US Regulations

Transcription

1 January 2015 Tax alert Cayman Islands FATCA tax alert Get the facts on FATCA! You can access current FATCA news and thought leadership. Type into your web browser: On 4 July 2014, the Cayman Islands Government advised that the Tax Information Authority (International Tax Compliance) (United States of America) Regulations, 2014 (US Regulations) and Tax Information Authority (International Tax Compliance) (United Kingdom) Regulations, 2014 (UK Regulations) had been put into effect. US Regulations UK Regulations Subsequently, on 22 July 2014, the Cayman Islands Government distributed final guidance notes on the implementation of the Foreign Account Tax Compliance Act (FATCA) in the Cayman Islands in accordance with the terms of an Intergovernmental Agreement (IGA) that the Cayman Islands entered into with the United Kingdom on 5 November 2013 (UK Agreement) and the United States on 29 November 2013 (US Agreement). The guidance notes were subsequently updated, and a version 2.0 was issued on 15 December These are available for review on the Cayman Islands Tax Information Authority website. Provided Cayman Islands Financial Institutions (including subsidiaries and branches of nonresident Financial Institutions that are located in the Cayman Islands) comply with these regulations, when effective, they will not be subject to FATCA withholding tax under the US Internal Revenue Code. A summary of the main points of interest in the Cayman Islands regulations and guidance notes and s are detailed below. This includes many provisions set out in the IGA that are incorporated into the regulations. This summary is not meant to be a substitute for the actual guidance notes or the regulations..

2 A. Cayman Islands Tax Information Authority (International Tax Compliance) (United States of America) Regulations, 2014 Key issues: FI s ability to use alternative definitions under Treasury Regulations or OECD CRS Sections 2.(2)(a) and 2.(2)(b) of the US regulations state that a word or expression defined in the US Agreement has the meaning in that Agreement except to the extent that a Financial Institution (FI) may use an alternative definition provided in either the US Treasury Regulations or the Common Reporting Standard (CRS) for the Automatic Exchange of Financial Account Information published by the Organisation for Economic Co-operation and Development (OECD). Registration An application for registration shall be made by a Reporting Financial Institution or Registered Deemed- Compliant Financial Institution as soon as possible but prior to 31 December 2014 or, if the institution has not commenced to carry on a business on that date, not later than 30 days following the date of commencement of that business. Information returns Submission of informational returns of US reportable accounts and payments to non-participating FIs for the 2014 US tax year will be due to the TIA by 31 May Due date for UK reporting is 31 May US reportable accounts For all US reportable accounts maintained by the institution in that year, the returns must include: For 2014 tax year and every following calendar year: Cayman FIs may use an alternate definition under the US Regulations or OECD CRS, as long as the use of such definition would not frustrate the purposes of the Agreement. Determination of such allowable use will take into account any guidance issued or approved by the Cayman Islands Tax Information Authority (TIA). Pre-Existing Entity Account identification date Section 5.(5)(f) states that a New Entity Account is a financial account opened after 30 June 2014, except insofar as a Reporting FI has elected to substitute a date no later than 31 December 2014 for the 30 June 2014 date. Pre-Existing account holder opens a new account Name, registered address and Global Intermediary Identification Number (GIIN) of the financial institution filing the return A statement of whether paragraph five of Article 4 of the Agreement (Special Rules Regarding Related Entities and Branches that are Non-participating Financial Institutions) applies and, if it does, whether the requirements have been met Name, address and US tax identification number or date of birth, as appropriate, of each account holder that is a US person or of a passive entity and its controlling US person(s), where this arises; also required for each: Account number (or its functional equivalent) Account balance or value at end of the tax year or, if an account was closed during the year, the highest balance or value of the account on the date the Reporting FI closed the account Section 7(2) provides that if an institution obtains, or is in the process of obtaining, evidence of a person s US status in relation to any Pre-Existing Account, it may rely on the evidence in relation to any new account unless it has reasonable cause to believe that the person s US status has subsequently changed. Additional details to be required, beginning the tax year 2015: For custodial accounts, the total gross amount of interest, dividends and other income arising from assets held in the account For depository accounts, the total gross amount of interest paid/credited 2

