Reminders About FATCA Requirements and New Cross-Border Claim Reporting
A. FATCA Requirements
Several important deadlines under the U.S. Foreign Account Tax Compliance Act (“FATCA”) are approaching. Advisers to all investment funds, both U.S. and non-U.S., should be aware of the deadlines that apply to their funds. U.S. funds have a new potential withholding obligation and funds formed outside the U.S. (“foreign funds”) that do not comply with FATCA may face withholding on gross proceeds payable to these funds from U.S. accounts or withholding agents and other consequences.
Foreign Funds in Jurisdictions That Have a Model 1 IGA with the IRS May Have a Compliance Advantage. The compliance requirements for a foreign fund differ depending on whether it is organized under the laws of a jurisdiction that enters into an “intergovernmental agreement” (“IGA”) with the U.S. government. IGAs are either (i) Model 1 agreements, by which the foreign jurisdiction agrees to gather FATCA-type information from its local funds and report that information to the IRS, or (ii) Model 2 agreements, by which the foreign government agrees that foreign funds in that jurisdiction will report information about their underlying owners directly to the IRS, subject to the applicable Model 2 IGA. So far, the Cayman Islands and 19 other countries have entered into Model 1 IGAs with the U.S. government. Bermuda and three other countries have entered into Model 2 IGAs with the U.S. government. Many other IGAs are expected to be completed over the next few months, including the British Virgin Islands.
A foreign fund in a jurisdiction that does not have a Model 1 IGA must register with the IRS and enter into an agreement with the IRS to comply with FATCA, unless an exemption or an alternative compliance status applies. The agreement obligates the foreign fund to conduct specific due diligence on its owners and report information to the IRS, adopt policies and procedures, report ownership by specified U.S. investors and recalcitrant investors, withhold from recalcitrant investors (such as other foreign funds that do not comply with FATCA), and periodically certify that the foreign fund has fully complied with FATCA and the agreement and that it does not help its account holders avoid FATCA reporting. If the foreign fund is in a Model 2 jurisdiction, the IRS agreement and reporting requirements will be subject to the Model 2 IGA entered into between that jurisdiction and the U.S. government.
A foreign fund in a Model 1 jurisdiction will not be required to enter into an agreement with the IRS. Such a foreign fund must register with the IRS and will have significant obligations under the local requirements adopted in that jurisdiction, which must include at least the requirements of the IGA, unless an exemption or an alternative to registration applies. Many of the Model 1 countries, including the Cayman Islands, have not yet adopted implementing legislation, so the nature and extent of those obligations is still unknown.
When Should a Foreign Fund Register with the IRS Under FATCA? The first decision a foreign fund must consider is when to register with the IRS. The registration form is fairly short and can be filed on-line. Information on the registration process is available at http://www.irs.gov/Businesses/Corporations/FATCA-Registration. Before registering, however, a foreign fund must authorize a “responsible officer” to sign the fund’s FATCA registration with the IRS, as discussed further below.
When a foreign fund registers with the IRS, it will receive its “global intermediary identification number” or “GIIN.” Withholding by U.S. withholding agents, such as brokers and other counterparties, starts July 1, 2014. The IRS will publish the first list of registered foreign financial institutions with GIIN numbers on June 2, 2014. If a foreign fund wants to be on that list it must submit its FATCA application by April 25, 2014. The June list will be the only list published before FATCA withholding starts on July 1, 2014.
A foreign fund that is not organized and operating in a Model 1 jurisdiction (for example, Bermuda is not a Model 1 jurisdiction) must register with the IRS by April 25, 2014.