In our three previous FATCA updates, we examined the proposed requirements relating to: (i) entity classification under the US IGA for Cayman Islands based Investment Entities; (ii) GIIN registration for a Reporting Financial Institution ("FI"); and (iii) due diligence obligations on Cayman Islands investment funds that are Reporting FIs.
Each of these updates can be viewed through the following links:
This update follows on closely from our prior Due Diligence update and should be read in conjunction with such alert. In addition, capitalised terms not otherwise defined herein have the same meaning given to them in our prior Due Diligence update.
Our focus in this update is to provide: (i) a high level summary of the relevant US and UK FATCA due-diligence compliance deadlines (including the IRS transitional measure announced in IRS Notice 2014-33); (ii) an update on the status of certain US and UK self-certification forms; and (iii) the current status of FATCA implementation and Common Reporting Standards ("CRS") in the Cayman Islands.
Due diligence completion deadlines
The timelines for implementing and completion of due diligence procedures on account holders vary depending on which of the following five categories the account holder (e.g. investor in an Investment Entity) falls within:
- Pre-Existing Individual (Lower Value) Accounts
For pre-existing individual accounts that were Lower Value Accounts as at 30 June 2014, all due diligence must be completed by 30 June 2016.
- Pre-Existing Individual (High Value) Accounts
For pre-existing individual investor accounts which were High Value Accounts as at 30 June 2014, due diligence must be completed by 30 June 2015, and for accounts which were not High Value Accounts as at 30 June 2014 but become so by 31 December 2015, or any subsequent year, due diligence must be completed within six months of the relevant year end.
- New Individual Accounts
For all new individual investor accounts opened on or after 1 July 2014, self-certification is required upon account opening to determine the tax residency of the investor. The reasonableness of such self-certification must be confirmed based on documentation collected in opening the account, including any AML/KYC documentation.
- Pre-existing Entity Accounts
If the pre-existing entity account had a balance of less than US$250,000 on 30 June 2014, there is no requirement to review such account until the account balance exceeds US$1,000,000.
If the balance did not exceed US$250,000, but exceeds US$1,000,000 on 31 December 2015, or any subsequent year, the review needs to be completed within six months of the relevant year end.
Where the pre-existing entity account had a balance of over US$250,000 on 30 June 2014, the review must be completed by 30 June 2016.
See also details below regarding IRS Notice 2014-33.
- New Entity Accounts
For all new entity investor accounts opened on or after 1 July 2014, identification must be carried out as part of the account opening.
See also details below regarding IRS Notice 2014-33.
IRS Notice 2014-33
- Entity Accounts
The IRS recently published IRS Notice 2014-33 which provides, inter alia, that new entity accounts opened on or after 1 July 2014 and before 1 January 2015 will be considered pre-existing accounts subject to the same pre-existing account remediation deadlines as under the current regulations (i.e. see point (4) above). The relief applies not only to pre-existing entity account holders, but to any obligation held by an entity that is "issued, opened or executed" on or after 1 July 2014 and before 1 January 2015. It should be noted that while such accounts can be treated as pre-existing accounts, they will not benefit from the US$250,000 exception for pre-existing entity accounts that are not required to be reviewed, identified or reported (i.e. the due diligence on an account opened between 1 July and 31 December 2014 must be completed by 30 June 2016).
We understand the Cayman Guidance Notes and Regulations will reflect the option to apply the delayed deadlines.
- Transitional Relief
Pursuant to the same Notice, the IRS will treat calendar years 2014 and 2015 as a transitional period for the purposes of IRS enforcement and administration of the due diligence, reporting and withholding provisions under FATCA.
During the transitional period, the IRS will take into account the extent to which an FFI, NFFE or withholding agent has made "good faith" efforts to comply with the requirements of FATCA and the temporary coordination regulations thereunder. For example, the IRS will take into account whether a withholding agent has made reasonable efforts during the transitional period to modify its account opening practices and procedures to document the status of payees, apply the required standards of knowledge and the FATCA withholding presumption rules.
The Notice provides, however, that an entity that has not made good faith efforts to comply will not be given any relief from IRS enforcement during the transitional period.
The timelines for implementing and completion of due diligence on account holders under the UK IGA have not been affected by any postponements.
The timeframes for completion of due diligence on pre-existing accounts are the same as for the US IGA, however the implementation of due diligence procedures for new accounts (both individual and entity) commenced on 1 July 2014.
As outlined in our prior Due Diligence update, a key component of a Reporting FI's due diligence obligations will be relying on the self-certification of its account holders. Such self-certification may be required in the context of existing account holders, and shall be required in the context of any new account holders. In this regard, and to ensure that it has made "good faith" efforts in accordance with Notice 2014-33, every Reporting Investment Entity should be reviewing its investor base to ensure that it has valid Forms W-8 and W-9 on file.
Revised W-8 forms and related instructions have been published by the IRS with the instructions for the W-8BEN-E form having most recently been published on 25 June 2014. The revised forms and related instructions can be found through the following links:
Self-certification is also required under the UK IGA. However, the UK IGA does not permit reliance on the US IRS Forms.
Accordingly, specific forms have been developed and authorised by the Cayman Tax Information Authority ("TIA") for use in the Cayman Islands under the UK IGA (and future IGAs under the OECD CRS), as well as an alternative for the US IGA. The forms should be considered for use by all Cayman FIs and particularly for when implementing new account due diligence procedures from 1 July 2014.
The self-certification forms for individual and entity self-certification can be found through the following links:
Implementation of FATCA and CRS in Cayman
As noted in our prior Due Diligence update, the Cayman Islands government has been developing legislation to create Cayman Islands legal obligations on FIs consistent with the terms of the IGAs. Draft Regulations and draft Guidance Notes have been published and comments have been received back following private sector consultation. That process has now closed and we understand that the Regulations are to be finalised imminently with the Guidance Notes following shortly thereafter.
Based on the draft Regulations, a few points are worthy of note:
- All Reporting FIs will need to send reports to the TIA by 31 May annually, beginning 31 May 2015.
- If no US Reportable Accounts are identified, a nil return to that effect must be filed with the TIA.
- If clients conclude they are Reporting FIs, notification to that effect together with name, classification and any GIIN must be given to the TIA by 31 March of the year in which the first report is due.
- Where breach of the Regulations occurs with the consent or connivance of, or is attributable to the neglect of, any director or other officer of a body corporate, that individual as well as the body corporate is considered to have committed an offence and is liable to be proceeded against accordingly.