FATCA came into force on 1 July 2014.

All non-U.S. Financial Institutions ('FIs') must identify their U.S. tax resident accountholders to the IRS or face a 30% withholding tax on gross payments from U.S. payors.

Inter-Governmental Agreement

The Inter-Governmental Agreement ('IGA') between the Cayman Islands and the U.S. is a pact to introduce legislation in the Cayman Islands requiring FIs to report U.S. tax resident accountholders to the Cayman Islands Tax Information Authority ("TIA"). In turn, the TIA will pass that information to the Internal Revenue Service ('IRS'). Cayman Islands FIs are exempt from FATCA withholding tax until 1 January 2015 (by virtue of the above mentioned IGA).

Financial institutions

The following Cayman Islands FIs are required to report their U.S. tax resident accountholders to the TIA:

  • Custodial Institutions;
  • Depository Institutions;
  • Investment Entities (which includes certain types of fund); and
  • Certain types of Insurance Companies

Various FI's may be exempted, for example, where they are small or have a sponsor which has registered on their behalf.

Registration and GIIN

From 1 January 2015, the withholding tax will apply. FI's must register as a Registered Deemed-Compliant FFI on the IRS FATCA Registration Portal before this date.

Upon registration the FI will receive global intermediary identification number ("GIIN"). FIs will thereafter need to provide payors with said GIIN to ensure they are not subject to the withholding tax.

Due diligence

DD can be performed by the FI or a delegated third party.

-Accounts existing at 30 June 2014

Due diligence ('DD') must be performed on such accounts.

Accounts up to $50,000 for individuals and up to $250,000 for entities are exempted from the due diligence requirements.

Individual accountholders

By 30 June 2015 FIs must review their electronic databases for indications that an accountholder is a U.S. tax resident ("U.S. Indicia"):

  • Nationality or residence status;
  • Current residence and mailing addresses on file;
  • Current telephone number on file;
  • Any standing instruction to transfer funds;
  • Whether there is an "hold mail" address; and
  • Whether there is any power of attorney or signatory authority.

If the electronic databases would not reveal this information the FI must review its paper files for all accounts over $1 million.

Entity accountholders

By 30 June 2016 FIs must review their files to determine if the accountholder is:

  • U.S. tax resident;
  • Non-U.S. entity controlled by U.S. tax residents; or
  • Nonparticipating FI

-Accounts opened after 30 June 2014

DD (to identify reportable accounts) must be undertaken by FIs upon or prior to opening the account. Accounts with balances under $50,000 are exempt.

Individual accountholders

The FI must obtain a self-certification from the accountholder stating whether or not he/she is a U.S. tax resident. The FI must attempt to corroborate and cross reference the self-certification.

Entity accountholders

Again, the FI must obtain a self-certification if the accountholder is:

  • A U.S. tax resident;
  • A Non-U.S. entity controlled by U.S. tax residents; or
  • A Nonparticipating FI

A self-certification or other evidence cannot be relied on if the FI has actual or constructive knowledge that the assertion is incorrect or unreliable.

Self-certification is unnecessary where the where the accountholder's status can be determined from a GIIN

Reporting timeline and Tax Information Authority

The DD should have identified whether its account holders are:

(i) U.S. tax residents; or

(ii) Non-U.S. entities controlled by U.S. tax residents.

In 2014, FIs must report the identity and account balance (or value at year end) of such accountholders. FIs must also report any payments made to Nonparticipating FIs

In 2015, information on gross income credited to custodial and depository accounts is required

In 2016, information on proceeds of property sales or redemptions credited to custodial accounts is required.

The required timing of these reports will be set out in the forthcoming Cayman Islands legislation implementing the Cayman IGA.

FATCA Action Plan

Cayman Islands entities

Step 1

Identify whether the entity will qualify as a Reporting FI.

Step 2

Identify whether the entity could potentially suffer FATCA withholding tax – i.e. will it have any income paid directly or indirectly from a U.S. payor.

Step 3

If the entity is a Reporting FI:

  • Register on the IRS FATCA Portal to obtain a GIIN.
  • Implement due diligence without further delay

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.