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FATCA — the Foreign Account Tax Compliance Act — was enacted on 18 March 2010 as part of the US Hiring Incentives to Restore Employment (HIRE) Act, adding Chapter 4 to the US Internal Revenue Code.

Its aim is to reduce tax evasion by US persons by requiring information on financial assets held outside the United States to be reported to the US Internal Revenue Service (IRS). Non-US financial institutions — banks, brokers, custodians, management companies and investment funds — must either report certain data on their US accounts, or suffer a 30% US withholding tax on certain payments.

FATCA reaches much further than banks. It applies to:

• Foreign Financial Institutions (FFIs) — investment funds, custodians, depositary banks, insurers and certain holding companies and treasury centres.
• Non-Financial Foreign Entities (NFFEs) — trading companies, holding structures, trusts, foundations and personal investment companies, which must still certify their status.
• US persons — citizens and residents, including those living permanently outside the US or holding a non-US passport.

In practice, if a non-US entity holds a financial account anywhere, it will be asked to document its FATCA status.

FATCA is US law, but many governments have signed IGAs with the US and implemented FATCA into domestic law. There are two model agreements:

• Model 1 — institutions report to their own national tax authority, which exchanges the data with the IRS. Reciprocal and non-reciprocal versions exist.
• Model 2 — institutions report directly to the IRS, supplemented by government-to-government exchange on request.

Classification categories vary between IGAs and between IGAs and the US Treasury Regulations, so the entity’s jurisdiction of tax residence determines which rulebook applies. Entities in jurisdictions with no IGA fall back on the US Treasury Regulations.

For individuals, a US person is generally a citizen or resident of the United States — including someone who lives permanently outside the US or holds a non-US passport. For entities, this covers corporations and partnerships created or organised in the US or under US or state law, estates of US persons, certain trusts subject to US court supervision and control, and the US government and its agencies.

A “specified US person” is any US person other than certain excluded categories, such as publicly traded corporations and their affiliates, tax-exempt organisations, governmental entities, banks, brokers, dealers, regulated investment companies, REITs, common trust funds and certain charitable trusts.

Broadly:

• Corporations — any person owning, directly or indirectly, more than 10% of the stock.
• Trusts — any person treated as an owner of any portion of a grantor trust under US tax law, and any person holding directly or indirectly more than 10% of the beneficial interests.

The person must also be a specified US person. A Passive NFFE with substantial US owners generally must disclose them on the Form W-8BEN-E, or on a withholding statement accompanying a Form W-8IMY.

Classification runs in three steps:

• Step A — pick the right W-series form, based on whether the entity is US or non-US and whether it is the beneficial owner or an intermediary.
• Step B — identify the applicable rulebook, i.e. the IGA of the entity’s country of tax residence, plus any local guidance notes, or the US Treasury Regulations where no IGA exists.
• Step C — classify the entity by reference to its nature and activities: first test whether it is a Financial Institution; if not, it is a Non-Financial Foreign Entity.

There are five broad categories of Financial Institution. Test the entity against all of them — meeting any one is enough:

If none of these apply, the entity is a Non-Financial Foreign Entity (NFFE).

A trust falls within the Investment Entity definition where it is professionally managed. That is the case if any of the following is true:

• The trustee is itself a Financial Institution.
• The trustee engages a Financial Institution to carry out the day-to-day management functions of the trust.
• The trustee engages a Financial Institution to manage the trust’s financial assets — typically where a discretionary fund manager runs the portfolio.

Simply holding a retail product (such as units in an investment fund) or a fixed asset (such as an insurance product or investment bond) does not amount to professional management. A trust that is not professionally managed is generally a Passive NFFE.

A non-US entity that is not a Financial Institution is an NFFE. It is Active if it meets one of the exceptions, and Passive by default if it does not.

