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.