Foreign Account Tax Compliance Act (FATCA)

Transcription

1 Foreign Account Tax Compliance Act (FATCA) Implications for Funds TAX kpmg.lu

2 Overview of FATCA The U.S. government intends to combat tax evasion by U.S. persons more intensively. The Foreign Account Tax Compliance Act (FATCA), which was enacted into law on 18 March 2010, will bolster the U.S. government s arsenal and will make it more difficult for U.S. persons to hide income and assets. For investment funds, this translates into new withholding tax and reporting obligations which have the potential to dramatically change the way funds currently operate. Withholding Documentation Reporting Notice , released on 27 August 2010, sets forth the general framework for implementing FATCA. Further implementation guidelines are still to come. FATCA provisions are applicable to a wide range of foreign financial institutions (FFIs), including investment funds, and require the documentation of all investors in order to identify those that are U.S. persons. Under FATCA, a 30% withholding tax is applied on any payment from U.S. sources (interest, dividend or sales proceeds) made to an investment fund, unless the fund enters into a disclosure agreement with the U.S. Treasury whereby it agrees to: Identify U.S. investors; Comply with verification and due diligence procedures; Perform annual reporting; Deduct and withhold 30% from any payment made by the fund to inadequately documented investors; and Comply with requests for additional information. Who is impacted? > Funds invested in the U.S. market including, but not limited to, funds of funds, exchange-traded funds, hedge funds, private equity and venture capital funds, other managed funds, commodity pools, and other investment vehicles. Highlights FATCA provisions apply as from 2013 on payments of interest, dividend or sales proceeds on U.S. securities; Funds agreeing to participate in the programme will face enlarged due diligence and documentation requirements; In the absence of an agreement with the IRS, the fund will suffer a 30% withholding tax on interest, dividend or sales proceeds on U.S. securities; Portfolio interest exemption will be repealed for targeted bearer bonds; Obligation to withhold 30% U.S. withholding tax on payments made to recalcitrant account holders (U.S. investors refusing disclosure and non U.S. investors without proper FATCA documentation); and Annual Reporting of all assets held indirectly or directly by U.S. persons.

3 U.S. Withholding Agent Custodian Transfer agent Distributor * Distributor * non-u.s. U.S. Unidentified recalcitrant investor Non US-owned foreign entities US-owned foreign entities Institutional investor Institutional investor non-u.s. U.S. Unidentified recalcitrant investor Non US-owned foreign entities US-owned foreign entities Recalcitrant Entities 30% withholding tax No withholding tax * Typically, fund distribution channels involve several layers of distributors Remark: For direct investment, the reporting has to be done at the level of the fund In case of investment through multiple distributors, the reporting has to be done by the last FFI Widely-held funds The identification of U.S. investors is perhaps the most important requirement introduced by FATCA. For widely-held funds, however, identifying U.S. investors is difficult given the number of investors. The Luxembourg fund distribution model typically involves distributors (e.g. banks, insurance companies, wealth managers, etc.) and transfer agents. In particular this means that units or shares in investment funds are held through nominee accounts. Funds that are exclusively distributed through intermediaries that are themselves FATCA compliant will be in the position to address the problem, as these distributors should be held responsible for identifying the investors and reporting to the IRS. Funds that are distributed through noncompliant distributors, however, will need to address the identification of investors and reporting to the IRS. The role of the transfer agents will be crucial. When analysing the distribution channel, one needs to take into consideration that not only banks but also insurance companies are concerned (e.g. unit-linked life insurance policies). Alternative investment funds Specialized investment funds have encountered an increasing success over the last years. Private equity, real estate or hedge funds often are held by a more limited number of investors than UCITS. They are tailored to allow institutional investors, family offices or even qualified individual investors to access investments either directly or through feeder structures (like trusts or companies). These private placements will also need to be adequately documented, enabling the identification of the investors and the reporting to the IRS in order to avoid adverse withholding tax consequences.

4 Foreign trusts FATCA will extend the taxation of U.S. persons who transfer property to non-u.s. trusts. This provision, which is already applicable to transfers made from 18 March 2010, will typically impact U.S. investors who invest into Luxembourg based funds through foreign (e.g. Cayman) trust structures. Dividend equivalent payments Securities lending is part of the management strategies of investment funds today. Substitute dividend payments made under such transactions are also covered. The provisions are applicable since 14 September FATCA introduces an additional regime for FFIs involved in securities lending on U.S. securities (QSL status). How can KPMG help you? Considering the implications of FATCA, an FFI which wants to maintain relations with U.S. clients will not only have to comply with FATCA but also with other applicable regulations. The impact on the fund is not negligible and requires assistance of specialists. KPMG can: Inform senior management; Perform an impact analysis; Create visibility for your organization; Help develop and train a dedicated team in your organisation; and Assist you on technical implementation, documentation, reporting and withholding. What has to be done? Milestones 18 MAR 2010: Law enacted 18 MAR 2010: U.S. beneficiary presumption for foreign trusts becomes applicable 14 SEPT 2010: Provision on dividend equivalent payments becomes applicable 18 MAR 2012: End of the grandfathering period for certain obligations From Q onwards: Further guidance to be released Action points Impact analysis of FATCA on the business Risk assessment Awareness workshops Dedicated internal working group Communication with distributors, investors, transfer agents, etc. Gap analysis, system analysis and assessment Decision on becoming a participating FFI or not Staff training Formalities to become FFI Verification process on client information Electronic search on databases Verification of documentation Monitoring Obtaining waivers Why KPMG? To stay up to date and develop knowledge on FATCA, KPMG in Luxembourg has been active conducting different initiatives: KPMG in Luxembourg has set up a dedicated team composed of experienced professionals to perform an in-depth analysis of the new FATCA rules, with the support of KPMG U.S.; Speakers at various conferences on FATCA; Regular publication of newsletters with regard to new FATCA provisions; and KPMG in Luxembourg is a leading contributor to the KPMG worldwide network. Our team is at your disposal to help develop the right strategy for the implementation of FATCA within your organisation. 01 JAN 2013: FATCA becomes effective 2013 Reporting Withholding Compliance verification

5 Contact persons Georges Bock T: E: Gérard Laures T: E: Claude Poncelet T: E: KPMG Tax 10, rue Antoine Jans L-1820 Luxembourg T: F: E: tax@kpmg.lu The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation KPMG S.à r.l., a Luxembourg private limited company, is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International. Printed in Luxembourg.