The Foreign Account Tax Compliance Act ("FATCA") is US legislation designed to enable the US Internal Revenue Service ("IRS") to obtain information about the income of US persons from financial institutions outside the US. FATCA will affect Irish investment funds and securitisation companies and add to their existing compliance obligations. This update explains the practical impact of FATCA on these entities and what steps they should take to comply.
Overview of FATCA
FATCA requires non-US foreign financial institutions ("FFIs") to register with the IRS and report details of "Financial Accounts" held by "Specified US Persons" and certain non-US entities in which a Specified US person has a controlling interest ("US Reportable Account") unless the FFI falls within an exempt or "deemed compliant" category. The concept of "Financial Account" is broadly defined and an FFI should consider which of its contractual arrangements fall within its scope and are therefore potentially reportable. If an FFI does not comply, a 30% withholding may be imposed on payments to the FFI from US withholding agents of US source income and the proceeds of sale of assets producing such income.
FATCA in Ireland
Ireland has signed a Model 1 reciprocal inter-governmental
agreement ("IGA") with the US, and this
provides that an FFI based in Ireland which is not exempt or deemed
compliant ("Irish Reporting FI") shall
report US Reportable Accounts directly to the Irish Revenue
Commissioners ("Revenue") who will then
exchange information with the IRS. The Irish Reporting FI
would also need to register with the IRS and obtain a Global
Intermediary Identification Number
("GIIN") (see "GIIN
Registration" below).
It is intended that Irish regulations will be enacted into Irish
law by May 2014, accompanied by detailed guidance notes, so that
the IGA is fully effective in Ireland from 1 July 2014 (at present
the regulations and guidance notes are in draft form).
An Irish Reporting FI will need to identify its US Reportable
Accounts using the detailed due diligence procedures set out in
Annex I of the IGA and submit a return to Revenue on or before 30
June each year, starting in 2015. If an Irish Reporting FI has no
US Reportable Accounts, it must submit a nil return to Revenue. The
due diligence procedure for new accounts opened on or after 1 July
2014 should be put in place by that relevant date, and due
diligence of existing accounts opened before that date should be
completed by 30 June 2015 for high value accounts and 30 June 2016
for all other accounts.
Application of FATCA to Irish investment vehicles
The two most common Irish investment vehicles are a regulated investment fund authorised by the Central Bank of Ireland ("fund") and a securitisation or "section 110" company ("section 110 company"). Both would typically be FFIs by virtue of being an "Investment Entity" and would therefore need to comply with the registration and reporting obligations set out above. However, their obligations may be reduced to the extent that the interests of investors are held by or through or reported by another FFI or the securities or units are listed on a recognised stock exchange. The directors of the vehicle must therefore consider the scope of their FATCA obligations, whether they need to engage a service provider to undertake FATCA reporting and what changes to make to their prospectus documentation and subscription forms.
Application of FATCA to Funds
A fund may be exempt from FATCA registration and reporting if it
qualifies as a "Regulated Collective Investment Vehicle".
This will be the case if all of the interests in the fund are held
by Reporting FIs or if another "Investment Entity" is
required to report interests in the fund. This may well be the case
in practice in Ireland as funds must have authorised managers and
administrators and would often have shares/units held through a
clearing system or by institutional investors. To avoid withholding
on US source payments it receives in this case, the fund would
provide US withholding agents with a W8 form.
If the fund is not within the exemption for Regulated Collective
Investment Vehicles, it will have the normal FATCA registration and
reporting obligations of an Irish Reporting FI (see "GIIN
Registration" below). On the basis of Revenue's draft
FATCA guidance, it would have to report all directly held interests
that are not listed on a recognised stock exchange or held through
intermediaries that are Reporting FIs. The fund should engage its
administrator or other appropriate third party to undertake its due
diligence and reporting obligations as either a delegate or a
sponsor (though it will remain responsible for any failure by that
service provider).
Application of FATCA to Section 110 companies
A section 110 company is often the issuer in a CLO or other
securitisation transaction, but is also used in practice by
investors for a wide range of asset-backed transactions. It issues
debt securities which would typically be listed on a recognised
stock exchange for Irish tax reasons.
