WHAT IS FACTA?

FATCA or the Foreign Account Tax Compliance Act is US legislation in force from 1 July 2014, requiring financial institutions (“FIs”) globally to report on their US taxable accountholders or suffer a 30% withholding tax on US source income. To overcome confidentiality and other restrictions imposed on non-US FIs by their domestic laws, the US has entered into a network of inter-governmental agreements (“IGAs”), by which the contracting jurisdictions have agreed to implement FATCA.  The Cayman Islands (“Cayman”) entered into a Model 1 IGA with the US in November 2013 (“US IGA”).

WHAT IS UK FATCA?

Cayman also entered into an IGA with the UK in November 2013 (“UK IGA”) pursuant to which it is required to implement equivalent reporting requirements by FIs in respect of their UK taxable accountholders.

WHAT CAYMAN LEGISLATION IMPLEMENTS FATCA?

Cayman has amended its Tax Information Authority Law (“TIA Law”) to accommodate the automatic exchange of tax information required by FATCA, and on 4 July 2014 introduced the following regulations under the TIA Law to implement the US IGA and the UK IGA:

  • The Tax Information Authority (International Tax Compliance) (United States of America) Regulations, 2014 (“US Regs”); and
  • The Tax Information Authority (International Tax Compliance) (United Kingdom) Regulations, 2014 (“UK Regs”).

The upshot is that Cayman FIs will report to the Tax Information Authority (“TIA”) in Cayman in accordance with the US Regs and the UK Regs, which will transmit the information to the US Internal Revenue Service (“IRS”) or Her Majesty’s Revenue and Customs in the UK (“HMRC”), as applicable, rather than Cayman FIs reporting directly to the IRS or HMRC.

FATCA TERMINOLOGY

FATCA, the related US Treasury Regulations (“Treasury Regs”), and the IGAs and domestic implementing legislation they have spawned have created almost impenetrable layers of obscure terminology.  To make matters worse, the US Regs and UK Regs permit FIs to import definitions directly from the Treasury Regs or even the OECD’s Common Reporting Standard for the Automatic Exchange of Financial Account Information.

However, we can hope to cut through some of the obscurity with the following abbreviated definitions of a few commonly used terms:

  • Specified US Person: a US citizen or tax resident, excluding certain listed or tax exempt entities, government bodies, banks and certain brokers and dealers.
  • Specified UK Person: a UK tax resident, excluding certain listed entities, depositary institutions, brokers and dealers, government bodies and UK retirement schemes.
  • NFFE: a non-US/non-UK tax resident entity, as applicable, that is not an FI.
  • Active NFFE: an NFFE that receives less than half its income as passive income and certain listed, government, non-commercial and holding entities.
  • Passive NFFE: an NFFE that is not an Active NFFE.
  • Nonparticipating FI: (US Regs only) an FI that is non-compliant with FATCA.
  • Pre-existing Accounts: accounts existing on 30 June 2014.

WHICH CAYMAN FUNDS ARE AFFECTED?

All Cayman funds are required to report to the TIA under the US Regs and the UK Regs (“Reporting FIs”), whether established as a company, a limited partnership or a trust, open or closed-ended, regulated or unregulated, and regardless of their investment strategy (hedge fund, private equity fund, venture capital fund etc.), unless they fall within one of the exempted categories in Annex II to the US IGA or the UK IGA (“Exempted Persons”). The exempted categories relevant to funds are, in summary:

  • Certain pension funds.
  • Funds whose investors are all Exempted Persons.
  • Trusts with a Reporting FI trustee reporting on the trust’s behalf.
  • Funds with a registered sponsor complying on their behalf.
  • Funds regulated by the Cayman Islands Monetary Authority (“CIMA”), all the investors in which:
  • are Exempted  Persons;
  • are Active NFFEs (essentially, entities that are not FIs and don’t receive the majority of their income as passive income);
  • (US IGA only) are US citizens or tax residents other than Specified US Persons; or
  • (US IGA only) are FIs that are not Nonparticipating FIs.

A fund that is an Exempted Person will nonetheless be a Reporting FI if it registers with the IRS for a global intermediary identification number (“GIIN”).

WHAT ARE A REPORTING FI’S OBLIGATIONS?

Each Reporting FI must:

  • Apply for a GIIN (on the IRS’s FATCA registration portal) by 31 December 2014 (or, if later, within 30 days of commencing business).
  • Establish due diligence procedures (see below) to identify:
  • Reportable Accounts (see below); and
  • The jurisdiction of residence of each investor (and US citizenship, if applicable).
  • Maintain records of due diligence undertaken for 6 years after the relevant year.
  • Notify the TIA by 31 March 2015 (or 31 March in the first year it becomes a Reporting FI) that it is a Reporting FI (providing its name, status as an “Investment Entity”, GIIN and point of contact).
  • For 2015 and 2016 establish procedures to identify allocations/payments to investors who are Nonparticipating FIs.
  • Submit a return to the TIA by 31 May annually in respect of the prior calendar year (commencing 31 May 2015) setting out:
  • GIIN number.
  • Confirmation it is not under common control with a Non-Participating FI (or certain additional information if it is).
  • Required information on each Reportable Account (see below) or a statement that there are no Reportable Accounts.
  • In respect of 2015 and 2016, details of any allocations/payments to Nonparticipating FIs, or confirmation there were none.
  • Notify the TIA if any of its previously notified details change.

