A financial institution that is a foreign entity y 2 An entity - - PowerPoint PPT Presentation

Who is Affected by FATCA?

Presented by: Maury Cartine, JD, CPA, Partner, Marcum LLP Michael P. Spiro, Tax Attorney, Finn Dixon & Herling LLP

y FINN DIXON & HERLING LLP

• A “financial institution” that is a
• “foreign entity”

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• An entity that:
• Accepts deposits in the ordinary course of a “banking or similar

business”;

• Holds as a “substantial portion of its business financial assets for the

account of others”;

• “Is engaged “primarily in the business of investing, reinvesting or

trading” in securities, partnership interests, commodities, notional principal contracts, insurance or annuity contracts; or

• Is an insurance company (or holding company of an insurance

company) that issues or is obligated to make payments with respect to a “financial account.”

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• Accepts deposits of funds;
• M akes personal, mortgage, industrial or other loans;
• Purchases, sells, discounts or negotiates accounts receivable, installment
• bligations, notes, drafts, checks, bills of exchange, acceptances, or
• ther evidences of indebtedness;
• Issues letters of credit and negotiates drafts thereunder;
• Provides trust or fiduciary services;
• Finances foreign exchange transactions;
• Enters into, purchases or disposes of finance leases or leased assets; or
• Provides charge and credit card services.

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• Entity’s gross income attributable to the holding of financial

assets and related financial services is 20% or more of the entity’s gross income during the shorter of:

• The three year period ending on December 31 of the year

in which the determination is made; or

• The period during which the entity has been in existence.

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• Entity’s gross income from investing, reinvesting and trading

is 50% of more of the entity’s total gross income during the shorter of:

• The three-year period ending on December 31 of the year

in which the determination is made; or

• The period during which the entity has been in existence.

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• A depository account;
• A custodial account;
• An equity or debt interest (other than interests that are regularly traded
• n an established securities market) in a financial institution that is:
• A financial institution solely by reason of being engaged primarily in

the business of investing, reinvesting or trading; or

• Any other financial institution, but only if the value of the debt or

equity interest is determined directly or indirectly primarily by reference to assets giving rise to withhold able payments.

• Any cash value insurance contract.

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• An entity that is not a “U.S. Person”
• “U.S. Person”
• a citizen or resident of the United States;
• a partnership created or organized in the United States or under the law of the

United States or of any State;

• a corporation created or organized in the United States or under the law of

the United States or of any State;

• any estate with income that is effectively connected to a trade or business

within the United States;

• any trust if--
• a court within the United States is able to exercise primary supervision over the

administration of the trust, and

• ne or more United States persons have the authority to control all substantial

decisions of the trust.

• the United States government;
• a State or the District of Columbia.

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• A foreign entity that is not a financial

institution.

• A “Passive NFFE” is an NFFE that is not an

“Excepted NFFE” (as described herein).

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• Corporations
• Generally 1 or more chains of corporations connected through stock
• wnership with a common parent corporation if—

the common parent owns directly stock possessing more than 50%

• f the vote and more than 50% of the value of at least 1 of the other

corporations, and

stock possessing more than 50% of the vote and more than 50% of

the value of each corporation is owned directly by 1 or more of the

• ther corporations.
• Partnerships and other entities
• A partnership is included in the expanded affiliated group if more than

50% of the value of the entity is owned by members of the expanded affiliated group.

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y Parent (UK

corporation)

y Sub 1 (Spanish

corporation)

y Cayman limited

partnership

y Sub 2 (French

corporation)

y 30% y 21%

• Deemed Compliant FFIs (“DCFFIs”)
• Registered Deemed Compliant FFIs
• Certified Deemed Compliant FFIs
• Owner Documented FFIs
• Participating FFIs (“PFFIs”)
• Non-Participating FFIs (“NPFFIs”)
• Excepted FFIs (“EFFIs”)
• Excepted NFFEs (“ENFFEs”)

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• Registered Deemed Compliant FFI:
• M eets one of 4 criteria and complies with procedural

requirements.

• 4 types of Registered Deemed Compliant FFIs:

Local FFIs Nonreporting M embers of PFFI Groups Qualified Collective Investment Vehicles Restricted Funds

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• The FFI is licensed and regulated under the laws of its country of origin (which is

FATF compliant) as a bank or similar organization authorized to accept deposits in the ordinary course of business, a securities broker/ dealer, financial planner or investment adviser.

