www.taxjournal.

com ~ 1 August 2014

T
he US Congress enacted the Foreign Account
Tax Compliance Act (FATCA) in 2010 to
target ofshore accounts that were not subject
to US information reporting to the Internal Revenue
Service (IRS).
FATCA requires non-US entities to register with
the IRS and conduct diligence and reporting on their
investors and account holders. Te law efectively
makes foreign fnancial institutions (FFIs), i.e. those
which are non-US, information gathering agents of
the IRS by threatening an FFIs own US source income
and sale proceeds with a 30% withholdingtax.
Tis regime is not intended to raise revenue
for the US government, but rather to identify US
investors in FFIs. Te 30% withholding tax does
not apply, for example, if the relevant FFI enters into
an agreement with the IRS to report information
in respect of fnancial accounts held by US persons
(or non-US entities which have a 10% US owner), or
which does not maintain accounts of such persons or
entities. Te agreement obligates an FFI to apply the
30% withholding tax to payments it makes to other
FFIs which have not entered into such agreements.
Many countries have entered into intergovernmental
agreements (IGAs) with the US that provide relief
from the FATCA rules promulgated in the US
Treasury regulations.
Does FATCA apply to a fund?
FATCA applies to non-US funds that are FFIs and
also non-US investment entities. Tis defnition
encompasses most kinds of funds (other than
investment funds owned and controlled by
sovereigns) (see section 1471(d)(5) of the Internal
Revenue Code (the Code) and section 1.1471-5(e)
(4) of the US Treasury Regulations (Treas. Regs)). It
includes entities that:
conduct investment and asset management
activities for customers;
are managed by other FFIs and the gross income
of which is primarily attributable to investing,
reinvesting or trading in fnancial assets; or
are collective investment vehicles with investment
strategies of investing, reinvesting or trading in
fnancial assets.
If a non-US entity is not an FFI, it will be a non-
fnancial foreign entity (NFFE). An NFFE generally
will not be required to comply with the diligence and
reporting requirements applicable to FFIs. However,
an NFFE may need to identify to a withholding agent
any US persons with accounts or substantial interests
in it.
FATCA applies when a non-US fund receives
withholdable payments. Such payments include:
US-source interest and dividends, rents, salaries,
wages, premiums, annuities, compensations,
remunerations, emoluments and other fxed or
determinable annual or periodic gains, profts
and income (FDAP income); and
gross proceeds from the sale or other disposition
of any property which can produce US-source
interest or dividends, regardless of whether the
recipient realised a gain (or loss) on such property.
A fund that does not derive, and is not a payee of,
any withholdable payments should not be subject
to FATCA withholding, even if it does not become
a participating FFI or a deemed-compliant FFI.
Payments of FDAP income are subject to FATCA
withholding from 1 July 2014 (Treas. Regs section
1.1473-1(a)(1(ii)). Gross proceeds from the disposition
of property that can produce US-source interest
and dividends will only be subject to FATCA
withholding for dispositions occurring afer 31
December 2016.
FATCA will not apply to FDAP income derived
from, and gross proceeds from a disposition of, any
grandfathered obligations. Grandfathered obligations
include debt obligations which are outstanding on
1 July 2014 and which are not materially modifed
thereafer. Equity interests are not grandfathered,
regardless of their issue date (Treas. Regs section
1.1471-2(b)(2)(i) and -2(b)(2)(ii)(B)(1)). Prior to 1
January 2017, a payment made with respect to
collateral under a collateral agreement securing
transactions, including debt instruments and
derivative fnancial instruments, will not be subject to
FATCA withholding provided that the secured party
holds a commercially reasonable amount of collateral
(Temp. Treas. Reg 1.1473-1T(a)(4)(vii)). Tis is the
case even if the securities posted as collateral are not
grandfathered obligations.
Receiving withholdable payments
If a non-US fund receives withholdable payments, it
can become:
a participating FFI; or
a registered deemed-compliant FFI.
Participating FFIs: A fund generally can enter
into an FFI agreement with the IRS to become
a participating FFI by registering through the
FATCA internet portal. Once the IRS approves
the registration, it issues a global intermediary
Practice guide
How FATCA applies to
non-US funds
SPEED READ From 30 June 2014, FATCA came into force
for what the US has designated as foreign nancial
institutions (FFIs), including non-US funds that are FFIs
and also non-US investment entities. Any fund that is
deemed to be in receipt of withholdable payments
(which encompasses various types of US-sourced income,
gains, prots, interest or dividends) will be subject to
FATCA withholding and reporting requirements. Many
countries, however, have entered into intergovernmental
agreements with the US that provide relief from the
FATCA rules promulgated in the US Treasury regulations,
and these must be considered in determining how FATCA
will apply to each countrys funds.
Andrey Krahmal is a member of Atlas Tax Chambers.
He represents individuals, trusts, partnerships
and companies of all sizes in connection with their
inboundand outbound US tax issues (including
FATCAmatters). Email: andrey@atlastaxchambers.com;
tel:0207670 1500.
16
1 August 2014 ~ www.taxjournal.com
identifcation number (GIIN) to the fund. Te
IRS started publishing a monthly electronic list of
participating FFIs and registered deemed-compliant
FFIs starting on 2 June 2014. Te IRS FFI list is
important because both US withholding agents
and participating FFIs will verify a GIIN furnished
by a fund with its certifcation to avoid FATCA
withholding on payments made to the fund.
Tere is no need to enter into an FFI agreement if
the fund is subject to a Model 1 IGA (determined on
its country of organisation or tax residence) or if the
fund qualifes for an exception because it is one of the
following:
a deemed-compliant FFI;
an exempt benefcial owner FFI:
(a) non-US governments and their controlled
entities;
(b) international organisations;
(c) non-US central banks of issue;
(d) governments of US territories;
(e) non-US retirement plans; and
(f) entities wholly owned by other exempt
benefcial owners; or
excluded under regulations:
(a) fnancial entities of a non-fnancial group;
(b) non-fnancial start-ups or entrants of new
business lines;
(c) entities in liquidation or bankruptcy;
(d) non-US members of participating FFI groups;
and
(e) non-proft organisations.
Registered deemed-compliant FFIs: Funds that
qualify as deemed-compliant FFIs are not required
to enter into FFI agreements. Tere are two
categories of deemed-compliant FFIs (pursuant to
(Treas. Regs sections 1.1471-5(f)(1) and -5(f)(2)):
certifed deemed-compliant (this category applies
to small and local banks); and
registered deemed-compliant.
A fund subject to a Model 1 IGA will automatically
qualify as a registered deemed-compliant FFI, as
long as it complies with the registration requirements
of the applicable IGA. Such funds will be subject
to diligence and reporting requirements, but
the requirements are less stringent than those
applicable to a participating FFI. An FFI subject to
a Model 2 IGA will be subject to many of the same
requirements as a participating FFI. However, an FFI
subject to a Model 2 IGA may qualify as a registered
deemed-compliant FFI if it meets the requirements
of one of the types of registered deemed-compliant
FFIs in Annex II of the applicable Model 2 IGA or in
the US Treasury regulations.
Treas. Regs section 1.1471-5(f)(1)(i) states that
the categories of registered deemed-compliant FFIs
include:
local banks;
non-reporting members of corporate groups;
collective investment vehicles and restricted
funds;
qualifed credit card issuers and servicers; and
sponsored investment entities and controlled
foreign corporations.
Does the country in which
the fund is organised or tax
resident have an IGA that
applies the fund?
Is the fund an FFI
under the IGA?
Is the fund an FFI under
the US Treaty regulations?
Is the fund eligible to be a
certied deemed-compliant
FFI, an excluded FFI or an
exempt benecial owner?
The fund is an NFFE.
Certication requirements
may apply.
GIIN registration, diligence,
information reporting and
withholding requirements
do not apply.
Is the fund in a Model 1
IGA jurisdiction?
GIIN registration, become a
registered deemed-compliant
FFI. Diligence to the extent
required by the IGA, report
information to the local
government.
Is the fund eligible to be
a registered deemed-
compliant FFI?
GIIN registration, become a
registered deemed-compliant
FFI. Procedures for a
registered deemed-compliant
FFI in the regulations or IGA,
as applicable.
GIIN registration, become a
participating FFI, enter into
an FFI agreement. Diligence
and information reporting to
the IRS per FFI agreement (as
modied by the IGA).
Yes
Yes No

