By Simon Riveles and Simon M. Cooke.
On November 29, 2013, the Cayman Islands signed a FACTA Model 1 intergovernmental agreement (“IGA”) with the United States. The IGA ensures that financial institutions located in the Caymans, whose investors include ‘Specified U.S. Persons’ (defined below), will be able to largely bypass the burdensome FACTA compliance obligations that are applicable to financial institutions located in Model 2 and non-IGA jurisdictions. The financial institutions are referred to in the IGA as ‘Reporting Cayman Islands Financial Institutions’ (“Reporting Institutions” or “RIs”). RIs will report certain information on U.S. account holders to the Cayman Authorities, who will then automatically exchange the information with the U.S. Internal Revenue Service (the “IRS”). Although the subject of this blog is relevant to financial institutions located in the Cayman Islands, much of what is discussed below would also be applicable to financial institutions in other Model 1 jurisdictions such as the British Virgin Islands.
Model 1 IGA’s and Model 2 IGA’s
The IRS released two general versions of the IGAs, Model 1 and Model 2. Under Model 1 IGAs, Foreign Financial Institutions (“FFI’s”) would report information on U.S. account holders directly to their own governments, which would then share the information with the IRS. Under Model 2 IGAs, FFI’s would directly report to the IRS. Therefore, in order to avoid FACTA withholding tax (discussed below), an FFI in a Model 1 country like the Caymans, will be required to register with the IRS and obtain a Global Intermediary Identification Number (“GIIN”), but should not be required to enter into an agreement directly with the IRS. In contrast, FFIs in Model 2 IGA countries, just like FFIs in countries without an IGA, must register and enter into an agreement with the IRS.
Background of FACTA
On July 1, 2014 FACTA comes into effect. Passed into law in March, 2010, FACTA stands for the Foreign Account Tax Compliance Act. FATCA targets tax non-compliance by U.S. taxpayers with foreign accounts and focuses on reporting by U.S. taxpayers with regard to their interest in certain foreign financial accounts as well as focusing on accounts held by U.S. taxpayers in FFIs or foreign entities in which U.S. taxpayers hold a substantial ownership interest. The cost of non-compliance is the imposition of a 30 percent withholding tax on U.S. taxpayers.
FFI’s that only contain exempt U.S. taxpayers
If an FFI contains solely exempt U.S. taxpayers, it must still register with the IRS and obtain a GIIN. An FFI whose investors are solely exempt U.S. taxpayers, may be able to satisfy the criteria of a ‘Qualified Collective Investment Vehicle’ (“QCIV”). To be classified as such, the FFI must be registered in its country of origin as an investment fund and holders of equity interests in the FFI must solely be exempt U.S. taxpayers or satisfy the criteria of several other exempted groups. If classified as a QCIV, the compliance obligations of the FFI are significantly reduced with the FFI’s only substantial requirements being to monitor its account holders and renew its exempt status with the IRS every three years. Regardless of whether an RI is a QCIV, if it contains solely exempt U.S. taxpayers, its reporting obligations to Cayman authorities under the IGA will be minimal given its investors would likely not satisfy the criteria of ‘U.S. Specified Persons’.
If a Model 1 FFI is part of an Expanded Affiliated Group (“EAG”), it must register and identify with the IRS as a member of the same EAG. An EAG is a group of entities where more than a 50% ownership is held by a common corporate parent. For corporate entities, the above 50% threshold is determined relative to vote and value. For non-corporate entities, only ownership is taken into account.
For example, under a typical master/feeder structure, the offshore feeder and master fund would be part of an EAG to the extent the offshore feeder owns more than 50% of the master fund.
Compliance Obligations for Cayman RI’s
1) Both the IGA and FACTA, require the RI to register with the IRS and obtain a GIIN. The GIIN is used to identify Model 1 RIs to withholding agents.
2) As part of its registration with the IRS, an RI will need to appoint a ‘Responsible Officer’, who is the point of contact for the IRS and will be the only individual to receive emails from the IRS regarding the RIs FACTA account. The Responsible Officer must be authorized under applicable local law to establish the statuses of the RIs home office and branches as indicated in the registration.
