What is FATCA?
The Foreign Account Tax Compliance Act (FATCA), introduced in the US in 2010, imposes mandatory reporting obligations on what are described as foreign financial institutions (FFIs) and certain Non-Financial Foreign Entities (NFFEs).
The main aim of the regulatory regime is to combat tax evasion by US citizens through the use of foreign accounts but it also has wide implications for trustees of private trusts in Ireland.
How will FATCA impact Trustees resident in Ireland?
Trustees resident in Ireland may have obligations under FATCA even where there is no US settlor, no US assets, no US trustees and no US beneficiaries.
However Trustees resident in Ireland will have the benefit of coming within the Ireland / US Intergovernmental Agreement (IGA) which provides for the automatic reporting and exchange of information between Ireland and the US in relation to accounts held in Irish financial institutions by US persons. Irish financial institutions will report directly to the Irish Revenue Commissioners in respect of accounts held by US persons. The Irish Revenue will in turn exchange the information received with the IRS in the US.
What are the implications of non-compliance for Trustees?
Failure to comply with FATCA will result in a 30% withholding tax penalty being applied on certain sources of investment income beginning on a specified date now extended to 1 January 2015 where FFIs can demonstrate they are making reasonable efforts to comply.
What type of trust structures are deemed compliant?
Charitable trusts and pension trusts are deemed compliant FFIs meaning no further obligations should arise under FATCA. A full list of deemed compliant FFIs is contained in Annex II of the IGA.
What type of trust structures are not deemed compliant?
Private trust arrangements can come within the definition of FFIs under the IGA.
Revenue has confirmed that a trust structure will be a FFI in either of the scenarios below:
- Where the trust is professionally managed i.e. has a corporate trustee
- Where the trustee has engaged a financial institution to manage the financial assets of the trust
A trust which is a FFI is obliged to register with the IRS and will need to complete due diligence to determine whether the financial accounts managed by the trustee are reportable to Revenue under FATCA.
Registration of FFIs
FFIs must register with the IRS directly to obtain a Global Intermediaries Identification Number (“GIIN”). Registration with the IRS can be completed online by completing Form 8957. An FFI’s GIIN may be sought by other financial institutions as evidence that the FFI is FATCA compliant. This will ensure that the 30% withholding tax is not applied on US source income/US beneficially owned income.
All FFIs must be registered on the IRS list to be published on 31 December 2014. Withholding tax will be applied from 1 January 2015 where FFIs do not appear on the IRS list. To ensure that an FFI is included on the IRS December List, registration should be completed before 24 October 2014.
Going forward, trusts which are FFIs will be obliged to complete due diligence in respect of the composition of the trust and report to Revenue. The reporting deadline is 30 June 2015.
Trusts which are not FFIs are not outside the reach of FATCA and can be classified as NFFEs. A NFFE includes trusts with lay / individual trustees which hold passive assets such as a property or shares directly in a company.
Unlike FFIs, a trust which is an NFFE should not have an obligation to register with the IRS or to report to the Revenue. However, NFFEs will need to provide a self-certification to any relevant FFIs with which they hold accounts (passive income accounts) to ensure that the 30% withholding tax is not applied.
The following persons should take steps now to take advice and consider the extent of their obligations under FATCA:
- Any individual / trust company which acts as a trustee
- Any firm providing trustee services who comes within the definition of an FFI
- Any solicitor / accountant who has clients in the categories above
Anyone concerned with possible FATCA obligations arising for trusts should consult their tax advisers in a timely manner to ensure that any obligations are met in advance of the deadlines.