3 For all other accounts, the total gross amount paid or credited to the account holder where the institution is the obligor or debtor, including the aggregate amount of redemption payments Additional details to be required, beginning with the 2017 tax year: For custodial accounts, the gross proceeds from sales/redemptions associated with the account where the institution acted as custodian, broker, nominee or agent Payments to Non-Participating Financial Institutions (NPFIs) A Reporting Financial Institution shall establish and maintain arrangements designed to identify payments made to an NPFI in either the calendar year 2015 or A Reporting Financial Institution shall in respect of each of the calendar years 2015 and 2016 prepare a return detailing the names of the NPFIs to whom payments have been identified in accordance with regulation 10(1) as having been made in the year in question and the total amount of payments made to each of the NPFIs in question. If, for a calendar year, no payments are identified, the Reporting Financial Institution shall prepare a return for the calendar year stating that fact. Due dates for Cayman Islands Financial Institutions Notification to the Competent Authority An FI which has reporting obligations under the regulations shall notify the Competent Authority of that fact and shall provide by 31 March in the first calendar year in which it is required to comply, the following: The name of the FI Categorization of the FI as determined in accordance with the Agreement Where the FI has registered with the Internal Revenue Service (IRS) of the US for purposes of the US Agreement with regulation 4, the GIIN assigned to that FI by the IRS In conjunction with the release of the updated Cayman Islands FATCA Guidance Notes, the Cayman Islands Government also indicated that the Ministry currently is making proposals for Cabinet approval to amend the notification due date prescribed in Regulations 10(3) and 14(3) of the UK and US Regulations, respectively, from 31 March to 30 April. An industry advisory will be issued following Cabinet s consideration. Filing date of informational return to the Cayman Islands TIA An FI shall send a return to the Competent Authority on or before 31 May of the year following the calendar year to which the return relates, in the form the Competent Authority requires. The required form for electronic reporting will be made available on the Cayman Islands TIA website in early The reporting format will be consistent with currently published schemas by the US IRS for FATCA and the OECD for CRS. Nil returns Under US Regulations if, during the calendar year in question, the Reporting Financial Institution maintains no reportable accounts it must submit a return stating that fact (i.e., nil return). Enforcement and penalties The Regulations (both US and UK) detail anti-avoidance measures directed at arrangements put in place by any person to avoid the obligations required by the Regulations. These anti-avoidance provisions mirror existing penalty provisions found under Exchange of Information Laws in the Cayman Islands, for example, the Reporting of Savings Income Information (European Union) Law enacted in Specific details on the penalties related to non-compliance can be found in the Cayman Islands TIA Regulations enacted for both the US and UK Agreements. Third-party appointment Third parties may be appointed as agents to carry out the duties and obligations imposed by these regulations. However, the FI must have access to all records and documentary evidence used to identify and report on 3

4 reportable accounts and remains responsible for carrying out its obligations. The FI is responsible for any failure of a third party to carry out its obligations, notwithstanding that the actions were the actions of the third party or that the failure to act was the failure by that third party to act. Arrangements to obtain the US TIN of every specified US person on a reportable account are required for all new accounts opened from 1 July 2014 (except for New Entity Accounts insofar as a Reporting FI has elected to substitute a date no later than 31 December 2014 for the 30 June 2014 date) and all Pre-Existing Accounts from 1 July It would seem most efficient for FIs to request the US TIN, where relevant, from holders of new accounts in the same document/process via receipt of a completed Form W9 or as the core self-certification question itself (see further comments below). B. Cayman Islands Tax Information Authority (International Tax Compliance) (United Kingdom) Regulations, 2014 Much of the UK Regulations in general are similar to the US Regulations previously discussed in item A, though obviously some terms and references will differ between these jurisdictions. Key differences between the US and UK Regulations will be discussed in more detail under item C (Cayman Islands IGA guidance notes section) of this alert. It is advised that the UK Regulations be reviewed in order to understand those requirements, though we will highlight some of the key issues here. Account holder identification Under UK Regulations, the account holder s UK tax status and residency status is important for the due diligence and identification process, not citizenship or place of incorporation as with the US Regulations. Information returns initial due date Submission of informational returns of UK reportable accounts for the 2014 and 2015 tax years will be due to the TIA as of 31 May Registration Currently, there is no required registration for FIs with Her Majesty s Revenue and Customs (HMRC) under the UK Regulations and, thus, no UK equivalent to the US GIIN. Pre-Existing Accounts For individual or entity accounts, any reference to a Pre-Existing Account is to a financial account maintained on 30 June Any account opened after that date is considered a new account for UK Regulations. Nil returns Under the UK Regulations if, during the calendar year in question, the Reporting Financial Institution maintains no reportable accounts it must submit a return stating that fact (i.e., nil return). C. Cayman Islands IGA guidance notes (22 July 2014) The Cayman Islands guidance notes cover both the US and UK regulations throughout the document, as well as OECD CRS definitions where applicable. This comprehensive approach should be beneficial for all institutions in understanding their compliance requirements for the various information reporting regimes. It should be noted that to best serve the Cayman Islands institutions, the Cayman Islands guidance notes will be updated periodically to address any issues or terms that need additional clarity or definition. Comments from industry may be communicated to the Cayman Islands Government through the appropriate channels. Chapter 1: Background The Cayman Islands entered into IGAs with the US and UK in 2013 which, throughout this alert, will be referred to as the US Agreement and UK Agreement as applicable. 4