3) The IGA requires RIs to provide information, on an annual basis, regarding ‘U.S. Reportable Accounts’ to the Cayman Islands. U.S. Reportable Accounts are defined as a financial account maintained by a RI and held by one or more ‘Specified U.S. Persons’ or by a Non-U.S. Entity with one or more Controlling Persons (i.e. persons or a trust that exercises control over the entity) that is a Specified U.S. Person. A Specified U.S. Person is a U.S. citizen or resident individual, a partnership, trust (subject to certain conditions) or corporation organized in the U.S. or under the laws of the U.S. or any State thereof, that is not a an organization exempt from taxation under Section 501(a) of the U.S. Internal Revenue Code or a corporation whose stock is regularly traded on one or more established securities markets, amongst other exemptions. The IGA requires the RI to provide the following information:
- The name, address, and U.S. Taxpayer Identification Number (“TIN”) of each Specified U.S. Person that is an Account Holder of such account and, in the case of a Non-U.S. Entity that, after application of the due diligence procedures set forth below, is identified as having one or more Controlling Persons that is a Specified U.S. Person, the name, address, and U.S. TIN (if any) of such entity and each such Specified U.S. Person. A Form W-9 or equivalent should be sent to the Specified U.S. Person to obtain their TIN;
- The account number (or equivalent);
- The name and identifying number of the RI;
- The account balance or value as of the end of the relevant calendar year or other appropriate reporting period or, if the account was closed during such year, immediately before closure;
- In the case of any Custodial Account (i.e. an investment account held for the benefit of another person):
- the total gross amount of interest, the total gross amount of dividends, and the total gross amount of other income generated with respect to the assets held in the account, in each case paid or credited to the account (or with respect to the account) during the calendar year or other appropriate reporting period; and
- the total gross proceeds from the sale or redemption of property paid or credited to the account during the calendar year or other appropriate reporting period with respect to which the RI acted as a custodian, broker, nominee, or otherwise as an agent for the Account Holder;
- In the case of any Depository Account (i.e. any commercial, checking, savings, time, or thrift account, or an account that is evidenced by a certificate of deposit), the total gross amount of interest paid or credited to the account during the calendar year or other appropriate reporting period; and
- In the case of any account not described above, the total gross amount paid or credited to the Account Holder with respect to the account during the calendar year or other appropriate reporting period with respect to which the RI is the obligor or debtor, including the aggregate amount of any redemption payments made to the Account Holder during the calendar year or other appropriate reporting period.
Due Diligence Obligations
RIs are also required to undertake due diligence in order to identify and report on US Reportable Accounts that are over a certain threshold (e.g for an individual account the threshold is $50,000). RIs do this by searching for U.S. indicia in their clients’ accounts. These due diligence procedures apply to both pre-existing accounts and new accounts (i.e. accounts opened on or after July 1, 2014). The procedures vary depending on the size of the account. For accounts between $50,000 and $1,000,000, the procedure involves a search of the electronically searchable data maintained by the RI for their clients. For accounts over $1,000,000, the procedure involves both a search of electronic records and paper documentation, if the electronic records are not sufficient to provide all the required information.
The U.S. indicia that are required to be searched for include the following:
1) Identification of the Account Holder as a U.S. citizen or resident;
2) Unambiguous indication of a U.S. place of birth;
3) Current U.S. mailing or residence address (including a U.S. post office box);
4) Current U.S. telephone number;
5) Standing instructions to transfer funds to an account maintained in the U.S.;
6) Currently effective power of attorney or signatory authority granted to a person with a U.S. address; or
7) An “in-care of” or “hold mail” address that is the sole address the RI has on file for the Account Holder.
May 15, 2014 is the deadline for FACTA registration of FFI’s to ensure their GIIN’s are included on the first IRS FFI List, expected to be released on June 2, 2014. June 3, 2014 is the deadline to appear on the second IRS FFI List to be released on July 1, 2014. Registrations submitted after these dates may still be included on the above lists but the IRS cannot provide any assurance this will be the case.
Withholding agents are not required to verify GIINs on payments made prior to January 1, 2015, where the payee is an FFI in a Model 1 jurisdiction and accordingly RIs may self-certify their status to withholding agents after July 1, 2014 (when FACTA comes into effect), and could register with the IRS on or before December 22, 2014 to be included on the IRS FFI list by January 1, 2015.
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