Common Active NFFE categories include:

• Less than 50% of gross income is passive income and less than 50% of assets produce or are held to produce passive income.
• Stock regularly traded on an established securities market, or a related entity of such a company.
• Governments, political subdivisions, public bodies, central banks and international organisations, or entities wholly owned by them.
• Holding companies and treasury centres of a non-financial group (but not entities operating as investment funds).
• Start-ups with no operating history that intend to run a non-FI business; entities in liquidation or bankruptcy that were not FIs in the past five years.
• Non-profit and 501(c) organisations established for religious, charitable, scientific, artistic, cultural or educational purposes.

A Passive NFFE must disclose its substantial US owners — or confirm it has none. That disclosure obligation is the main practical consequence of the classification.

Some Financial Institutions meet conditions that relieve them of registration, due diligence and reporting obligations. These are set out in Annex II of the relevant IGA and include:

• Exempt Beneficial Owners — governmental entities, international organisations, central banks, and certain retirement and pension funds, plus investment entities wholly owned by them.
• Deemed-compliant institutions — including sponsored investment entities, sponsored closely held investment vehicles, certain collective investment vehicles and restricted funds.

Categories and conditions vary by jurisdiction, so check the specific Annex II. A Financial Institution that does not meet any non-reporting category completes its W-form as a Reporting FI.

Forms and IRS instructions are published at irs.gov.

An account holder is the beneficial owner if it owns the assets or income in the account, or is entitled to them. It is acting as an intermediary if it receives amounts on behalf of another person or as a flow-through entity — for example qualified intermediaries (QIs), non-qualified intermediaries (NQIs), and non-US simple trusts, grantor trusts and partnerships.

For trusts, the common positions are:

• Non-US grantor trust — revocable by the settlor, or only the settlor and/or spouse are entitled to income while alive. The grantors are the beneficial owners.
• Non-US simple trust — all income must be distributed in the year. The beneficiaries are the beneficial owners.
• Non-US complex trust — generally irrevocable and discretionary. The trust itself is the beneficial owner and files a Form W-8BEN-E.

Chapter 4 status is the FATCA classification (Reporting FI, Passive NFFE, Active NFFE and so on). Chapter 3 status is the entity’s US tax character, which must also be declared on the same form.

On a Form W-8BEN-E, Chapter 3 options include corporation, partnership, complex trust, grantor trust, simple trust, private foundation, central bank of issue, tax-exempt organisation, estate, government and disregarded entity. On a Form W-8IMY they include qualified intermediary, non-qualified intermediary, territory financial institution, US branch, and withholding or non-withholding foreign partnerships and trusts.

A private investment company set up as a corporation would generally tick “Corporation”; an LLC ticks “Corporation”, “Partnership” or “Disregarded entity” as applicable.

Possibly. Where an entity concludes it is a Passive NFFE with substantial US owners, a Form W-9 from those US owners — and, outside the US, a secrecy waiver — may be required in addition to the entity’s own Form W-8BEN-E.

An Owner Documented FFI must provide W-series forms for all of its underlying beneficial owners. Curative documentation is required for non-US owners that display US indicia.

US indicia are the markers a Reporting Financial Institution must look for in the information it holds — whether collected for FATCA or for AML/KYC purposes. For individual accounts they are:

• Identification of the account holder as a US citizen or resident.
• Unambiguous indication of a US place of birth.
• A current US mailing or residence address, including a US post office box.
• A current US telephone number.
• Standing instructions to transfer funds to an account maintained in the United States.
• A currently effective power of attorney or signatory authority granted to a person with a US address.
• An “in-care-of” or “hold mail” address that is the sole address on file. For a pre-existing lower value account, a non-US “in-care-of” or “hold mail” address is not treated as a US indicium.

If US indicia are found, the account must be treated as reportable unless the holder provides curative documentation — for example evidence explaining why US citizenship was not acquired despite a US place of birth.

