Frequently Asked Questions
1. Is the FATCA Service only for trusts that have a U.S. person involved (e.g., as a settlor, beneficiary, or protector)?
No—the FATCA service is for any trust that primarily invests in securities. A trust that primarily invests in securities is treated as a “foreign financial institution” (an “FFI”) for FATCA purposes, even if no person involved with the trust is a U.S. person.
2. Is the FATCA Service only for trusts that invest in U.S. securities?
No. A trust is treated as an FFI if it primarily invests in securities, including non-U.S. securities.
3. Does a trust need the FATCA Service if it has not yet invested its assets?
No. If a trust’s assets consist solely of cash held in a bank account, the trust would not be treated as an FFI. Instead, it would be a “non-financial foreign entity,” which does not need to use the FATCA Service to be FATCA-compliant.
4. If a trust primarily invests in securities and does not achieve a FATCA-compliant status, what are the consequences?
A trust that is treated as an FFI and that does not achieve a FATCA-compliant status will be treated as a “non-participating FFI” for FATCA purposes. The banks and brokers where the trust or an underlying entity maintains an account will be required to report the trust to the IRS as a non-participating FFI and withhold on certain amounts paid to the trust or an underlying entity. The FATCA-compliant status of a non-U.S. bank or broker could also be jeopardized by maintaining an account for a non-participating FFI. Therefore, because of the increased cost and risk, banks and brokers may choose to simply close accounts held by non-participating FFIs.
5. What if a bank or broker erroneously accepts documentation that does not reveal the status of the trust as a non-participating FFI?
Currently, certain banks and brokers erroneously accept documentation other than the documentation actually required by the FATCA regulations, and this documentation may not reveal a trust’s status as a non-participating FFI. The U.S. Internal Revenue Service (the “IRS”) will audit banks and brokers to insure their compliance with FATCA and with agreements the banks and brokers have entered into with the IRS. A bank or broker that has erroneously accepted incorrect documentation from its account holders may be subject to penalties and may lose its own FATCA-compliant status. Additionally, non-U.S. banks and brokers that do not properly comply with FATCA could harm their correspondent banking relationship with a U.S. institution.
Therefore, banks and brokers should be expected to improve their account holder documentation processes either in advance of or as a result of an IRS audit or an inquiry from a U.S. correspondent institution. Trusts that have already achieved a FATCA-compliant status and submitted the proper documentation can avoid being caught up in the eventual scramble.
6. Does the FATCA Service apply to underlying entities through which the trust invests?
Yes. Under current law, it is unclear exactly how underlying entities should be treated for FATCA purposes. The FATCA Service includes taking any necessary action to insure FATCA compliance for the entire structure.
7. Does the FATCA Service have any effect on the pre-FATCA 30% withholding applicable to certain types of U.S. source income?
No. Under pre-FATCA law (which is still in effect), U.S. withholding agents are required to withhold 30% from certain types of U.S. source income, including certain types of interest and dividends, unless an applicable treaty provides for a lower rate of withholding. The 30% FATCA withholding applies concurrently with this pre-FATCA withholding (i.e., ultimately only 30% total is required to be withheld). Note, however, that there are important differences between the two withholding regimes, including the following: (i) FATCA withholding is generally nonrefundable, whereas pre-FATCA withholding is refundable in certain circumstances if it exceeds actual U.S. tax liability; and (ii) FATCA withholding applies to a broader set of payments than does pre-FATCA withholding. Also, as described above, failing to achieve a FATCA-compliant status has other negative effects in addition to the 30% FATCA withholding. Therefore, achieving a FATCA-compliant status is still important for trusts that are subject to the pre-FATCA 30% withholding on certain types of U.S. source income.
8. What is the process to sign up for the FATCA Service?
No formal agreement or documentation is required. A client that wishes to utilize the FATCA Service need only so inform us.
9. What action does the trustee take for trusts that sign up for the FATCA Service?
Pursuant to the FATCA Service, we will take all necessary action for the trust and any underlying entities to achieve and maintain a FATCA-compliant status. Specifically, we will cause the trust to be treated as a “sponsored entity” for FATCA purposes, which is one type of “registered deemed-compliant FFI.” The action we will take for each trust includes the following: (i) registering the trust with the IRS, (ii) providing the proper withholding forms to banks and brokers, (iii) performing any necessary reporting to the IRS, (iv) monitoring changes in the law to insure continued FATCA compliance for your structure, and (v) working with banks and brokers to insure that they do not improperly withhold under FATCA.
Please see the our FATCA Memorandum for more details on this new service, and please let us know if you would be interested in further discussing this service and its cost.
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