Foreign Account Tax Compliance Act (“FATCA”) was enacted in 2010 by the US Congress to target non-compliance by US taxpayers using foreign accounts. FATCA’s cornerstone is that it requires foreign financial institutions to report to the US Internal Revenue Service (“IRS”) information about financial accounts held by US taxpayers or by foreign entities in which the taxpayer hold a substantial ownership interest. Withholding tax at 30% is imposed on the US source income of any financial institution that fails to comply with this requirement.
In the UK FATCA is implemented by the introduction of The International Tax Compliance (United States of America) Regulations 2014 following the Intergovernmental Agreement (IGA) which was signed by the UK and the US in September 2012.
The effect of the legislation is to place an obligation on financial institutions to inform the IRS when any sums are paid to or from a US person, regardless of where in the world the payment is made. In addition, the IRS want to be assured that the financial institution has adequate systems in place to identify and record any US persons. All UK entities are subject to the UK Rules and will soon find that they will be asked for their FATCA status with the usual anti-money laundering and client identification processes when dealing with financial institutions such as banks.
While the major impact of FATCA will fall on banks and investments houses, it is essential to understand that FATCA’s consequences are more far reaching. While FATCA’s net does not stretch as far as UK charitable Trusts, the majority of UK Trusts are classed as financial institutions under FATCA irrespective of whether or not they have US persons as settlors, trustees or beneficiaries or US assets.
Once a financial institution is caught by FATCA, it will need to consider whether it needs to register with the IRS and subsequently report transactions to the IRS via HMRC, although the exact mechanism for doing so has not yet been established. The requirement for registration and reporting will depend on the nature of the Trust, the composition of the Trustees, the underlying assets and who manages those assets. The fact is, however, that whether a Trust has a US connected settlor, trustee or beneficiary does not alter the characterisation of the trust for FATCA purposes. It may, however, alter the reporting requirements in the case of a US trustees, there may also be a question over the residence of the trust itself.
The guidance published to date suggests that executors of a deceased person’s estate will not be classed as entities within FATCA and will therefore not be reportable as long as the executors are administering the estate. However, it is not uncommon for executors to become Trustees of a will Trust in due course and care should be taken in identifying the point of transition between the two.
Broadly speaking, any trust that derives more than 50% of its income through investing, reinvesting or trading in financial assets where the trust is “managed” by an entity that acts for customers or where more than 50% of gross income is attributable to a business trade in money market instruments, will be caught by FATCA. While the term “manage” is undefined in the UK Regulations, the US Regulations indicate that any financial institution undertaking the activities of an investment entity on behalf of the trust, most commonly as a discretionary fund manager, will be deemed to be a manager of the trust in this context. In this scenario, the trust itself is a financial institution and the trustees will either have to register themselves with the IRS or the trustees can decide to appoint a withholding agent and opt for deemed compliant status.
Alternatively, the existing Trustees may consider appointing a corporate trustee which is in itself a financial institution registered with the IRS, thus avoiding the need to register with the IRS themselves and transferring the responsibility for reporting to that corporate trustee.
The deadline for registration with the IRS is 25 October 2014 and advice should be sought immediately on whether or not any particular trust is classed as a financial institution under FATCA. This also applies to trusts that are going to be established going forward and care should be taken to monitor the status of the trust under FATCA on a regular basis.
Once the trust is registered with the IRS, it will be issued a GIIN number which banks and other financial institutions will need in order to carry out services for the Trust. As anyone who has had any dealings with the IRS will know, their forms are notoriously incomprehensible and it is recommended that advice is sought immediately on whether or not a trust falls under FATCA because if it does, substantial time should be allowed to complete the necessary IRS forms.
In line with the recent trend by tax authorities worldwide, the UK has now stated that it will also look to sign further IGAs with other jurisdictions. In particular, the Crown Dependencies and the British Overseas Territories have all agreed to enter into automatic Tax Information Exchange Agreements with the UK as well.
If you are involved with any trusts (whether as settlor, trustee or beneficiary), we urge you to consider the status of your Trust under FATCA as soon as possible and if you have any queries in relation to this article, please do not hesitate to contact a member of the Edwin Coe Private Client team.
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Please note that this blog is provided for general information only. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content of this blog.
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