WHAT INVESTORS ARE REPORTABLE ACCOUNTS?

Reportable Accounts include investors who are:

  • Specified US Persons (US Regs).
  • Specified UK Persons (UK Regs). Relevant exemptions include:
  • Deceased investors and their representatives.
  • Investors with Pre-existing Accounts not exceeding US$50,000 (individuals) or US$250,000 (entities) on 30 June 2014 (unless the account exceeds such limit on the last day of 2015 or any subsequent year) (“De-minimis Pre-Existing Accounts”).

WHAT INFORMATION MUST BE PROVIDED ON REPORTABLE ACCOUNTS?

The following information must be provided on each Reportable Account:

  • Investor’s name and address.
  • Investor’s US federal taxpayer identification number (“TIN”) or UK national insurance number (“NIN”), as applicable (not required until 2017 for Pre-existing Accounts).
  • Account number or functional equivalent.
  • Account balance at the end of the calendar year or when the account was closed during the year, if applicable.
  • Total gross credits during the year, or a statement that there were none.
  • (UK Regs only) If the investor is an individual, their date of birth (“DoB”).
  • If the investor is a Passive NFFE controlled by a Specified US Person/Specified UK Person (as applicable), that person’s name and address and, if an individual, their TIN and DoB/NIN and DoB (as applicable).

Note: an alternative reporting regime is available under the UK Regs for Reporting FIs with non-domiciled UK investors who have elected to be taxed by HMRC on a remittance basis.  The alternative regime focusses on remittances to and from the UK.

WHAT ARE THE DUE DILIGENCE OBLIGATIONS?

  • Investors with De-minimis Pre-existing Accounts: no requirements unless the FI elects to treat them as Reportable Accounts.
  • Other Investors with Pre-existing Accounts:
  • Individuals: seek indications it is a Specified US Person or a Specified UK Person by reviewing electronically searchable data, and paper files must also be reviewed if (a)  the account balance on that date exceeds US$1 million (or exceeds that amount on   the last day of 2015 or any subsequent year) and (b) the search would not reveal any of the following:
  • Nationality or residence status.
  • Current residence and mailing addresses on file.
  • Current telephone number on file.
  • Any standing instruction to transfer funds.
  • Whether there is an “in-care-of ” or “hold mail” address.
  • Whether there is any power of attorney or signatory authority.

Any indications of the foregoing can be rebutted by a self-certification from an investor in the approved form.

  • Entities: review the anti-money laundering due diligence (“AML/KYC”) files (and for FIs, the GIINs on the published IRS list of foreign FIs) to determine if the accountholder is one of the following:
  • Specified US Person.
  • Passive NFFE controlled by Specified US Persons (if the account is over US$1 million, also obtain self-certification as to identity of controllers).
  • Nonparticipating FI.
  • New Investors on or after 1 July 2014:
  • Individuals: rely on self-certification in the approved form (unless the fund has reason to know the self-certification is incorrect or unreliable) to determine if the investor is a Reportable Account and check reasonableness against any AML/KYC documents obtained.
  • Entities: rely on self-certification in the approved form (unless the fund has reason  to know the self-certification is incorrect or unreliable) and/or the investor’s GIIN, if applicable, to determine if the investor is a Reportable Account or a Nonparticipating FI.

WHAT POWERS DOES THE TIA HAVE?

The TIA may require a Reporting FI to provide or make available for inspection (by bringing to Cayman, if necessary) any relevant books, documents or other records, or electronically stored information to determine if any submitted information is correct and complete.

WHAT ARE THE PENALTIES FOR NON-COMPLIANCE?

  • Non-compliance is generally an offence punishable by a fine of US$6,100 and/or 2 years’ imprisonment.
  • Directors, officers, managers, partners or trustees of an entity who consent to or connive in an offence or where an offence is attributable to their neglect, will also be guilty of the offence and subject to the same penalties.

CAN A REPORTING FI DELEGATE ITS FATCA RESPONSIBILITIES?

Both the US Regs and the UK Regs permit a Reporting FI to delegate its responsibilities to a third party, provided it:

  • retains access to and is able to produce the records and documentary evidence used to identify and report on Reportable Accounts; and
  • will remain liable for any failure by the third party to comply with those responsibilities.