FATCA
The intent behind FATCA is to keep U.S. persons from hiding income and assets overseas. not allow us to delve into the details. Qualifying FFIs are able to avoid the full compliance burden of FATCA, though registration is required (and renewed every three years) and we recommend that qualification be documented. At a very high level, these categories apply to registered investment funds whose investors are entirely composed of non-U.S. persons. To qualify as a registered deemed compliant FFI, qualified collective investment vehicles can only have participating FFIs, deemed compliant FFIs or other exempt investors. Restricted funds may have nonFFI investors but strict constraints are required to avoid any U.S. investment in the fund. Canadian VC and PE funds that are required to register and who will be receiving U.S. source income after June 30, 2014 should have registered on the FATCA portal; those who have not risk being subject to 30 per cent FATCA withholding on their U.S. source income and will have to consider the issues associated with recovering the withholding tax. Those who have not registered and are not expecting U.S. source income immediately after the July 1, 2014 can still register, as the IRS will be updating its list of registered FFIs periodically.
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Revised registration Q&A
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The IRS recently released additional FATCA frequently asked questions and answers. One of particular interest to VC and PE funds address the mechanics of how a “Sponsoring Entity” registers a “Sponsored Entity.” This is relevant in many circumstances, including, for example, when a sponsor wants to sponsor its various funds. The sponsoring entity provisions allow a fund sponsor to undertake FATCA compliance and due diligence procedures on behalf of its funds. The mechanics of how this would work on the FATCA portal were not clear. In the FAQ, the IRS states that, until January 1, 2016, a Sponsored Entity can provide the GIIN of the Sponsoring Entity and that the Sponsored Entity need not separately register on the FATCA portal.
Next steps After determining whether to register, VC and PE funds that are not deemed compliant should begin to implement FATCA. The first step for those not deemed compliant is to alter new account opening procedures so that Private Capital § Quarter 2 § 2014
new questions regarding possible U.S. status of new individual and entity clients are asked for new accounts opening on or after July 1, 2014. The IRS has released new forms – W-9, W-8 BEN and W-8 BEN-E – that include necessary FATCA certifications. Form W-8 BEN is now exclusive to non-U.S. individuals and Form W-8 BEN-E is now exclusive to non-U.S. corporations and trusts. The IRS has extended the date until which past W-8 forms are valid to the end of 2014. These new forms should both be embedded into new account opening procedures for FFIs that are required to do so for new accounts opened on or after July 1, 2014.
Proposed and temporary regulations under FATCA The IRS further provided FATCA guidance with the release of proposed and temporary regulations on February 20, 2014. This guidance does not change the July 1, 2014 effective date when FATCA becomes operational, but provided many helpful clarifications to the application of FATCA. For example, the definition of an “expanded affiliated group” was changed such that FFIs will no longer need to apply the complex indirect constructive ownership provisions. In addition, these regulations provide that a partnership or trust can elect to be a common parent of an expanded affiliated group. These regulations also introduced a new category referred to as a “Direct Reporting NFFE.” This new category allows passive NFFEs (foreign entities that are not financial institutions) to provide documentation on their substantial U.S. owners to the IRS directly rather than to their FFIs or withholding agents. A direct reporting NFFE is required to register with the IRS on the IRS FATCA portal, obtain a GIIN, and report its substantial U.S. owners. The IRS continues to publish guidance on FATCA and will continue to do so after FATCA’s July 1, 2014 start date. All FFIs will need to monitor future developments and be flexible to implement any new changes the IRS requires.
Dan Lundenberg is a partner at Grant Thornton LLP (Canada) and is the national leader of the U.S. Corporate Tax Services Group. Dan is also the Grant Thornton Canada leader for FATCA. He is based in Toronto and can be reached at 416-360-4988 or daniel.lundenberg@ca.gt.com.