New York (HedgeCo.net) – By James Wall and Jay Levy at J.H. Cohn LLP – Recent IRS guidance about the Foreign Account Tax Compliance Act (“FATCA”) could have significant reporting or cost consequences for offshore investment funds that have U.S. investors.
FATCA requires non-U.S. financial institutions and non-U.S. entities (including offshore investment funds) to provide information to the IRS identifying U.S. persons invested in non-U.S. bank and securities accounts. Earlier this year, the IRS issued guidance that, among other things, a foreign financial institution (“FFI”) must enter into an agreement with the IRS by June 30, 2013 to ensure that it will be considered a participating, or “good” FFI, thus avoiding the new 30 percent withholding tax slated to commence January 1, 2014.
The 30 percent withholding tax will be applicable to all “withholdable payments”—including all U.S. source dividends, interest, rents and royalties, and gross proceeds from the sale or disposition of any property that can produce dividends or interest from U.S. sources –made to non-participating FFIs.
FFIs are broadly defined to include non-U.S. entities that accept deposits, hold financial assets for the account of others or engage primarily in the business of investing, reinvesting or trading in securities, partnership interests, commodities, or any interest in such securities. FFIs will generally include banks, securities brokers and dealers, hedge funds, collective and family investment vehicles, private equity funds, and trust companies, among others.
In order to be a “good” FFI not subject to the 30 percent FATCA withholding, the FFI must, according to a lengthy-yet-incomplete IRS Notice, belong to a class of institutions the IRS designates as “per se” good; comply with procedures to ensure that the FFI does not maintain U.S. accounts; or enter into an FFI Agreement with the IRS with the required obligations to conduct due diligence regarding account holders and report any direct or indirect U.S. owners to the IRS.
Certain other proposals remain on the table regarding carve outs, withholding obligations, and due diligence and reporting requirements, among other points of consideration. To date no final regulations have been issued but it is anticipated that further guidance in the form of proposed regulations will be issued by the end of 2011 that likely will contain drafts of such forms.
While much is still unknown about the application of FATCA, what is clear is that it will create a substantial administrative burden for off-shore funds and financial institutions that invest in U.S. capital markets on behalf of their owners/account holders.
For updates on this topic as it develops, go to www.jhcohn.com/Industries/Financial-Services.
Jay Levy, CPA, is a J.H. Cohn partner and co-director of the Firm’s Financial Services Industry Practice. He may be reached at email@example.com or 877-704-3500.
James Wall, J.D., LLM, is a J.H. Cohn principal and director of the Firm’s International Tax Services group. He may be reached at firstname.lastname@example.org or 877-704-3500.