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Industry Updates

Cayman Islands Signs FATCA IGA with US

30 Nov 2013

Further to our prior client updates on the US Foreign Account Tax Compliance Act ("FATCA"), we are pleased to confirm that on 29 November 2013 the Cayman Islands signed a Model 1(b) (i.e. non-reciprocal) intergovernmental agreement with the United States ("US IGA"). 

The governments have also agreed to replace the existing bilateral tax information exchange agreement entered in 2001 with an updated version, addressing the automatic information exchange requirements introduced by the US IGA and FATCA. 

The Cayman Islands government's release can be found here. 

A copy of the US IGA can be found here. 

Although the US IGA has been executed, it will still need to be brought into force in both jurisdictions in accordance with applicable protocols, before coming into effect. Supporting legislation is in the process of being drafted for the Cayman Islands, which will assist in removing any issues of confidentiality when complying with reporting requirements. 

The net effect of the US IGA is that Cayman Islands financial institutions ("FIs") will be treated as if they were participating foreign financial institutions ("Participating FFIs") for the purposes of FATCA, even where members of an FIs' affiliated group may not be. 

We shall shortly be producing comprehensive legal guides in relation to each major industry that is impacted by FATCA. In the meantime, please use the following links for further information on: 

Investment Funds; 

Structured Finance Products; and 

Insurance Companies.

In the interim, the key points for consideration are as follows: 

Purpose 

FATCA was enacted to require foreign entities to report information on foreign assets held by US persons. Failure to report the required information would result in the imposition of a punitive 30% withholding tax on qualifying US source payments. 

FATCA, in conjunction with the US IGA, requires Cayman FIs to report information annually to the Cayman Islands Tax Information Authority ("Cayman TIA") on financial accounts that are held by US individuals or entities controlled by Specified US Persons. The Cayman TIA will then forward the information to the US Internal Revenue Service ("IRS") on an annual basis. 

In addition, certain non-financial foreign entities ("NFFEs") which do not meet the definition of an FI, may separately be required to self-certify their status to withholding agents (using IRS Form W8 or similar) so as to avoid the application of withholding tax. 

Cayman FIs that comply with the IGA and enabling legislation will be treated as satisfying the due diligence and reporting requirements of FATCA. As such, those FIs will be 'deemed compliant' with the requirements of FATCA, will not be subject to withholding, and will not be required to close recalcitrant accounts (i.e. accounts held by clients that refuse to provide, or allow the FI to provide, the information). 

Further, the US IGA categorises FIs as either "Reporting FIs" or "Non-Reporting FIs". By default, all FIs are Reporting FIs, unless they qualify as Non-Reporting FIs. The categories of Non-Reporting FIs are specified in Annex II to the US IGA. 

For each US Reportable Account that it maintains, a Reporting FI is required, amongst other things, to obtain and ultimately report the name, address, and TIN of each Specified US Person that is a holder of such account (subject to the application of look-through provisions), the account number and certain financial information in relation to the account (e.g. account balance).

Scope 

An FI includes a Custodial Institution, Depository Institution, Investment Entity, or a Specified Insurance Company, which in practice will cover banks, custodians, nominees, trust companies and trusts, investment funds (including hedge and private equity funds), administrators, managers and advisers, as well as certain structured finance products and insurance companies.

Exclusions 

Annex II of the US IGA classifies certain entities as "exempt beneficial owners" and "deemed compliant FIs", which are collectively regarded as "Non-Reporting FIs", as well as describing certain excluded accounts (e.g. for retirement and pension plans or term life insurance contracts). 

Among the exclusions, Annex II contains specific conditions to be satisfied for Investment Managers and Advisers, Investment Entities (e.g. Sponsored Entities) and Trustee Documented Trusts. We shall elaborate on the Annex II exclusions under the industry specific legal guides. 

A Non-Reporting FI does not need to register on the IRS FATCA registration website, save for certain Sponsored Investment Entities that may have US Reportable Accounts. As such, Annex II should be reviewed very carefully before a client determines whether it should register. 

A Non-Reporting FI will however need to provide certification (e.g. via an IRS Form W8 or similar) to the relevant withholding agent as to its deemed-compliant status.  

