Less than a month left to register for FATCA

Thu 02 Oct 2014

Entities which engage in investment activities or manage funds including deposits on behalf of others, such as trusts, personal investment companies, or including EBTs (but not charities), need to consider how FATCA affects them.  This is because such entities may be classed as ‘financial institution’ for the purposes of FATCA.  If that is the case, they need to be registered with the IRS in time to be on the list published on 1 January 2015.

25 October 2014 is the effective deadline

STEP and ICAEW warn that in practice, this means that 25 October 2014 should be regarded as the deadline for registering for a Global Intermediaries Identification Number (GIIN).

What is FATCA?

This is US legislation which is aimed at making sure US citizens disclose their worldwide income.  The UK and US governments entered into an ‘inter-governmental agreement’ or IGA which brings FATCA into force in the UK, with ‘financial institutions’ having reporting requirements to HMRC. Whilst the ultimate goal is the reporting of financial accounts held by individuals with US connections, that does not mean you can ignore it for affected entities with no US connections because the effect of not complying may be irrecoverable withholding tax.  That is not really surprising because the individuals with financial assets held/ managed by financial institutions can easily change over time.

Is the entity a financial institution?

The starting point is to decide whether the entity is a financial institution or not.

Outside the financial sector, most entities are most likely to fall to be treated as a financial institution if they fall under the ‘investment entity’ definition.  This would catch, for example, trusts which are managed by financial institutions.  So, for example, if a trust is managed by a discretionary fund manager it will be regarded as an investment entity where it also meets the financial assets test (where the trust’s gross income is mainly attributable to investing, reinvesting, or trading in financial assets).   Thus, a professionally managed family trust which mainly invests in shares would be an investment entity, whereas if the family trust was not managed by another financial institution, or invested primarily in real property, it would not be caught.

If the entity is (or likely to be) a financial institution, what next? 

Essentially, the trust (or other entity) will either need to register itself for a GIIN or it will be able to take advantage of one of the options by which a third party takes on the FATCA obligations (such as if the discretionary fund manager agrees to act as sponsoring entity).  However, the ultimate responsibility lies with the trustees, so they must ensure that registration and compliance with reporting and due diligence requirements are complied with. If they don’t then the implications will be serious: a 30% withholding will be applied to payments to by financial institutions – and in practice financial institutions will not want to do business with them.