On 28 January 2013, the US Internal Revenue Service (IRS) published more than 500 pages of final regulations under the US ‘Foreign Account Tax Compliance Act’ or FATCA.
The final regulations contain welcome changes from the proposed regulations for the private client industry but still require many trusts, trust companies, charities and funds to implement certain client-identification procedures to avoid a new US withholding tax. In addition, the US
Treasury Department continues to sign bilateral intergovernmental agreements (IGAs) with individual jurisdictions with the goal of easing the potentially onerous burden of FATCA on certain entities.
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Very briefly, FATCA requires all non-US ‘financial entities’ (broadly defined to potentially include trusts, trust companies, charities and funds) to enter into an agreement with the IRS, meet specified compliance requirements, and transmit certain account information on any US clients to the IRS.
Entities covered by FATCA that do not comply with these requirements are subject to a 30% US withholding tax on their US source income, which not only includes dividends and interest from US payors but also the gross proceeds (not gain) on the sale of US stocks and securities.
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By GlobalDataThe private client industry should take heart from some of the simplifications in the final regulations as well as in the IGAs that have been executed with partner jurisdictions, including to date the UK, Denmark, Mexico, Ireland and most recently Switzerland.
However, the final regulations still contain some surprises and those who have been delaying addressing their FATCA compliance will need to ramp up their efforts, as the legislation begins to come into effect in phases starting on 1 January 2014.
Even those who are not themselves subject to FATCA, such as private individuals, likely will begin to see a significant increase in the amount of due diligence that they are asked to provide. This will be with respect to new and existing bank and brokerage accounts or interests in funds, as banks, brokers and funds may be required to obtain this information to comply with their FATCA obligations.
The final regulations have tried to conform the due diligence process to the IGA and Financial Action Task Force model.
One welcome change from the proposed regulations issued in February 2012 is that certain trusts and family-owned investment vehicles may be treated as ‘non-financial foreign entities’ under the final regulations if their trustees and investment advisors are individuals. Family vehicles that fall into this category will be subject to a lesser degree of regulation and only required to certify as to whether they have any US owners who own more than a specified percentage (and if they do, provide certain information with respect to those owners).
Unlike ‘financial entities’, these non-financial entities do not have to enter into an IRS agreement (or otherwise comply with an IGA), go through the onerous due diligence procedures or report account information to the IRS. Further, a new ‘sponsored/sponsoring’ certification procedure may simplify this reporting even more.
The final regulations take a number of steps to conform the regulations to be consistent with the IGAs. They also confirm that accounts held by estates are not financial accounts for purposes of FATCA.
Local bank rules ease path for us citizens
Another change that may have a practical impact on private clients is the revised ‘local bank’ test under the final regulations. Over the past few years, institutions have chosen to refuse o accept new US clients and to terminate relationships with existing US clients sometimes on the false understanding that this eliminates their FATCA compliance obligations. As a result, some US people have found it difficult to open and maintain accounts where they live.
Broadly, under the ‘local bank’ exception, banks that only service clients in a particular jurisdiction are exempt from FATCA. However, under the final regulations, a local bank will no longer qualify for this exception if they discriminate against opening or maintaining accounts for US clients.
While it is too soon to tell how much of an impact this will have, it could make it easier for US people to have accounts at local banks where they live.
Richard Cassell is partner and joint wealth planning practice group leader and Kristin Konschnik is a partner at international law firm Withers.
