Ireland: Impact Of FATCA On Irish Funds And Securitisation Companies

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.

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