The US Foreign Account Tax Compliance Act ("FATCA"),
likely to be implemented as of 2013, will have considerable effects
on the withholding tax duty of the profits and income, contract
documentation and investment structures relating to the investments
made in the US. The purpose of FATCA is to prevent the US investors
from avoiding US taxation by making investments in the US via
companies tax resident abroad.
The most crucial consequence of the implementation of FATCA is the
withholding tax imposed to a foreign financial institution
("FFI") at the rate of 30 per cent based on the income
and profit derived from the US, indirectly or directly. The concept
of the FFI is deemed to cover e.g. entities accepting deposits in
the ordinary course of banking or similar business and entities,
the substantial business of which consists of holding financial
assets for the account of others. Consequently, e.g. Finnish
investment funds, fund management companies and investment banks
may be subject to said regulation. Currently, it seems that the
withholding tax duty will be applied to payments made as of the
beginning of 2014. For example, currently, dividends received by a
Finnish bank from a US company has been subject to withholding tax
of 15 per cent. As of the implementation of FATCA, the respective
dividends may be subject to withholding tax of 30 per cent.
Based on FATCA, the withholding tax duty can be avoided if a FFI
undertakes an agreement with US tax authorities containing
information exchange duty and follows regulated procedural
requirements. However, even profit distributions by such
participating foreign financial institutions ("PFFI") are
subject to withholding tax, if the payments are distributed forward
to other FFIs.
According to current information, the FFI must enter into said
agreement with the IRS by June 30, 2013. In addition to FFIs, FATCA
places reporting duties on other foreign entities owned totally or
partly by US persons and on US persons holding certain kinds of
financial assets or investments abroad. Some few FFIs are already
exempted from the withholding tax duty based on the proposed
legislation without having to sign the FFI agreement with the IRS.
Currently, the type of such FFIs have not been confirmed, however,
e.g. ETF funds could belong to the exempted FFIs.
Exact time of coming into effect, relation to the existing tax
treaties and the accurate scope of application of FATCA are hence
yet to be specified. Based on the recent announcement by IRS, the
publication of the proposed regulation version of FATCA will be
postponed to take place in 2012. However, the implementation of
FATCA should be taken into account already now in case a taxpayer
has or plans to make direct or indirect investments in the US.
Evaluation of the effects of FATCA may be of a great importance for
e.g. funds having investments in US, including funds of funds
investing in the US indirectly through other funds. In addition,
the final form of the regulation regarding exempted FFIs, i.e.,
what types of entities are exempted, if any, will affect the
position of foreign investors.
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.