The US Foreign Account Tax Compliance Act 2009 (FATCA) takes effect from 1 January 2013. This new regime will amend the existing system of US tax withholding and will have major implications for all financial services institutions (which may include non-US domiciled investment vehicles (“Funds”)) that have US investors or clients and/or which receive US source investment income.
In summary, the effect of the new rules will be as follows:
- a punitive 30% rate of US withholding tax will be applied to “US source investment income” of Funds. This will include interest, dividend, royalty and fee income and proceeds of disposal in respect of US investments made by Funds;
- in order to avoid this 30% US withholding tax, unless the Fund falls within an exemption from the new rules the Fund will need to enter into an information reporting agreement with the US Treasury. This would require the Fund to comply with certain due diligence and information collection requirements with regard to its investors and to make annual reports to the Internal Revenue Service (IRS) to include information on its US investors; and
- there will be a form of exemption from the new FATCA rules for investments in Funds that are regularly traded on “established” securities markets and (it is expected) a more wide-ranging exemption for widely-held collective investment vehicles.