The Foreign Account Tax Compliance Act (“FATCA”) generally requires that non-U.S. persons who receive U.S. source payments complete IRS form W-8 to certify their non-U.S. tax status. Non-U.S. financial institutions must also register with the IRS and agree to comply with certain due diligence, reporting and withholding requirements. In addition, intergovernmental agreements (“IGAs”) between the U.S. and numerous foreign countries impose alternative due diligence and reporting requirements on financial institutions resident in those countries. This update discusses how these rules apply to trusts.
The Operation of FATCA: An Overview
Section 1471 of the Internal Revenue Code (the “Code”) provides for a 30% withholding on passive investment income paid to “foreign financial institutions” (“FFI”s) from U.S. sources. To avoid withholding, an FFI must report—either to the IRS or to the relevant authorities in the jurisdiction in which it is located—income earned by U.S. account holders, along with identifying information as to that U.S. account holder.
Section 1472 of the Code provides for withholding on similar payments made to “non-financial foreign entities” (“NFFEs”), unless the beneficial owner of the NFFE certifies that it is not a U.S. person or provides certain information as to certain U.S. owners or controlling persons.
Foreign Trust Treatment: FFI or NFFE?
Is a foreign trust an FFI or NFFE? It depends on the structure of the trust. The FATCA regulations conclude that foreign trusts with corporate trustees are FFIs. Foreign trusts with only individual trustees will be FFIs if they hire professional investment advisors. If they do not, they will be NFFEs. Private trust companies that conduct their own investing are evaluated on a case-by-case basis.
FFIs and NFFEs
An FFI (including a trust) may comply with FATCA by entering into an agreement with the U.S. Treasury (a “participating” FFI), or much more commonly by complying with the rules of the IGA in the country where the trustee is located. In either case, the trustee will register for a global intermediary identification numbers (“GIIN”) with the IRS and report all of the information required by the IRS with respect to the trust it manages.
If the trustee is a corporate entity that is also an FFI, the corporate trustee will obtain two GIINs: one GIIN to use for its own reporting as an FFI and a second GIIN (a “Sponsoring GIIN”) to report on behalf of all trusts for which it serves as trustee. Regardless of the number of trusts for which the corporate trustee serves as a sponsoring entity, the corporate trustee will only obtain one Sponsoring GIIN.
For a trust with an individual trustee that is treated as an FFI by virtue of retaining a professional investment advisor, the trustee will need to obtain a GIIN for that trust. If an individual trustee needs to report on behalf of multiple trusts, the individual will need to obtain a separate GIIN for each trust.
By comparison, NFFEs, unlike FFIs, are not required to enter into an agreement with the U.S. Treasury (or any local competent authority) and do not need to acquire a GIIN. Rather, an NFFE must instead self-certify as to its FATCA classification and identify substantial U.S. owners or, in some cases, controlling U.S. persons (if any) in a form provided to each financial institution maintaining its accounts.
Upcoming Dates and Deadline
The FATCA enforcement regime has been developing over the last few years. The deadlines that apply to each trust depend on the jurisdiction in which the trust is located.
In most jurisdictions, FFIs are required to report to the local authorities (called “Model 1” IGA jurisdictions), and the first reports are due to the local authorities no later than September 30, 2015. Please note, however, that IGAs may impose earlier reporting requirements.
For example, after several extensions the Cayman Islands, a Model 1 jurisdiction, imposed a registration deadline of May 29, 2015 for FFIs to register with the Cayman Tax Information Authority, if those FFIs intend to submit FATCA reports regarding certain U.S. reportable accounts maintained during 2014, and a reporting deadline of June 26, 2015 to make the actual report. The Bahamas, another Model 1 jurisdiction, imposes its first reporting deadline of August 17, 2015 to report certain U.S. reportable accounts maintained during 2014.
A few jurisdictions, such as Japan and Switzerland1, require FFIs to submit reports directly to the U.S. (called “Model 2” IGA jurisdictions). These reports to the U.S. are generally due by June 29, 2015 (for reporting with respect to calendar year 2014) and by March 31 of the year following the end of the relevant calendar year (for 2015 and later calendar years).
For individuals and entities that act as trustees of foreign trusts, there may be significant diligence and reporting requirements imposed as a result of FATCA. While many institutional trustees are familiar with these rules, individual trustees often are not.