Annex I of a Model 1 IGA lets a Financial Institution elect not to review pre-existing accounts below a threshold. Applying the rule is optional, and applies to accounts held as at the pre-existing account cut-off date:

Accounts exceeding USD 1 million at a subsequent year-end become high value accounts and attract enhanced review. Separate thresholds apply to certain insurance contracts and depository accounts. There is no de minimis rule for new accounts.

A self-certification is a declaration by the account holder of its tax status, usually built into the account opening documentation. For new individual accounts the Financial Institution must obtain one and confirm its reasonableness against information gathered at onboarding, including AML/KYC documentation.

If the self-certification shows the holder is a US citizen or US tax resident, the institution treats the account as a US reportable account and obtains a self-certification containing the US TIN — which may be a Form W-9 or an agreed equivalent.

Where the de minimis rule is applied, the self-certification must be provided at account opening or within 90 days of the end of the calendar year in which the account first exceeds the threshold. A single valid self-certification can cover subsequent accounts, provided there is a procedure for tracking changes in circumstances.

A recalcitrant account is an account of a pre-existing individual investor who fails to provide sufficient self-certification or documentation for the institution to determine whether the account is US reportable. It also covers holders whose classification may have changed following a change in circumstances and who fail to supply the required information.

For new accounts, an institution cannot accept an investor who fails to provide adequate documentation at account opening.

Under a Model 1 IGA, what the final US regulations call a recalcitrant account is generally treated as a US reportable account — and the institution is typically not required to withhold on it or close it, provided it is reported.

A change in circumstances is any change that adds or alters information relevant to the account holder’s status — for example the appearance of a new US indicium, a change of address or telephone number, a new power of attorney, or a change to the entity’s activities or ownership that affects its FATCA classification.

Once identified, the institution must obtain updated documentation. If the holder does not respond within the applicable cure period, the account is reported. Institutions are expected to run ongoing monitoring rather than a one-off review at onboarding.

A Global Intermediary Identification Number (GIIN) is issued by the IRS on registration to participating FFIs, registered deemed-compliant FFIs and Reporting Model 1 FFIs, and identifies the entity to withholding agents. All GIINs appear on the published IRS FFI List, which counterparties use to verify status.

Reporting Financial Institutions register on the IRS FATCA registration portal and appoint a responsible officer or point of contact. Most NFFEs do not register — the exceptions are Direct Reporting NFFEs and Sponsored Direct Reporting NFFEs, which quote their GIIN on the W-form.

For a registered institution, the GIIN is usually sufficient — a counterparty can verify it against the IRS FFI List. US withholding agents will generally require the GIIN together with the relevant W-8 form. Non-registered entities, including NFFEs, document their status by supplying a completed W-series form with the correct Chapter 3 and Chapter 4 classifications.

The core enforcement mechanism is a 30% US withholding tax on certain US-source payments to non-participating foreign financial institutions and in respect of undocumented accounts. Beyond the withholding cost, the practical consequences include:

• Counterparties and custodians declining to deal with, or closing accounts of, undocumented entities.
• Sanctions under domestic law where an IGA has been implemented locally.
• Loss of a non-reporting or deemed-compliant status through failure to meet its conditions.

Both regimes require financial institutions to identify and report account holders resident elsewhere, and both use similar concepts — Financial Institution, Active and Passive NFE, self-certification and controlling persons.

The key differences: FATCA is US-specific and keyed to US citizenship as well as residence, carries a 30% withholding sanction, and uses IRS W-series forms and GIINs. The OECD Common Reporting Standard is multilateral, keyed to tax residence only, has no equivalent withholding mechanism, and uses its own self-certification forms. Most institutions run the two processes together, but a classification under one regime does not automatically carry over to the other.

Classification rules are genuinely complex and some entities qualify under several categories at once. If the position remains unclear after working through the decision trees, take professional tax advice. Financial institutions are generally not permitted to advise customers on their FATCA classification, so a relationship manager cannot resolve it for you.