An existing section 110 company may be 'certified deemed
compliant' (and therefore exempt from FATCA registration and
reporting) if it is regarded as a Limited Life Debt Investment
Entity ("LLDIE"). The definition
of an LLDIE has recently been changed and although some points are
subject to further clarification, the broad concept is that this
exemption will apply to an entity that has issued all its
securities before 17 January 2013 pursuant to a trust indenture or
similar agreement for the purpose of purchasing specific types of
debt and which must repay its investors at a set date or period
following maturity of the last asset. With respect to the
underlying assets of the LLDIE, they must "substantially
all" consist of debt instruments or interests therein. Initial
indications are that this means 80% by value. All payments to
investors must be cleared through a clearing system or custodial
institution, or be made through a paying/transfer agent, that is,
in either case, a participating FI, reporting FI or a US financial
institution. The final condition, which is subject to official
confirmation, is that the trust indenture/trust deed has not
already given authority to the trustee (or equivalent) to fulfil
the obligations of the section 110 company to comply with FATCA
(i.e. by giving the trustee authority to obtain investor
information and make the necessary reporting).
To the extent that the LLDIE exemption is not applicable, then a
section 110 company will not be able to avail itself of the
Regulated Collective Investment Vehicle exemption as it is not
regulated by the Central Bank of Ireland. The section 110 company
would need to register with the IRS (see "GIIN
Registration" below) and report details of its US Reportable
Accounts but, based on Revenue's draft FATCA guidance, it would
not need to report securities listed on a recognised stock
exchange. If all its US Reportable Accounts are listed securities,
and there are no other US Reportable Accounts by virtue of other
contractual arrangements entered into, it would submit a nil return
to Revenue. In our view, this is likely to be beneficial to
many Irish section 110 companies and may be relied upon in practice
frequently in the future.
In respect of its unlisted securities or payment obligations in
respect of other "Financial Accounts", the directors
should engage with the note trustee or other service provider to
manage FATCA compliance. Payments by a section 110 company would
often be made to a paying agent and/or a clearing system (before
reaching the ultimate investor) in which case the reporting
obligation may pass to them.
GIIN Registration
An Irish Reporting FI should register with the IRS (not Revenue)
on their FATCA internet portal or by manual submission of Form 8957
in order to obtain a GIIN number and get on a list of FFIs
maintained by the IRS. The GIIN would be provided to US
counterparties who would be entitled to pay the Irish Reporting FI
free of FATCA withholding by verifying its status on the FFI
list.
The Irish Reporting FI must register before the end of 2014 so that
it appears on the FFI list published on 1 January 2015. However, as
a practical matter, it may choose to register sooner and should
take advice on that. In the meantime, from 1 July 2014 when FATCA
withholding first applies, an Irish Reporting FI can self-certify
its status on IRS Form W-8BEN-E to avoid being withheld upon by US
counterparties. This form has not yet been finalised.
When registering for a GIIN an Irish Reporting FI would need to
nominate a responsible officer as a point of contact to receive
information related to the registration. This is an
individual with authority under Irish law to confirm the Irish
Reporting FI's status and submit the information provided on
its behalf. In the case of a company or fund, the responsible
officer could be one of the directors unless registration has been
validly delegated to a third party.
Practical action points
Given the impending deadlines (see below) and preparation
required to comply with FATCA, directors of funds and section 110
companies should do the following:
(a) Engage their legal advisers to ascertain the scope of
their FATCA obligations.
(b) Enquire of existing service providers as to whether they
will undertake the required FATCA registration, due diligence and
reporting and what their proposed fee structure is.
(c) Review and, if necessary, amend their prospectus,
subscription and constitutional documentation.
FATCA deadlines for Irish Reporting FI
1 July 2014 | The due diligence procedure in IGA Annex I must be in place for accounts opened after this date |
30 Dec 2014 | Obtain GIIN before end of 2014 for avoidance of withholding on US source payments |
30 June 2015 | Complete due diligence of high value individual accounts opened
before 30 June 2014 Submit first FATCA return to Revenue |
30 June 2016 | Complete due diligence of all other accounts opened before 30 June 2014 |
Documentation
Depending on the scope of their FATCA obligations, a fund or
section 110 company should contact their legal advisers and review
their prospectus documentation, subscription forms and
constitutional documentation to ensure they have the power to do
the following:
(a) Collect the required information from investors and report
this to Revenue.
(b) Take action that is reasonable or advisable in order to
comply with FATCA.
(c) Seek an indemnity from investors for any fine, penalty or
withholding suffered as a result of investor action or
inaction.
(d) Redeem interests held by investors that do not provide the
correct FATCA information.
(e) Pass on to investors the cost of compliance with FATCA, if
appropriate.
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.