South Africa: The Impact Of FATCA On Investment Funds

Last Updated: 6 September 2011
Article by Shayne Krige

The United States Foreign Account Tax Compliance Act (FATCA) is the latest salvo fired by the United States (US) against offshore structures used to avoid US tax.

Foreign financial service providers bear the collateral damage in this latest battle and if, as anticipated, the law is implemented in its current form, it will have important consequences for South African financial service providers, including investment funds.

The aim of FATCA is to clamp down on Americans who use foreign structures to avoid paying US tax. In going after these structures, the US tax authorities face the significant practical issue of how to obtain information about structures set up outside their jurisdiction.

Recent experiences in Abbottabad notwithstanding, the US cannot enforce its laws in foreign countries and so must turn to persuasion. By way of coaxing information about foreign structures out of foreign financial institutions (FFIs), FATCA imposes a withholding tax on all uncooperative FFIs and ultimately excludes them from the US securities market.

Certain provisions of FATCA come into force next year and its impact goes well beyond tax issues extending to compliance, internal controls, IT systems, service provider relations and customer operations.

Who is affected?

The definition of an FFI under the Act is extremely broad and includes banks, trust companies, custodians and any entity involved in investing, reinvesting or trading in securities, partnerships or commodities. Investment funds are therefore impacted.

How FA TCA affects investment funds

Investment funds, as FFIs, are "invited" to enter into an agreement with the IRS in terms of which they undertake to institute procedures to identify US customers and report their investments to the IRS.

Identification of US accounts

The fund must identify all interests in the fund held directly or indirectly by "US Persons".

Most investment fund administrators currently store information about the addresses of investors during the subscription phase, but this information invariably relates to the registered holder of interests in the fund rather than the ultimate beneficial owner.

Some are required to collect information about the ultimate beneficial owner but this is collected in accordance with the administrator's own money laundering obligations which will in most cases not dovetail with the FATCA requirements. It is also generally stored separately and the circumstances in which it can be disclosed will be limited.

As a result, most funds will, as a minimum, have to go back to their investors to find out whether any of them are holding as nominees or intermediaries for US Persons.

Obtaining waivers from investors

FATCA obliges the fund to obtain a waiver from each investor so that it can report the required data to the IRS. This applies not only to investors who are US Persons but each and every investor in the fund. If an investor refuses to allow the fund to report information about it to the IRS, even if the investor is not a US Person, the fund must close the account, i.e. forcibly redeem the investor.

This creates a host of problems for funds such as:

  • Investors may have valid grounds, unrelated to US tax evasion, for not wishing to give personal information to the IRS.
  • The fund itself may be subject to data protection rules that prohibit it from supplying this information even if it does hold a waiver.
  • The contract the fund has with investors may not allow forced redemptions in this context.
  • The South African Consumer Protection Act (CPA) contains a prohibition on unfair and unjust terms. Terms that allow the fund to terminate the investment in these circumstances may well breach the CPA.

Annual reporting

The record-keeping and reporting requirements of FATCA are potentially the most burdensome and costly compliance issues that FATCA raises. Funds are required to supply the IRS with certain information about US investors on an annual basis

Most funds and their administrators will not currently have systems in place capable of collecting and providing all of this information to the IRS in the requisite format. Major changes will need to be made to the IT systems used by funds and their administrators to collect and report this information.

Many South African businesses are still grappling with multiple corporate record keeping systems in the context of the inconsistencies between the Income Tax Act and new Companies Act and the addition of another record keeping layer will exacerbate the problems FFIs currently face.


Any FFI that does not sign an agreement with the IRS will be subjected to a 30% withholding on all payments from US payors. This withholding is not limited only to US revenue. The 30% withholding is payable on any payment routed via a US payor irrespective of the original provenance of the payment.

Unlike the European Union Savings Tax Directive, the withholding under FATCA is not an alternative to compliance. In addition to the imposition of the withholding, the Act requires financial institutions to close the accounts of any FFI that fails to sign an agreement with the IRS. This ultimately means exclusion from the US securities market.

If an FFI does sign an agreement with the IRS but specific investors refuse to provide information, the withholding will only apply to payments on behalf of non-compliant investors. A fund would therefore need systems in place to allocate liabilities from gross receipts to specific investors only. This may in turn impact the reporting of the fund's net asset value and require formal segregation of compliant from non-compliant investors within the fund.

Although the Act does allow the 30% withholding to be made further upstream by an FFI that has an agreement with the IRS, this is not a viable alternative for funds.

The challenges

Certain particular issues relating to the application of FATCA to investment funds have been raised with the US Treasury, but authorities have not provided any significant guidance to date other than to make it clear that they do not accept that there are fundamental issues with the legislation and do not anticipate significant changes.

With FATCA coming into force next year, many funds have already started:

  • restructuring so that they can offer sub-funds reserved exclusively for US investments (or US Persons) and eliminate FATCA issues for funds that do not trade in US investments;
  • amending their fund documentation to address the specific issues raised by FATCA;
  • upgrading their internal systems to meet the new compliance standards;
  • consulting with their administrators with a view to outsourcing FATCA compliance; and
  • consulting with their banks, custodians and prime brokers to assess their readiness to deal with FATCA and the impact on the services they receive.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.