FATCA Implications for Trustees September 2014

George Hodgson

Myths about FATCA:

2

Myth 1 - It doesn’t apply to me, I’m British

Myth 2 - It doesn’t apply to the trust because

there are no US connections, assets or income

Myth 3 - It doesn’t apply to the trust because it is

worth less than $50,000/$250,000/$1,000,000

3

All trusts are deemed to be entities.

Trusts are either Investment Entities - a type of

Financial Institution (FI) - or Non Financial

(Foreign) Entities (NFFE).

What sort of entity a trust is depends on what assets are in the trust and who ‘manages’ the trust.

Facts about FATCA:

4

If the trust gets most of its income from financial

assets, it will be a Financial Institution where:

The trustee is a FI

The trustee engages FI to manage the trust

The trustee engages FI to manage the financial

assets of the trust

5

Trusts that are FIs may need to register with the IRS

and report

Trusts that are NFFE’s don’t need to register or

report, they will be reported on by any FIs they use if

the ‘account’ is above a threshold level

FATCA Myth 4 - Having to register and report is to be avoided at all costs

6

Categorising Trusts - UK/US IGA:

7

Only trusts that are UK tax resident are covered

by the UK/US IGA.

Entities which are registered charities are also

treated as ‘deemed compliant Financial

Institutions’ and do not have to register with the

US authorities.

Are any trusts not covered by the IGA?:

8

Test 1 : Is the trust carrying on business in the UK

and is 50 per cent or more of the trust’s gross

income attributed to trading in money market

instruments, foreign exchange and a range of

other financial instruments, portfolio management or the investment and administration of funds?

What determines if trust is a Financial

Institution?:

9

Test 2: Is more than 50 per cent of the trust’s income

attributable to investing, reinvesting or trading in

financial assets?

If YES: Go to Test 3

If No: Trust is NFFE

What determines if trust is a Financial

Institution?:

10

Test 3: Is the trust ‘managed’ by an entity that is

carrying on business in the UK where more than

50 per cent of gross income is attributable to a

business trading in money market instruments,

foreign exchange and a range of other financial

instruments, portfolio management or the

investment and administration of funds?

What determines if trust is a Financial

Institution?:

11

If the trustees appoint a discretionary fund manager

to manage the trust’s assets, the fund manager is

likely to be an FI and this will make the trust an FI

for FATCA purposes.

If the trustee is a corporate trustee, the trustee is

likely to be an FI and this will also make the trust an

FI for FATCA purposes.

12

Do not register or report.

If they have an account with an FI they will need to

confirm their status as NFFE to the institution.

If they have an account with an FI will need to do

due diligence to see if there are ‘Specified US

persons’ connected to the trust.

Non Financial Foreign Entities (NFFEs):

13

Accounts of deceased persons.

Accounts established for the purposes of a court

order, judgement or other legal matter.

Accounts established for the sale, exchange or lease

of real or personal property where the account only

holds monies used to secure the obligations of the

parties to the transaction.

Non-reportable accounts:

14

Option 1: Trustee Documented trust.

Trustee is a Reporting FI.

Trust becomes a non-Reporting UK FI.

Trust does not need to register or report.

Trustee will register and report on trust.

Options for a trust which is a Financial

Institution?:

15

Option 2: Trust Registers as a Financial Institution.

Must register with IRS and obtain a GIIN.

Must report as an FI via HMRC.

Will need to declare its status as a Reporting FI to

all FIs it has accounts with and provide GIIN.

Can use third party service provider, but

compliance responsibilities remain with trust.

Options for a trust which is a Financial

Institution?:

16

Option 3: Trust is a Sponsored Investment Entity

Sponsor must be authorised to manage trust.

Sponsor must register with IRS as Sponsoring Entity.

Sponsor must register the funds it sponsors as

‘Sponsored Entities’ with the IRS.

Trust will remain liable for any compliance failure of

its Sponsoring Entity.

Options for a trust which is a Financial

Institution?:

17

Option 4: Owner documented Financial Institution

Must appoint ‘Designated Withholding Agent’.

Trust need not register with IRS.

Designated Withholding Agent must be Reporting

Financial Institution and undertake due diligence

and reporting for the trust.

Owner documented status only applies to

payments from and accounts with the Designated

Withholding Agent.

Options for a trust which is a Financial

Institution?:

18

IRS portal now open for FIs to register

First list of FIs published on 2 June 2014

FI must be on published list by 1 January 2015

To meet the deadline they will need to be registered

by 25 October 2014

FIs are already sending letters asking for trust’s

status under FATCA

Timeline:

19

US Specified Persons who are beneficial owners

(AML definition).

Can generally use information obtained for AML

due diligence.

BUT…new requirement to establish tax residency of all account holders.

Who gets reported?:

20

For trusts that are NFFEs, FIs will report value of

the accounts they hold

If trust is an FI, ‘equity interests’ are reported

For settlor in year of settlement or with any

continuing interest or control, this includes

all assets as of last valuation.

For mandatory beneficiaries it is the Net

Present Value (NPV) of payments.

For discretionary beneficiaries it is based on

actual payments that tax year.

What gets reported?:

21

UK IGAs with CDs & OTs

If FI under UK/US FATCA, also FI under

UK/CD-OT FATCA.

Use same GIINs.

Different ‘indicia’, focus on tax residence.

Reporting timetable is FATCA + 12 months.

What about other FATCA type schemes?:

22

OECD Common Reporting Standard

Uses same approach as IGAs, technically,

however, no need to register.

No withholding.

Focus on tax residence.

Timetable is FATCA + 18 months.

40+ jurisdictions ‘early adopters’.

New ‘Global Standard’.

What about other FATCA type schemes?: