FATCA key terms
The below aims at facilitating your way through the specific vocabulary used in the FATCA regulations.
Chapter 3 of the Internal Revenue Code, also referred to NRA (Non-Resident Alien) withholding, defines the requirements of withholding and reporting on U.S. source income to foreign persons. It puts in place a tax information and withholding regime, known as the Qualified Intermediary (QI) regime, allowing Non-Resident beneficial owner to benefit from an exemption or reduced tax rate according the Double Taxation Treaty in force between the U.S.A. and its the country of residence.
Chapter 4 of the Internal Revenue Code, also referred to as FATCA, creates a new tax information reporting and withholding regime for payments made to certain FFIs (Foreign Financial institutions) and NFFEs (non-Financial Foreign institutions) to prevent U.S. taxpayers who hold financial assets in FFIs nd other offshore vehicles from avoiding their U.S. tax obligations.
Chapter 4 does not replace chapter 3, but is coming on top by adding additional documentation and reporting requirements.
Deemed Compliant FFI
A deemed-compliant FFI is an FFI that is treated as meeting the requirements of FATCA without entering into an IRS agreement (and thus is not subject to withholding). There are two types:
A “registered deemend-compliant FFI”:
To be recognised as such, this type of entity are required to register with the IRS and declare its status as deemed-compliant and to attest to the IRS that it satisfies certain procedural requirements. FFIs that comply with the requirements of FATCA under an agreement between the U.S.A. and a foreign government will fall into this category; and
A “certified deemed-compliant FFI”
To fall into this category, the entity is not required to register with the IRS but will need to certify to the withholding agents that it meets the requirement of the certified deemed-compliant status on an IRS Form W-8.
FATCA stands for “Foreign Account Tax Compliance Act”
FDAP is a U.S. source payment that is “Fixed or Determinable, Annual or Periodic” passive income.
A Foreign Financial Institution (FFI) is defined as an entity that is not resident in the U.S.A. for tax purposes and that:
- Accepts deposits in the ordinary course of business of a banking or similar institution;
- Holds financial assets for the accounts of others as a substantial portion of its business; or
- Is engaged primarily in the business of investing, reinvesting or trading in securities or other financial assets.
This definition is very broad and is expected to encompass a number of entities generally not considered to be financial institutions.
In general, an FFI will enter into an agreement (referred to as “FFI Agreement”) with the U.S. Treasury Department by which the FFI becomes a “participating FFI” and thereby avoids FATCA withholding on payments that it receives. Generally, an FFI Agreement requires the FFI to:
- Obtain information from each account holder as is necessary to determine which accounts are U.S. accounts;
- Comply with verification and due diligence procedures with respect to the identification of U.S. accounts;
- Report annually for U.S. accounts;
- Provide any additional information requested by the IRS;
- Obtain a waiver from U.S. account holders if the reporting of information is prevented by foreign law;
An IGA is an Intergovernmental agreement concluded between the United States and foreign governments with regards to the compliance and implementation of FATCA.
A GIIN is a Global Intermediary Identification Number and is to be obtained via the IRS registration portal as of 2 January 2014.
A “Grandfathered Obligation” is any U.S. sourced obligations outstanding as of July 1, 2014, which will be exempt from FATCA withholding.
The term “obligation” is defined here as any legal agreement that produces or could produce withholdable payments, other than equity interests (that is, both stock and partnership interests) and contains a definitive term.
However, if the grandfathered obligation undergoes significant modification, it would no longer be exempt from FATCA withholding tax.
Know Your Customer (KYC) regulations implements due diligence procedures for identification procedures of potential and existing clients of a Financial institution.
A New account is an account opened on or after 1 July 2014.
A NFFE is a Non-Financial Foreign Entity is defined as any foreign entity that does not meet the definition of an FFI, and generally includes:
- Privately held operating businesses;
- Professional services firms; or
- Any other non-publicly-traded foreign entity not involved in banking or investment management.
Non-Participating FFI (NPFFI)
A NPFFI that does not comply with FATCA or IGA agreements and is not deemed compliant or excepted.
Participating FFI (PFFI)
A PFFI that enters into an agreement with the IRS to comply with FATCA or complies according to the IGA agreement to undertake certain due diligence, withholding and reporting requirements for U.S. account holders.
A pass-through payment is any withholdable payment or other non-U.S. source payment to the extent that it is attributable to a withholding payment.
A Pre-existing account is an account opened prior 1 July 2014.
Qualified Intermediary (QI) is a foreign bank or other foreign financial institution that has entered into an agreement with the Internal Revenue Service (IRS) to maintain its own records of the U.S. or foreign status of the beneficial owners of U.S. sourced payments and may undertake certain responsibility for income reporting and tax withholding.
The QI regime under Chapter 3 has been supplemented by Chapter 4 also known as the Foreign Account Tax Compliance Act (FATCA).
Any account holder who:
- does not provide necessary information and documentation on its U.S. accounts;
- or fails to provide a waiver allowing reporting of the account holder to the IRS, in any case where any foreign law prevents such reporting of account holder.
Specified U.S. Person
A U.S. citizen (including dual citizen) or U.S. resident alien for tax purposes, privately owned domestic corporation, domestic partnership, or a domestic trust or estate.
Substantial U.S. Owner
A “Specified U.S. Person” that have more than 10% of interest in the foreign entity (directly or indirectly).
Any financial account held by a specified U.S. person or a U.S. owned foreign entity.
Below list of indicia may indicate U.S. status:
- Indication that the account holder is a U.S. citizen or resident;
- A U.S. place of birth;
- A U.S. mailing or permanent address;
- A U.S. telephone number;
- An account for which the only address is a P.O. Box, an “in care of” address or a “hold mail” address;
- A power of attorney (POA) or signing authority granted to a person with a U.S. address;
- Standing instructions to transfer funds to an account in the U.S.A.
Having one of these indicia does not mean that the account is owned by a U.S. person, only that it must be given closer scrutiny.
U.S. Owned Foreign Entity
A U.S. Owned Foreign entity is a foreign entity with one or more substantial U.S. owners (more than 10% direct or indirect ownership).
A withholdable payment is defined as any U.S. source dividend or interest payment and any other “fixed or determinable annual or periodical gains, profits and income” (“FDAP” income), as well as any gross proceeds from the sale or other disposition of assets that can produce U.S. source interest or dividends.