• The FFI has no fixed place of business outside its country of organization.
• The FFI does not solicit account holders outside its country of organization.
• The FFI is required under the tax laws of its country of organization to perform

either information reporting or withholding of tax with respect to accounts held by residents.

• At least 98% of the accounts held by the FFI are held by residents of the country

in which the FFI is organized.

• The FFI puts into place procedures to prevent the opening of accounts for any

specified U.S. Person or NPFFI.

• If the FFI is a member of an expanded affiliated group, each member of the group

must be incorporated or organized in the same country and must qualify as a local FFI.

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• The FFI is a member of an expanded affiliated group that includes one or

more PFFIs.

• The FFI must review its accounts to identify any U.S. accounts or

accounts held by NPFFIs.

• If the FFI identifies any U.S account, it must within 90 days of identifying

the account, enter into an FFI Agreement, transfer the account to an affiliate that is a PFFI or U.S. Financial Institution or close the account.

• The FFI must implement policies and procedures to ensure that it will

identify U.S. accounts and transfer any such accounts to an affiliate that is a PFFI or U.S. Financial Institution.

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• The FFI is an FFI solely because it is engaged in the business of investing, reinvesting or trading and must be regulated in its country
• f organization as an investment fund.
• Each holder of record of direct debt interests in excess of $50,000 or equity interests in the FFI or any other account holder of a

financial account with the FFI must a PFFI, Registered Deemed Compliant FFI, U.S. Person described below or exempt beneficial

• wner.
• All other FFIs in the FFI’s expanded affiliated group must be PFFIs or Registered Deemed Compliant FFIs.
• For this purpose a “U.S. person” is a U.S. person that is not a “specified U.S. Person”. This generally includes:
• Publicly traded corporations and members of the expanded affiliated group of a publicly traded corporation;
• Tax exempt organizations and IRAs;
• The United States or any State or instrumentality thereof;
• Any bank or real estate investment trust;
• Any regulated investment company registered under the Investment Company Act of 1940; or
• Any dealer in securities, commodities or derivatives.
• Exempt Beneficial Owners
• Foreign governments;
• Political subdivisions of foreign governments;
• Wholly owned instrumentalities and agencies of foreign governments;
• International organizations and wholly owned agencies or instrumentalities of international organizations;
• Foreign central banks of issue;
• Governments of United States possessions; and
• Certain foreign retirement plans.

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• The FFI is an FFI solely because it is engaged in the business of investing, reinvesting or

trading and must be regulated in its country of organization as an investment fund;

• Interests in FFI are only sold through “distributors” or redeemed directly by the restricted

fund.

• Distributors
• The distributor is a PFFI, a Registered Deemed Compliant FFI or a restricted distributor.
• Restricted Distributor
• Provides investment services to at least 30 unrelated customers and no more than half of the

distributors customers can be related persons;

• The distributor is required to perform Anti-M oney Laundering due diligence under the laws of its

country of organization;

• The distributor operates solely in its country of organization and does not solicit customers
• utside its country of organization;
• The distributor has no more than $175 million in total AUM and no more than $7 million gross

revenue for the most recent accounting year end;

• The distributor provides a Form W-8; and
• The distributor is prohibited under its agreement from distributing securities to specified U.S.

persons.

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• A registered deemed compliant FFI must:
• Have its chief compliance officer certify to the IRS that the

requirements for the deemed compliant category claimed by the FFI have been satisfied;

• Obtain from the IRS a confirmation of its registration as a

deemed compliant FFI and FFI employer identification number;

• Renew its certification every three years; and
• Agree to notify the IRS if there is a change in

circumstances which would make the FFI ineligible for deemed compliant status.

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• M eets one of four criteria and has certified its status as such

to a withholding agent on a valid withholding certificate. No registration with the IRS is required.

• Four types of Certified Deemed Compliant FFIs:
• Nonregistering Local Banks
• Retirement Funds
• Non-Profit Organizations
• FFIs with Low Value Accounts

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• The FFI operates and is licensed as a bank in its country of organization and

engages primarily in the business of making loans and taking deposits from unrelated retail customers.

• The FFI has no fixed place of business outside of its country of organization.
• The FFI must not solicit customers outside of its country of organization.
• The FFI must have no more than $175 million in assets on its balance sheet, and

if it is a member of an expanded affiliated group, the group must have no more than $500 million in total assets on its consolidated or combined balance sheets.

• The FFI must be required under the tax laws of its country of organization to

perform information reporting or tax withholding with respect to resident accounts.

• Each FFI in the expanded affiliated group must be organized in the same country

and meet the same requirements.

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• The FFI is organized for the provision of retirement or pension benefits under the

law of the country in which it is established or in which it operates and either:

• All of the following are true:
• All contributions to the FFI are employer, government, or employee contributions limited by

reference to earned income;

• No single beneficiary has a right to more than 5% of the FFI’s assets;
• Contributions to the FFI that would otherwise be subject to tax are deductible or excluded from

gross income, taxation of investment income of the FFI is tax-deferred or 50% or more of the total contributions to the FFI are from the government and the employer.

Or:

• All of the following are true:
• The FFI has fewer than 20 participants;
• The FFI is sponsored by an employer that is not an FFI or a Passive NFFE;
• Contributions to the FFI are limited by reference to earned income;
• Participants that are not residents of the country in which the FFI is organized are not entitled to

more than 20% of the FFI’s assets; and

• No participant that is not a resident of the FFI’s country of organization is entitled to more than

$250,000 of the FFI’s assets.

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• The FFI is established and maintained in its country of residence

exclusively for religious, charitable, scientific, artistic, cultural or educational purposes.

• The FFI is exempt from tax in its country of residence.
• The FFI has no shareholders to members who have a proprietary or

beneficial interest in its income or assets.

• The laws of the FFI’s country of residence or the FFI’s formation

documents do not permit any income or assets of the FFI to be distributed to, or applied for the benefit of, non-charitable purposes.

• The applicable laws of the FFI’s country of residence or the FFI’s

formation documents require that upon the FFI’s liquidation or dissolution, all of its assets be distributed to another charitable

• rganization or escheat to the government.

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• The FFI is only an FFI because it accepts deposits in the
• rdinary course of a banking or similar business or holds

financial assets for the accounts of others.

• No financial account maintained by the FFI or by any

member of its expanded affiliated group has a balance or value in excess of $50,000.

• The FFI (or in the case of an FFI that is a member of an

expanded affiliated group, the entire expanded affiliated group) has no more than $50 million in assets on its balance sheet as of the end of its most recent accounting year.

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• Owner Document FFIs are treated as Deemed Compliant FFIs with respect to

payments received by and accounts held with a “designated withholding agent.” A “designated withholding agent” is a withholding agent that agrees to undertake the due diligence and reporting obligations described below.

• To be an Owner Document FFI:
• The FFI must not accept deposits in the ordinary course of a banking or similar business,

hold as a substantial portion of its business, financial assets for the account of others,

• r be an insurance company.
• The FFI must not maintain a financial account for any NPFFI or issue debt which

constitutes a financial account to any person in excess of $50,000.

• The FFI must provide the designated withholding agent with withholding certificates

disclosing each individual, specified U.S. person, owner-documented FFI, exempt beneficial owner or NFFE that holds an interest in the FFI.

• The withholding agent must report to the IRS:
• The name of the owner-documented FFI;
• The name of each specified US person owning a direct or indirect interest in the FFI;
• The TIN or EIN of each such specified US person; and
• The address of each such specified US person.

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• An FFI with respect to which an FFI Agreement is in full

force and effect.

• An FFI Agreement is an agreement with the IRS to:
• Deduct and withhold tax with respect to passthru

payments made to recalcitrant account holders and NPFFIs;

• Obtain information to determine which of its financial

accounts are US accounts; and

• Report on an annual basis with respect to its US accounts.

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• FFIs other than DCFFIs, EFFIs and exempt

beneficial owners that do not enter into FFI Agreements.

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• Non-Financial Holding Companies
• A foreign entity substantially all of the activities of which is to own (in whole or in part) the outstanding stock of one
• r more subsidiaries that engages in trades or businesses (other than as financial institutions).
• The entity does not function, or hold itself out as, an investment fund whose purpose is to acquire or fund companies

and then holding interests in those companies as capital assets for investment purposes.

• Start-Up Companies
• A foreign entity that is not yet operating a business and has no operating history, but is investing capital into assets

with the intent to operate a business other than that of a financial institution within 24 months of formation.

• The entity does not function, or hold itself out as, an investment fund whose purpose is to acquire or fund companies

and then holding interests in those companies as capital assets for investment purposes.

• Non-Financial Entities that are Liquidating or Emerging from Reorganization or Bankruptcy
• A foreign entity that was not a financial institution in the past five years and is in the process of liquidating or

reorganizing with the intent to recommence operations as a nonfinancial entity.

• Hedging/ Financing Centers of Non-Financial Groups
• A foreign entity that primarily engages in hedging and financing transactions with or for members of its expanded

affiliated group that are not financial institutions and that does not provide financing or hedging services to non- affiliates.

• Section 501(c) Entities
• Foreign entities that are exempt from U.S. income taxation under Code Section 501(c)(which generally describes tax-

exempt entities). y 27

• Excepted FFIs;
• Publicly traded corporations;
• Any corporation that is a member of the same expanded affiliated group

as a publicly traded corporation;

• Exempt beneficial owners;
• Territory Entities directly or indirectly wholly owned by bona fide

residents of the same U.S. possession under the laws of which the entity is organized; and

• Active NFFEs
• Less than 50% of its gross income for the preceding calendar year is passive

income or less than 50% of the assets held by the NFFE at any time during the preceding calendar year are assets that produce or are held for production of passive income.

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• Withholding Agent means any person required to deduct and withhold

tax under Sections 1441, 1442, 1443 and 1461 of the Internal Revenue Code

• Generally, this includes all persons, in whatever capacity they are acting,

having the control, receipt, custody, disposal or payment of any items of income subject to withholding (Section 1441 of the Internal Revenue Code)

• Withholding Agents include the usual suspects: broker/ dealers, banks,

general partners of domestic partnerships, etc.

• However, Withholding Agents also include volunteers such as:
• Qualified Intermediaries
• Withholding Foreign Partnerships
• Withholding Foreign Trusts

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• Qualified Intermediaries are FFIs that enter into an agreement with the

IRS to verify the beneficial ownership of payments of U.S. source income for purposes of determining any reductions in the statutory 30% withholding tax rate

• Qualified intermediaries and the U.S. withholding agent may agree who

has primary withholding responsibility for one or more classes of beneficial owners or payees or one anyone or more types of income

• Under the proposed FACTA regulations a Qualified Intermediary that

does not assume primary responsibility for withholding may make an election under Section 1471(b)(3) to be withheld upon with respect to recalcitrant account holders and other FFIs that do not meet the reporting requirements under FACTA

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• Withholding Foreign Partnerships are foreign partnerships that have

entered into an agreement with the IRS to assume primary withholding responsibility

• A Withholding Foreign Partnership may be an FFI or it may be a Non-

Financial Foreign Entity (NFFE)

• In either case, the Withholding Foreign Partnership will have obligations

under FACTA

• Withholding obligations if it is a FFI
• Reporting obligations regarding substantial U.S. owners

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• Withholding Foreign Trusts are foreign trusts that have entered into an

agreement with the IRS to assume primary withholding responsibility

• A Withholding Foreign Trust may be an FFI or it may be a Non-Financial

Foreign Entity

• In either case, the Withholding Foreign Trust will have obligations under

FACTA

• Withholding obligations if it is a FFI
• Reporting obligations regarding substantial U.S. owners

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• Nonqualified Intermediaries are foreign intermediaries acting on behalf
• f others that have not entered into any agreement with the IRS to

assume primary withholding responsibility

• Non-Withholding Foreign Partnerships and Non-Withholding Foreign

Trusts can be for purposes of simplicity characterized as Nonqualified Intermediaries

• Nonqualified intermediaries may be FFIs or they may be NFFEs
• In either case, Nonqualified Intermediaries will have reporting
• bligations under FACTA
• Reporting obligations regarding U.S. Accounts
• Reporting obligations regarding substantial U.S. owners

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MAURY CARTINE

Partner-In-Charge Alternative Investment Group Tax Department Marcum LLP 750 Third Avenue New York, New York 10017 Phone: 212-485-5760, fax: 212-485-5501 Maury.Cartine@marcumllp.com

New York . New Jersey . Boston . Connecticut . Pennsylvania . Florida. California . Grand Cayman

www.marcumllp.com

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MICHAEL P. SPIRO

Tax Attorney Finn Dixon & Herling LLP 177 Broad Street 15th Floor Phone: 203-325-5067, fax: 203- 325-5001 Mspiro@fdh.com

www.fdh.com