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Industry Updates

UK FATCA and Cayman Funds

15 Jul 2014

As noted in our prior update of 19 November 2013, the Cayman Islands government signed an intergovernmental agreement with the United Kingdom (the "UK IGA") on 5 November 2013. The UK IGA provides a framework for the implementation in the Cayman Islands of a UK tax residents reporting regime ("UK FATCA") which is similar in scope to the US Foreign Account Tax Compliance Act ("US FATCA"). In that respect, the structure and scope of the UK IGA is very similar to the intergovernmental agreement which the Cayman Islands government signed with the US government (the "US IGA") to implement US FATCA. Regulations to give effect to UK FATCA in Cayman Islands law were passed on 4 July 2014.

In our previous FATCA updates, we examined the proposed requirements under the US IGA relating to: (i) entity classification for Cayman Islands based Investment Entities; (ii) GIIN registration for a Reporting Financial Institution ("FI") and the concept of responsible officers; and (iii) due diligence obligations on Cayman Islands investment funds that are Reporting FIs.

Each of these updates can be viewed through the following links:  

US FATCA and Cayman Funds- Entity Classification

US FATCA and Cayman Funds- GIIN Registration

US FATCA and Cayman Funds- Due Diligence

This update follows our previous updates which should be read together, especially given the similarity between the UK IGA and US IGA. In addition, capitalised terms not otherwise defined herein have the same meaning given to them in our prior updates.

Points to note on the UK IGA (and how they differ from the US IGA) are as follows:

UK IGA - Substantive Agreement

(a) While the definition of "Cayman Islands Financial Institution" in the UK IGA is very similar to the definition in the US IGA, the UK IGA uses the term "resident in the Cayman Islands" whereas the US IGA uses the term "organised in the Cayman Islands". It is not currently understood how this will be implemented in practice as the Cayman Islands does not have a legal concept of "residency"or "tax residency".

(b) The definition of "Specified United Kingdom Person" in the UK IGA refers to persons or entities resident in the UK for tax purposes whereas the US IGA includes US citizenship as a factor. This accounts for the fact that the US taxes its citizens irrespective of residency whereas the UK taxes by reference to residency.

(c) Under Article 2 of the UK IGA, the information required to be collected and exchanged is largely the same as the requirements under the US IGA, except that a UK national insurance number is required instead of a US TIN, and for a Reporting FI which has registered with the IRS its GIIN should be supplied as part of the reporting.

(d) Under Article 3 of the UK IGA, the information exchange deadline remains the same at nine months after the relevant year end, except that under the UK IGA the first such exchange does not need to occur until the end of September 2016 (one year later than the US IGA).

(e) The UK IGA has no equivalent of Article 4 of the US IGA. In other words, there are no requirements relating to Non-participating FIs, there is no requirement to register for a GIIN equivalent, there is no concept of recalcitrant account holder, and there is no concept of branches-related entities that are Non-participating Financial Institutions.

(f) While the UK IGA includes a provision which allows HM Revenue & Customs to notify the TIA of significant non-compliance by a Reporting FI, this does not lead to the Reporting FI being treated as a Non-participating FI. As the UK IGA is not part of a withholding tax regime, there is no withholding tax that will arise as a result of being regarded as significantly non-compliant although this might be an offence under Cayman law resulting in enforcement action by the TIA.

(g) Under the UK IGA, there is no provision that anticipates future discussion between the governments on "foreign passthru payments".

UK IGA - Annex I

(a) The rules in Annex I of the UK IGA are largely identical to Annex I of the US IGA including as to relevant dates for determining whether an account is pre-existing or not, and also as to the dollar thresholds for determining account status for due diligence standards. It is noteworthy that the extension of time for the implementation of new entity accounts procedures under the US FATCA has not been reflected in UK FATCA.

(b) "UK indicia" means evidence of UK tax residency, a UK address, a standing order to remit funds to the UK, a power of attorney in favour of a person with a UK address, or an "in care of" or "hold mail" address in the UK.

(c) As with the US IGA, self-certification will play an important role in rebutting presumptions of tax residency where there are UK indicia.

(d) For Pre-existing Entity Accounts, there is no requirement to identify Non-participating FIs as the concept of Non-participating FI is not a concept in the UK IGA.

(e) As there is no functional equivalent of a GIIN, there is no requirement to identify GIINs or equivalent for investors as part of the due diligence procedures.

UK IGA - Annex II

(a) The categories of Non-Reporting Investment Entity in Annex II are largely similar to Annex II of the US IGA with a few subtle differences.

(b) Trustee Documented Trust. The trustee must be a Reporting Cayman Islands FI to qualify under the UK IGA. Under the US IGA, the trustee can be a non-Cayman FI (subject to certain exceptions).

(c) Sponsored Investment Entity. The sponsoring entity must be a Cayman Islands FI and must notify the Cayman TIA of its status as a sponsoring entity to qualify. Under the US IGA, the sponsoring entity can be any entity as long as it is registered as a sponsoring entity with the IRS and has a corresponding sponsoring entity GIIN. In addition, if a UK Reportable Account is detected, there is no requirement to register the sponsored investment entity because of the absence of a registration system (unlike with the US IGA). Accordingly, this category is practically identical to Sponsored Closely Held Investment Vehicle (see further below).

(d) Sponsored Controlled Foreign Corporation (CFC). There is no provision in the UK IGA equivalent to that in the US IGA.

(e) Sponsored Closely Held Investment Vehicle. The sponsoring entity must be a Cayman Islands FI and must notify the Cayman TIA of its status as a sponsoring entity to qualify. Under the US IGA, the sponsoring entity can be any Reporting US FI, Reporting Model 1 FI or Participating FI as long as it is registered as a sponsoring entity with the IRS and has a corresponding sponsoring entity GIIN.

(f) Investment Advisers and Investment Managers. This is substantively the same as the US IGA.

(g) Collective Investment Vehicle. While this is similar to the provision in the US IGA, notably the list of investors who qualify to invest excludes UK specific equivalents of (i) US Persons who are not Specified US Persons, and (ii) FIs that are not Non-Participating FIs.

UK IGA - Annex III

The UK IGA also includes an alternative reporting regime which is set out in Annex III. We do not examine the regime in this update since it is not anticipated this will be used by the investment funds industry as it relates to persons who are non-domiciled in the UK, and both the Reporting Cayman FI and the relevant Specified UK Person must elect to apply the regime.

Action Points

(a) Verification procedures need to be in place to deal with any new investor accounts from 1 July 2014. The verification requirements apply immediately to these accounts so procedures should be designed to identify UK Reportable Accounts as well as US Reportable Accounts.

(b) For pre-existing accounts, a review of account balances ought to be conducted to ascertain how soon remediation needs to be undertaken and the extent of that remediation.

If clients require legal advice or have any concerns about FATCA and the UK IGA, Maples and Calder has leading expertise on the relevant provisions having established a FATCA team which has worked closely with the Cayman Islands government over the past two years. MaplesFS also provides client focused solutions to FATCA.

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