Annex I of the US IGA also includes certain categories of account that are not treated as US Reportable Accounts, i.e. such accounts that do not need to be reviewed, identified or reported include: 

(a)  a pre-existing individual account with less than US$50,000 as of 30 June 2014; and 

(b)  a pre-existing entity account with less than US$250,000 as of 30 June 2014. Further, such pre-existing entity account does not need to be reviewed, identified, or reported as a US Reportable Account until the account balance or value exceeds US$1,000,000. 

Registration

As a first step, Reporting FIs will need to register with the IRS and obtain a Global Intermediary Identification Number ("GIIN"). Withholding agents that verify the GIIN for Reporting FIs are not required to withhold tax on payments to those FIs. 

Registration can be completed through the IRS FATCA registration online portal via this link. 

Alternatively, you may submit a hard copy Form 8957 to the IRS, but the IRS have noted that such forms will take longer to process and may not be the most reliable form of registration.

FATCA Procedures 

A Reporting FI will comply with FATCA and the US IGA where it; 

(a)  complies with the applicable registration requirements on the IRS FATCA registration website; and 

(b)  identifies US Reportable Accounts and reports annually to the Cayman TIA specified information in relation to those US Reportable Accounts. 

A Reporting FI which fails to comply with paragraph (b) above is not subject to withholding unless it is regarded by the IRS as a Non-Participating FI, under the terms of the IGA. 

A "US Reportable Account" is any Financial Account maintained by a Reporting FI and held by one or more Specified US Persons or by a non-US entity with one or more 'controlling persons that is a Specified US Person. 

A "Specified US Person" is generally defined as a US Person that is not otherwise a listed corporation, member of an expanded affiliated group (of the FI), a US federal or state agency, any tax exempt organisation (entity or other arrangement) under the Code; and an entity registered with the Securities and Exchange Commission. 

A "US Person" is defined as including; 

(a)  a US citizen or resident individual; 

(b)  a US partnership or corporation; or 

(c)  a trust, if a US court has jurisdiction over the administration of the trust, and one or more US Persons have the authority to control all substantial decisions of the trust. 

Certain indicia included under Annex I must be used to determine the US status of such persons. 

The term "Controlling Person" is to be interpreted in a manner consistent with the Financial Action Task Force Recommendations, which essentially provide that; 

(a)  for "legal persons", such as a company, control depends on the ownership structure of the company and may be based on a threshold, e.g. any person owning more than a certain percentage of the company (e.g. 25%); or 

(b)  for "legal arrangements" (e.g. trusts) persons exercising ultimate effective control over the trust which may include the settlor, the trustee(s), the protector (if any), the beneficiaries or class of beneficiaries, without reference to thresholds. 

Timelines 

The IRS FATCA registration portal has been opened for Reporting FIs to acquaint themselves with the content. Any information entered through the portal up to 31 December 2013 is not final and can be modified. 

From 1 January through 25 April 2014, Reporting FIs may finalise their registration information through the portal (or manually through submission of Form 8597 to the IRS) to obtain a GIIN by 30 June 2014, and to avoid the imposition of withholding tax from 1 July 2014. 

However, it is important to note that withholding agents are not required to verify GIINs on payments made prior to 1 January 2015 where the payee is a Model 1 Reporting FI. Accordingly, Cayman Reporting FIs can effect registration through to the end of 2014 and, if necessary, may self-certify their status to withholding agents after 1 July 2014 to avoid withholding. 

Action Points

As registration will be required at some point during 2014 and due diligence regarding account holders will need to be completed in 2014 and 2015, clients should be taking the following steps as soon as possible: 

(a)  Determine the person who will be responsible for FATCA compliance; 

(b)  Determine if FATCA compliance will be handled internally or outsourced; 

(c)  Identify whether entities are FIs or NFFEs; 

(d)  Identify whether any exclusions under Annex II of the US IGA may apply; 

(e)  Consider registration of each Reporting FI with the IRS, if applicable; 

(f)  Classify existing account holders and commence information remediation as required; and 

(g)  Develop and implement updated on-boarding procedures for new account holders on or after 1 July 2014 

The US IGA expressly notes that Reporting FIs may use third party service providers to fulfil their obligations under Cayman Islands law. 

Our affiliate, MaplesFS, has established a FATCA team and developed a suite of products over the last two years to assist clients with their FATCA obligations. The MaplesFS FATCA services include classification of accountholders and accounts, remediation and validation of Reportable Accounts, implementation of new on-boarding procedures and reporting. 

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