FATCA – Foreign Account Tax Compliance Act
Enacted March 18, 2010 as part of Hiring Incentives to Restore Employment (HIRE) Act to combat tax evasion by US persons holding investments in offshore accounts.
CRS – Common Reporting Standard
CRS is a global reporting standard for the automatic exchange of information (AEoI) set forth by the Organization for Economic Cooperation and Development (OECD). More than 96 countries have agreed to share information on residents’ assets and incomes in conformation with reporting standards. It is more wide reaching than FATCA and requires a unified, cross-team effort to ensure readiness and compliance.
Non-Financial Foreign Entity (NFFE) and Intergovernmental Agreement (IGA) Key Terms
NFFE – Non-Financial Foreign Entity
A foreign entity excluded from the definition of FFI.
Entities excluded from the FFI definition and not subject to withholding including:
- Corporation with stock traded on established securities market
- Affiliated group of those corporations
- Entity organized in US Territory and owned by its residents
- Foreign government
- International organization
- Foreign Central Bank of Issue
- Any other specifically identified class, including those posing a low risk of tax evasion, as determined by the IRS.
IGA – Intergovernmental Agreement
A government may enter into a bilateral agreement with the U.S. to simplify reporting compliance and avoid FATCA withholding. Under a Model 1 IGA, Foreign Financial institutions (FFIs) in partner jurisdictions report information on U.S. account holders to their national tax authorities, which in turn will provide this information to the IRS. Under a Model 2 IGA, FFIs report account information directly to the IRS.
Foreign Financial Institution (FFI) Key Terms
FFI – Foreign Financial Institution
Any foreign entity that:
- Accepts deposits in the ordinary course of banking or a similar business such as banks and credit unions.
- Holds financial assets for the account of others as a substantial portion of its business such as brokerages or custodians.
- Is engaged, or holding itself out as being engaged, primarily in the business of investing, reinvesting, or trading in securities, partnership interests, commodities, or any interest. This includes a futures or forward contract or option in such securities, partnership interests, or commodities such as mutual funds, private equities and hedge funds.
FFI that enters into an agreement with the IRS to undertake certain due diligence, withholding and reporting requirements for US account holders.
Deemed Compliant FFI
An FFI that is exempt from withholding without entering into an IRS agreement, including:
- Registered deemed-compliant – An FFI that registers with the IRS to declare its status. This includes certain local banks, non-reporting members of participating FFI groups, qualified collective investment vehicles, restricted funds, and FFIs that comply with FATCA requirements under an agreement between the US and a foreign government.
- Certified deemed-compliant – An FFI that is not required to register with the IRS and certifies its status by providing a withholding agent with a valid Form W-8. This includes non-registered local banks, retirement plans, non-profit organizations, FFIs with only low-value accounts, and certain owner-documented FFIs.
Entities which are excluded from the FFI definition and not subject to withholding including:
- Holding companies engaged in non-FI business
- Start-up companies for non-financial business
- Liquidating or reorganizing non-financial entities
- Group hedge/financial company which is non-financial and restricted to affiliates
- Organized in US Territory
An FFI that does not enter into an agreement with the IRS and is not deemed compliant or excepted.
Financial Accounts Key Terms
Depository or custodial account and any equity/debt interest in an FFI, other than interests that are regularly traded on an established securities market.
An account with a holder who:
- Fails to comply with FFI requests for information to confirm identity, or
- Fails to provide a waiver allowing disclosure of information to the IRS where such disclosure is prevented by a foreign privacy law.
A financial account opened prior to January 1, 2014.
A Foreign Financial Institution or clearing organization or foreign branch of a US bank or clearing organization that has entered into an agreement with the IRS to take on certain information reporting and withholding responsibilities under Chapter 3 and Chapter 61 of the Code for payments of US source income that it receives as a custodian.
US Key Terms
Any financial account held by specified US persons or US-owned foreign entities.
Specified US person
US citizens, (including dual citizens, or US resident aliens for tax purposes, privately owned domestic corporations, domestic partnerships, or a domestic trust or estate.
US-Owned Foreign Entity
A foreign entity with one or more substantial US owners.
Substantial US Owner
A US person with more than 10% interest by vote or value in a foreign corporation, partnership or trust. For foreign investment vehicles, any percentage of ownership is reportable.
Any of the following which may indicate US status:
- US citizenship or permanent residence
- US address (resident or correspondence)
- US place of birth
- US telephone number
- Power of Attorney or signatory authority granted to person with US address
- Standing instructions to transfer funds to account maintained in the US or directions received from a US address.
Other Key Terms
New sections of IRS code added for FATCA.
All persons having control, receipt, custody, disposal or payment of any withholdable payment.
Any of the following:
- US source dividends, interest and other periodic payments.
- Gross proceeds from the sale of property that can produce US source income.
- Deposit interest paid by foreign branches of US banks.
A payment that is fixed or determinable, annual or periodic US source passive income.
Any withholdable payment, or any payment to the extent “attributable to” a withholdable payment.
KYC – Know Your Customer
Regulations requiring financial institutions implement due diligence policies to check the identity, background and source of wealth of their potential and existing clients.
FATF – Financial Action Task Force
An inter-governmental body that develops and promotes international policies to combat money laundering and terrorist financing.
Debt/interest obligations outstanding as of July 1, 2014 excluded from FATCA withholding requirements.