FATCA Implications for Trustees

George Hodgson Deputy Chief Executive

STEP

Myths about FATCA:

• 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

Facts about FATCA:

• 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

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

• 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

Categorising trusts - UK/US IGA

Are any trusts not covered by the IGA? • 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

What determines if trust is a Financial Institution? • 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? • 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? • 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?

• 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

Non Financial Foreign Entities (NFFEs)

• 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-reportable accounts

• 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

Options for a trust which is a Financial Institution?

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

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

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

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

Timeline • 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

Who gets reported? • 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

• HMRC require ‘nil returns’

What gets reported?

• 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 about other FATCA type schemes?

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?

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’