Much needed guidance on the Foreign Account Tax Compliance Act ('FATCA') provisions of the HIRE Act is expected by the end of the first quarter of 2011. According to a Department of Treasury official, the guidance, in the form of proposed Treasury regulations, will provide foreign financial institutions ('FFIs') with sufficient information to enable them 'to start the very complicated process of adjusting their systems to the FATCA regime'.
Under the FATCA provisions all FFIs will be required to enter special agreements with the IRS or suffer 30 percent withholding on investments into the US. The scope of the FFI definition is broad indeed with the legislation focusing on banks and entities taking deposits, custodians and entities holding financial assets for the account of others and entities engaged primarily in the business of investing (e.g. funds). Proposed guidance published in September also specifically references trust companies and life insurance companies. This broad reach also will necessarily affect family office structures that may not themselves fall under the definition of a FFI.
The September proposed guidance would not only treat trust companies as FFIs but also implies that each individual non-US trust would itself also be classified as an FFI (and would thus need to enter into an agreement with the IRS to avoid withholding on US investments). While the proposed guidance indicates that some 'small' family trusts may be exempted, trustees will likely need to understand how every trust for which they serve is classified for US tax purposes and will then likely need to look to the identity of the settler or the trust beneficiaries in determining which of them, if any, may be US clients for these purposes. Where US persons are identified, information about them may need to be reported to the IRS.
Under FATCA, unless an FFI enters into an agreement with the IRS to identify its US 'account holders' and report certain information about them to the IRS, a 30 percent withholding tax will apply to income and proceeds from all of its US investments. The withholding tax would apply to virtually all investments by the FFI into the US, whether made on its own behalf or on behalf of its 'account holders,' regardless of whether or not the 'account holders' are themselves US persons.
The promise of additional guidance will come as welcome relief for FFIs needing to understand what internal procedures will be necessary to ensure compliance with FATCA. Although the law does not take effect until 1 January 2013, many organisations are looking to begin implementation as soon as possible to meet the deadline.
FFIs wishing to avoid this new 30 percent withholding will therefore have to review their client accounts to identify any US persons (in the case of corporate and other entity accounts, the beneficial owners will have to be identified) and report the names and addresses of each US account holder (and certain indirect account holders through corporations and other entities), as well as the account number, the account balance and any gross payments or withdrawals through the account. The FFI will also be required to comply with any due diligence or verification procedures imposed by the US Department of Treasury.
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