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‘Heads up’ – FATCA Final Regulations

The US Internal Revenue Service and US Treasury  have published what we regard as one of the FATCA Final Regsmost important sets of regulations to appear in some time – at least for anyone who happens to be a trustee of one or more trustee documented trusts; or who is  a compliance specialist with an institution such as a fund administrator, bank, brokerage firm  or in any other similar entity  with US persons among their clients, settlors and trust beneficiaries.

The “Regulations Relating to Verification and Certification Requirements for Certain Entities and Reporting by Foreign Financial Institutions (FFI’s),” (issued as TD 9852), focus on the way key information is provided to the US tax authorities under the Foreign Account Tax Compliance Act (FATCA) regime.

These regulations were effective as of March 25, 2019. There is obviously much to digest in this document, however, a few key points are essential to take on board for those in the business of looking after trusts with US connections, or similar cross-border arrangements involving American citizens, clients or beneficiaries.

This is particularly the case for the majority of trust companies that we have observed that have, at some point, made the decision to act as foreign financial institution (FFI) sponsors. Under the new rules an FFI that agrees to sponsor certain types of entities, namely controlled foreign corporations, closely held investment vehicles, or Model 2 FFIs, must have a signed, written sponsorship agreement in place with each entity they are sponsoring, as of March 31.

There is also a new requirement for terminated sponsoring FFIs. In situations where the IRS terminates a sponsoring FFI’s sponsoring status, that FFI will now be required to obtain written approval from the IRS before it can act as sponsor again.

The proposed regulations require a responsible officer of a sponsoring entity “to certify that the sponsoring entity is compliant with the requirements of a sponsoring entity and maintains effective internal controls with respect to all sponsored FFIs for which it acts (or provide a qualified certification).”

By March 31st, each Foreign Entity, such as a foreign trust company that is acting as an FFI, should have had “sponsoring entity certifications” in place for sponsored entities in non-IGA (Intergovernmental Agreement) jurisdictions,

and certain Model 1 IGA jurisdictions, with older agreements in place not directly incorporating sponsored entities into the IGA.

Below are some of what we consider to be the other key points contained in the new regulations:

  • Who the new regulations affect: Sponsoring entities of foreign financial institutions (FFIs) and certain non-financial foreign entities (NFFEs); trustees of certain trustee-documented trusts, registered deemed-compliant FFIs, and financial institutions that implement consolidated compliance programs (compliance FIs).
  • The definition of a “Responsible Officer’ as it applies to FATCA regulations of this type has been expanded significantly.

The recently published regulations define the term “responsible officer” as “an officer of the sponsoring entity with sufficient authority to fulfil the duties of a responsible officer” as well as “an officer of an entity that establishes and maintains policies and procedures for, and has general oversight over, the sponsoring entity, provided such individual has sufficient authority to fulfil the duties of a responsible officer.”

The regulations call for the responsible officer of a sponsoring entity to be “an individual who is an officer of the sponsoring entity because the certifications required under these regulations should be made by the individual in the best position to know and represent whether the sponsoring entity is complying with its obligations.”

The responsible officer’s role is to oversee the compliance of the sponsoring entity with respect to EACH sponsored FFI.

In practice, though, the IRS knows that the person in the best position to know and represent whether a sponsoring entity is complying with its obligations under the regulations may potentially be an individual other than an officer of the sponsoring entity, given certain established industry practices.

Therefore, the final regulations define “responsible officer with respect to a sponsoring entity” as also potentially including “an officer of the sponsoring entity with sufficient authority to fulfil the duties of a responsible officer described.

The final regulations now also define a “responsible officer with respect to a sponsoring entity” as including “an officer of an entity that establishes and maintains policies and procedures for, and has general oversight over, the sponsoring entity, provided such individual has sufficient authority to fulfil the duties of a responsible officer described in [the regulations] (as applicable)”.

Further detail about this may be found in the Federal Register, on pages 10,976 and 10,977.

Still on the subject of responsible officers, since many investment entities do not appoint officers, but may appoint directors for corporate governance purposes, such directors would, the new IRS regulations say, “be able to fulfil the requirements of responsible officers.”

Meanwhile, acknowledging that many investment entities these days are structured as partnerships, in which the general partner or managing member has the authority to act on behalf of the partnership, and the general partner or managing member “may be an entity rather than an individual,” the new regulations also expand the definition of a “responsible officer” of a financial institution or sponsoring entity that is an investment entity to include – in addition to an officer of such entity –  “an individual who is a director, managing member, or general partner of such entity.”

Or, if the general partner or managing member of the investment entity is itself an entity, the term could also apply to “an individual who is an officer, director, managing member, or general partner of such other entity.”

  • One issue that the Treasury Department and IRS say they are “open to discussing…with the competent authorities of affected jurisdictions,” in due course, has to do with precisely how a sponsored Model 1 IGA FFI should comply with FATCA, if the Model 1 IGA jurisdiction in question “does not include a sponsored entity as a type of non-reporting institution in Annex II.”

Most of the FATCA IGAs that the US has with other governments are of the Model 1 variety, but there are eight that don’t include sponsored entities in their Annex II component: Denmark, France, Germany, Italy, Mexico, the Netherlands, Norway, and Spain.

There are other elements to this package of new regs, of course, and do contact us if you’d care to discuss.

One thing is apparent – the IRS will continue to refine and update these rules, and no one can afford to relax, least of all “FATCA responsible officers” – whichever type they happen to be.

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