Yes

No

No

Yes

No

Yes

No

Yes

No

17
www.taxjournal.com ~ 1 August 2014
IGAs
Te US Treasury entered into Model 1 and Model 2
IGAs with various jurisdictions.
Model 1 IGAs: Countries that enter into Model 1
IGAs establish local information reporting regimes,
pursuant to which FFIs, which are subject to the
IGA, report FATCA-relevant information to the local
taxing authorities. Te information is then furnished
to the US Department of the Treasury. A fund that
is subject to a Model 1 IGA, and that is required to
report FATCA-relevant information to the local
taxing authority, will not need to enter into an FFI
agreement, but will be required to register with the
IRS and to obtain a GIIN. However, an FFI that is
subject to a Model 1 IGA is not required to obtain
a GIIN or to provide a GIIN to a withholding agent
before 1 January 2015 (Treas. Regs 1.1471-3(d)(4)(iv)
(A)).
Model 2 IGAs: Model 2 IGAs difer from model
1 IGAs in that they do not provide for information
reporting to the local taxing authorities. Instead, they
require an FFI to report relevant FATCA information
directly to the IRS. A fund that is subject to a Model2
IGA generally must enter into an FFI agreement
unless it qualifes as a deemed-compliant FFI, an
excluded FFI or an exempt benefcial owner under
the applicable Model 2 IGA. Pursuant to its FFI
agreement, an FFI that is subject to a Model 2 IGA
generally must comply with applicable due diligence
rules, which may be modifed by the Model 2 IGA.
Application of IGAs: Each IGA is unique. Funds
should always confrm the specifc requirements.
Some IGAs, including Japans, apply to FFIs that
are resident in the relevant country. Resident may
mean tax resident as defned under the countrys
existing laws, or as specifed in any legislation or
guidance issued by the country regarding the IGA. In
contrast, other IGAs, including that of the Cayman
Islands, apply to FFIs that are organised under the
laws of the relevant country. Accordingly, an FFI
may be subject to multiple IGAs (in which case
the treatment is currently unclear) or to no IGA
(in which case the default rules of the US Treasury
regulations apply).
Several countries, including the UK, have issued
detailed guidance notes to expand upon and clarify
details of the relevant IGA. Such guidance notes
continue to be issued and revised as the FATCA
regime evolves, and may contain country-specifc
details and exceptions that difer from the US
Treasury regulations and guidance notes issued by
other IGA countries.
What if a fund does not comply?
Te treatment under FATCA depends on whether
the fund receives withholdable payments.
If withholdable payments are received: US
withholding agents must withhold tax at a 30% rate
on:
withholdable payments made to non-
participating FFIs that are not exempt benefcial
owners, excluded FFIs or deemed-compliant
FFIs; and
payments of US-source FDAP made to
participating FFIs acting as intermediaries,
except to the extent that participating FFIs
certify to the US withholding agents that the
portion of the payment is allocable to a class of
payees for which no withholding is required.
If no withholdable payments are received:
Terewill be no consequences under FATCA,
even if the fund is non-compliant. Ancillary
consequences may include difculty in opening
bank accounts or entering into transactions or
agreements with fnancial institutions, which
require that all counterparties are FATCA-
compliant, regardless of the non-existent risk
of withholding. Investors may demand that the
fund becomes a participating FFI because of
reputational risk. Some jurisdictions may require
FFIs to comply with FATCA under the local
legislation implementing an IGA, even though
FATCA compliance is otherwise voluntary. Some
funds may decide to comply with FATCA, even if
currently it is not directly relevant.
What if the investors do not comply?
Te fund may be required to withhold tax at a 30%
rate on withholdable payments to any investor that
is a non-participating FFI or a recalcitrant account
holder.
Funds that are subject to a Model 1 IGA are
not required to withhold, although they must
report information about their investors that are
non-participating FFIs or recalcitrant account
holders. Funds subject to Model 2 IGAs face relaxed
withholding requirements.
What does a fund need do to ensure
compliance?
Te fund is a participating FFI: Per the FFI
agreement, the fund must:
identify its:
(a) US accounts;
(b) accounts held by non-participating FFIs; and
(c) accounts held by recalcitrant account holders;
report annually to the IRS with respect to such
accounts;
withhold on payments to non-participating FFIs
and recalcitrant account holders; and
establish a FATCA compliance programme, and
have its responsible ofcer periodically certify
the efectiveness of the programme to the IRS.
Final thoughts
Under FATCA, an account includes not only
depositary accounts, but also equity and debt
interests in investment entities and fnancial
institutions, with exceptions for publicly traded
interests. See the fowchart on the previous page for
an illustration of how FATCA applies to a fund.
FATCA continues to evolve as additional IGAs
are signed and IGA jurisdictions promulgate
guidance. Te advisers should focus on FATCA
classifcation of entities in their fund structures and
ensure compliance.

For related
reading, visit
www.taxjournal.com
Q&A: The US FATCA
regulations have
nally landed (Jayne
Newton, 21.1.13)
FATCA, IGAs and
loan agreements
(Zoe Andrews &
J. Leonard Teti II,
1.11.12)
FATCA
grandfathering
& material
modication of debt
instruments (Reed
Carey, 15.5.14)
The worldwide reach
of FATCA (Stephen
Fiamma & Stefka
Kavaldjieva, 21.7.11)
18