The US Foreign Account Tax Compliance Act ("FATCA") is focused on the prevention of tax evasion by US persons and will have significant global impact on businesses both within and outside the United States. All foreign financial institutions ("FFIs"), including hedge funds and private equity funds, that have any material direct or indirect interests in US investments will need to adhere to FATCA or risk suffering US withholding tax at 30%.
The Cayman Islands Government announced on 15 March 2013 that it has decided to pursue a Model 1 inter-governmental agreement ("IGA") with the United States for the implementation of FATCA and to enter into a similar arrangement with the United Kingdom. In its announcement the Cayman Islands Government pledged its commitment to positive engagement in international tax co-operation.
Once the IGA has been entered into between the Cayman Islands Government and the United States and the Cayman Islands has passed implementing legislation and regulations, and provided that those implementing laws and regulation are complied with:
- Cayman FFIs will be automatically treated by the US Internal Revenue Service ("IRS") as satisfying FATCA and will (on application) be issued where applicable with a Global Intermediary Identification Number ("GIIN");
- There will be no requirement for Cayman FFIs to enter
- into an FFI agreement with the IRS;
- Cayman FFIs will be authorised to disclose the necessary information to Cayman authorities (for onward transmission to the IRS) without the need to obtain specific consents from account holders;
- The due diligence requirements to identify US investors should be more closely aligned to the requirements under the existing Cayman AML/KYC rules; and
- Cayman FFIs will not be subject to withholding under FATCA on payments they receive and will not be required to withhold on passthru payments they make to a recalcitrant account holder or non-participating FFI.
- Cayman FFIs should not have to close the account of a recalcitrant account holder.
The Cayman Islands has a history of conducting business with other highly regulated jurisdictions. The decision to sign up to the IGA will ensure that services provided from the Cayman Islands will continue to dovetail with service provided from such jurisdictions. As a result the use of Cayman Islands financial services will provide a low legal and compliance risk for service providers in other jurisdictions which also sign up to Model 1 IGAs for the implementation of FATCA and its regulations.
Dillon Eustace advises asset managers, banks, insurers, pension funds, supranational organisations, prime brokers, administrators, custodians, securities lending agents and others in relation to all aspects of the asset management and funds industries. We will continue to keep you updated on developments in Cayman Islands legislation and regulations covering the implementation of Cayman's IGA.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.