The Foreign Account Tax Compliance Act (known as "FATCA") was signed into law on 18 March 2010.
The main purpose of FATCA is to ensure the US Inland Revenue Service ("IRS") can identify and collect tax from US citizens and residents holding financial assets outside the US.
Who is within scope?
FATCA will apply to all foreign financial institutions ("FFIs"). The definition of FFIs in the legislation is broad and includes investment funds, hedge funds, private equity funds, securitisation vehicles, custodians and banks.
FATCA will also apply to certain nonfinancial foreign entities ("NFFEs") which are foreign entities with one or more substantial US owners (a US person that owns more than 10% of the vote or value of the NFFE).
What is its impact?
FATCA provides for a 30% withholding tax on certain payments (such as US source interest and dividends) made to FFIs. The same 30% withholding tax will also apply to gross sale proceeds from the sale of relevant US property.
Generally, FFIs can avoid the 30% withholding tax by agreeing with the IRS to disclose certain information on US accounts.
IGA / Registration with the IRS
In December 2012, an intergovernmental agreement ("IGA") was signed between the US and Ireland to facilitate the implementation of FATCA. The IGA simplifies the process for entities resident in Ireland by providing for automatic reporting and exchange of information in relation to accounts held in Irish financial institutions (including certain collective investment schemes domiciled in Ireland) by US persons and the reciprocal exchange of information regarding US financial accounts held by Irish residents.
Provided the Irish financial institution ("Irish FI") complies with certain due diligence requirements and reports prescribed information to the Revenue Commissioners in Ireland (the "Revenue Commissioners") it will be relieved of the burden of entering into an agreement with, and reporting directly to, the IRS, and will not need to impose the 30% US withholding tax on US sourced income.
The Revenue Commissioners are in the process of finalising their "Financial Accounts Reporting Regulations" (the "FATCA Regulations") and supporting draft guidance notes on the implementation of FATCA in Ireland which, once finalised, will provide further clarity on reporting.
Notwithstanding the IGA, under the draft FATCA Regulations Irish FIs (including Irish collective investment schemes funds) will be required to register with the IRS. On 19 August 2013, the IRS opened an online registration system for FFIs to register with the IRS under the FATCA. This registration system enables FFIs to register, modify, or add registration information with respect to FATCA and obtain a global intermediary identification number ("GIIN").
The registration system allows FFIs to complete draft registrations until 31 December 2013, enabling FFIs to become familiar with the FATCA registration website, to input preliminary information, and to refine that information. Starting in January 2014, FFIs will be expected to finalise their registration information by logging into their accounts, making any necessary changes and submitting the information as final. As registrations are finalised and approved in 2014, registering FFIs will receive a notice of registration acceptance and will be issued a GIIN.
The IRS will post electronically the first IRS Foreign Financial Institution (FFI) List in June 2014, and will update the list monthly. To ensure inclusion in the June 2014 IRS FFI List, FFIs will need to finalise their registrations by 25 April 2014. As Ireland is a Model 1 IGA Jurisdiction Irish FIs must provide a GIIN prior to 1 January 2015.
While the IGA removes the requirement to deduct 30% withholding tax for Irish FIs, the requirement to identify, report and maintain fund and investor detail under FATCA still applies.
These FATCA requirements will be introduced in three stages:
- first, Irish FIs must register with the IRS to obtain a GIIN;
- second, for new investors, Irish FIs will need to introduce revised account opening procedures to identify US accounts and gather the necessary information from new investors under FATCA. The deadline for the introduction of these revised account opening procedures has been extended by six months to 1 July 2014;
- third, for existing investor accounts, due diligence must be carried out by Irish FIs by 31 December 2014. Again, this deadline has been extended by six months from the deadline previously indicated by the IRS.
In terms of next steps for Irish funds,we recommend that funds review their prospectus disclosures and subscription application forms to ensure that the necessary information about US persons can be gathered from investors.
Also, the constitutive documents of the fund (such as the memorandum and articles of association for a corporate fund or trust deed for a unit trust) should be reviewed to ensure that the drafting is broad enough to allow the fund to redeem shares or units to cover any tax liability that may arise under FATCA. For example, where a fund suffers a penalty under FATCA because a shareholder/unitholder has not provided the necessary information or documentation, the fund should be able to redeem shares/units to cover this liability.
Finally, Irish funds should liaise with their service providers to ensure that registration through the IRS portal is completed in advance of the April 2014 deadline should they wish to be included on the first approved FFI list published by the IRS.
This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.