2015 is with us and looming is the 30 June 2015 deadline for the
first reports of FATCA information under the reporting regimes that
have been put in place in both Guernsey and Jersey to ensure
compliance with the US/Guernsey and US/Jersey Intergovernmental
Agreements regarding FATCA ("the US IGAs"). The deadline
for the first reports in relation to the UK/Guernsey and UK/Jersey
Intergovernmental Agreements regarding a FATCA-type reporting
regime ("the UK IGAs") is 30 June 2016.
Whilst most list Guernsey and Jersey funds ("Funds") may delegate FATCA reporting to a third party service provider, FATCA reporting obligations remain the Fund's responsibility.
This briefing considers:
- To what extent Funds could benefit from the reporting exemption for certain regularly traded interests; and
- Information gathering rights to allow Funds to obtain investor information that they need to report, which can include details of the ultimate beneficial owner of the Fund's interests and not the registered owner.
Regularly Traded Exemption
Under both the US IGAs and the UK IGAs ("the IGAs"), Funds do not typically need to report on interests that are "regularly traded on an established securities market". Whilst this exemption seems straightforward, it is interpreted very differently in relation to the IGAs.1
Under the UK IGA applicable to Guernsey, an "established securities market" is any "recognised stock exchange" in the Companies (Recognised Stock Exchanges) Regulations, 2009, which includes the Specialist Funds Market and the Channel Islands Securities Exchange.
Under the UK IGA applicable to Jersey, an "established securities market" is any "recognised stock exchange" in Article 3 of the Income Tax (Jersey) Law 1961, which also includes the Specialist Funds Market and the Channel Islands Securities Exchange.
Interests in the Fund are "regularly traded" on such exchanges as long as they are listed or quoted and/or available for trading. Crucially, there is no need for the Fund to check annually whether any trades have actually occurred, which reduces the administrative burden on the Fund in checking the extent to which it needs to report.
The position is very different under the US IGAs.
While the definition of an "established securities market" remains the same as in the UK IGAs, there are two further tests:
- First, there must be a meaningful annual value of shares traded on that exchange (not just the interests in the Fund in question, but shares generally); and
- Second, interests in the Fund itself are "regularly traded" on such exchanges only if there is a meaningful volume of trading with respect to the interests on an ongoing basis. Accordingly, there is a need for the for the Fund to check annually whether any trades have actually occurred, and then take a view as to whether the volume of trading has been "meaningful", which is a question of fact and degree.2
Thus, in relation the first test although the Channel Islands Securities Exchange is a "recognised stock exchange", due to the additional requirement of "meaningful annual trading" it is anticipated that, currently, the Channel Islands Securities Exchange will not be considered to be an established securities market for the purposes of the US IGAs.
In relation to the second test, even if interests in the Fund are "regularly traded", if the holder of the interests is registered on the books of the Fund and is not a Financial Institution acting in an intermediary capacity, then where the holder was registered on or after 1 July 2014 the interests in the Fund will not be "regularly traded" and the fund will need to report on those interests. Where the registered holder is a Financial Institution such that the regularly traded exemption applies, that Financial Institution may need to report on the interests.
However, this exclusion to the regularly traded exemption does not need to be applied prior to 1 January 2016. From 1 January 2016, the Fund will need to obtain necessary investor information in relation to interests caught by this exclusion, although for practical reasons the Fund should seek this information sooner rather than later.
The first reports by Funds in relation to the IGAs are due by 30 June 2015. Funds will need to ensure that they obtain all the necessary information from investors in order to comply with diligence and reporting requirements under laws implementing the US IGA and the UK IGA. For interests acquired after 30 June 2014, the Fund must, broadly, obtain the necessary information within a reasonable time of the investor acquiring the Fund interest and if it has not obtained such information by the time that the applicable report is due, the interest must be treated as reportable under both the IGAs.3
Information that will be required could also cover natural persons that directly or indirectly control a particular investor.
Therefore, it is crucial that the constitutional documents of the Fund, such as (in the case of corporate vehicles) the Articles of Incorporation, oblige investors to provide such information to the Fund as is required to allow the Fund to comply with applicable law. Further, the Fund may wish to have the ability to compulsorily redeem interests where the investor fails to provide the required information.
These provisions don't necessarily have to refer to FATCA by name, what is key is that the Fund has the ability to obtain information from investors that allow it to comply with applicable law. Therefore, pre-FATCA provisions in the constitutional documents may cover the situation. But if they do not, or of there is a desire to have FATCA specific provisions, then the Fund should consider making the necessary changes to its constitutional documents in time to allow it to collect the information that it needs.
The Future - "Global FATCA"
More than 50 jurisdictions, including Guernsey and Jersey, have signed the multilateral competent authority agreement that activates the automatic exchange of FATCA-like information in line with the Organisation for Economic Co-operation and Development's Common Reporting Standard ("the CRS"), and it is expected that more will follow.
The CRS is designed to create a global standard for the automatic exchange of financial account information, similar to the information to be reported under FATCA. However, there are differences between the CRS and the FATCA reporting regimes under the US IGA and the UK IGA currently in place.
Crucially, there is currently no general regularly traded exemption for the CRS, such that all Funds will need to report on certain investors who are, or are entities that are controlled by one or more, residents of any of the signatory jurisdictions.
Whilst this "global FATCA" is still some time away - the expected deadline for the first reports is 30 June 2017 – Funds will need to ensure that, in addition to allowing for reporting under the existing FATCA regimes, their constitutional documents allow them to collect the necessary information from investors to allow compliance with this new global FATCA.
1 The summary below of the regularly traded exemption is not exhaustive. In particular, the exemption is subject to anti-avoidance provisions which we do not cover here. Further details on the regularly traded exemption can be found here.
2 There is some guidance in that where interests are available and actively marketed for trading then the test may be met. Further, there may be a presumption of meaningful volume of trading if the Fund is "widely held", i.e. there are 25 or more unconnected shareholders and there is no majority interest (greater than 50%) in the Fund that is held by 5 or fewer persons and persons connected with them. However, this presumption is rebutted by evidence to the contrary.
3 Under revised guidance issued on 15 December 2014, it is understood that both Guernsey and Jersey will take a lenient approach for the 2014 reports where the Fund has been unable to obtain the necessary information within a reasonable time.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.