Against widespread speculation that the IRS might provide an
additional delay to the Foreign Account Tax Compliance Act's
(FATCA) withholding provisions by extending FATCA deadlines, FATCA
withholding is confirmed to go into effect on July 1. Broadly,
FATCA requires foreign entities to identify, document and report
their U.S. account holders to the IRS or else face a 30 percent
withholding tax applicable to certain U.S.-source payments made to
the foreign entity. Under FATCA, each foreign entity is classified
as either a Foreign Financial Institution (FFI) or a Nonfinancial
Foreign Entity (NFFE). The classification determines the foreign
entity's reporting, due diligence and withholding obligations
with respect to its U.S. account holders.
Any FFI that is not exempt or deemed compliant must register with
the IRS via an online portal by April 25 and obtain a global
intermediary identification number (GIIN) to avoid withholding on
post-June 30 payments of certain U.S.-source income.
All foreign trusts, foreign trustees and underlying foreign
holding companies must act now to determine their FATCA
classification. It is not at all uncommon for the foreign trustee,
foreign trust and underlying foreign holding company each to be
created in a different jurisdiction, and the presence or absence of
an intergovernmental agreement (IGA) with that jurisdiction can
further complicate matters. There are currently two types of IGAs,
Model 1 and Model 2, and both modify the obligations of FFIs in the
jurisdictions that have them.
Either registration as an FFI or self-certification as an NFFE may
be required for (i) the trust; (ii) the trustee; and (iii) any
underlying holding company. However, a foreign entity will be
exempt from registration if it is a certified deemed-compliant FFI,
such as a sponsored investment entity, a sponsored closely held
investment vehicle or an owner-documented FFI, in each case by
agreeing to have another entity do the FATCA reporting on its
behalf.
These rules are complicated and replete with conditions and
exceptions. Day Pitney is actively advising trustees regarding
their ongoing compliance requirements and those for their foreign
trusts and underlying holding companies. Please contact us if you
have any questions.
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.
