exempt from and does not comply with the US rules. Note as well that the WHT applies to the sums transferred, not just the income or gain element and penalties may also be charged where FIs fail to report or meet their obligations.

The impact of FATCA is wide reaching and, whilst it is well known that it applies to financial institutions (FIs) such as banks, it is less well known that other entities, such as trusts and  private investment companies,  can be classed as financial institutions for this purpose.  All trusts are affected by FATCA regardless of whether they have US persons as settlors, trustees or beneficiaries.

Relevant entities will therefore need to know how they will be classified for FATCA, as depending on their classification under FATCA, they may have reporting obligations.  Entities may be classed as FIs or Non-Financial Foreign Entities (NFFEs). 

• Any entity classed as an FI will need to obtain a Global Intermediaries Identification Number (GIIN) in time for publication in a list on 31 December 2014.These entities may have reporting obligations.
• NFFEs will need to certify their status as such to any FI with which they have a relationship (such as a bank). 

The GIIN will need to be given to other institutions as evidence of compliance, and should be quoted in any reporting.  Banks and other financial institutions will need to either have the GIIN or form W-8BEN (certifying it is a NFFE).  Without this, the bank or other financial institution may refuse to operate accounts or, apply the 30% WHT, so the consequences of non-compliance are severe.