5 The Cayman Islands Competent Authority The Cayman Islands Competent Authority is the TIA. The functions of the TIA are carried out by the Director and staff of the Department for International Tax Cooperation (DITC). The TIA will receive the information required to be disclosed under the Agreements and transmit that information to the IRS in respect of the US Agreement and HMRC in respect to the UK Agreement. The TIA does not have responsibility for the audit of the information provided by the FIs. The TIA will monitor compliance by the FIs with domestic legal requirements and, as necessary, will enforce applicable Cayman Islands Laws and Regulations, including cases of significant non-compliance reported by the US or UK Competent Authorities. Specified Persons Reference to Specified Person (defined in the US and UK Agreements) in these guidance notes relates to either a Specified US Person or Specified UK Person, as the context requires. Where a different treatment applies, these guidance notes will state Specified US Person or Specified UK Person. Chapter 2: Financial Institutions affected by FATCA What constitutes a financial institution? Custodial institutions will include brokers, custodial banks, trust companies and clearing organizations. Depository institutions will include banks, credit unions, industrial and provident societies and building societies, etc. Investment entities, as defined in the Agreements, include any Entity that conducts as a business, or is managed by an Entity that conducts as a business, one or more of the following activities for or on behalf of customers: 1) Trading in money market instruments 2) Foreign exchange 3) Interest rate and index instruments 5) Individual and collective portfolio management 6) Otherwise investing, administering or managing funds or money on behalf of other persons this category includes collective investment funds, fund administrators, fund managers, fund distributors and custodians. The updated guidance notes (version 2) have provided additional clarity on the managed by test and between managing and administering by entities (Note that reporting obligations only exist if financial accounts are held with the institution and so duplicative reporting on the same financial accounts is not intended to arise. It should also be noted that the CRS definition of Investment Entity differs from the Agreements definition. However, the CRS definition is substantially similar to the US Regulations definition. Entities have a choice of which definition to apply.) 7) Specified Insurance Companies, including insurance companies and their holding companies when the insurance company writes products which are cash value or annuity contracts 8) A Captive Insurance Company that does not issue cash value insurance contracts or annuity contracts would, in most instances, not be categorized as an FI and would thus be deemed a Non-Financial Foreign Entity (NFFE). The updated guidance notes (Version 2) in section have clarified the requirements where a Cayman captive insurance company, having made a US IRC section 953(d) election, would be treated as a US entity and not a Cayman entity for FATCA purposes. 9) The updated guidance notes have added a Nominee Companies section (2.12), defining the requirements to be considered disregarded. 10) Subsidiaries and branches of a non-cayman Islands entity (including a US Entity) carrying on a business as a Custodial Institution, Depository Institution, an Investment Entity, or Specified Insurance Company in the Cayman Islands will be a Reporting Cayman Islands Financial Institution. 4) Transferable securities and commodity futures trading 5

6 What constitutes a Cayman Islands Financial Institution? A Cayman Islands Financial Institution is any financial institution organized under the laws of, or resident in the Cayman Islands. For a company, if the company is incorporated in the Cayman Islands For trusts, if any of the trustees are incorporated, registered or licensed in the Cayman Islands (section 6) For partnerships, if the partnership is established in the Cayman Islands Related Entities and Expanded Affiliated Groups Under the US Agreement, an Entity is a related Entity of another Entity if either Entity controls the other Entity, or the two Entities are under common control. Control for this purpose includes direct or indirect ownership of more than 50% of the vote or value in an Entity. The definition of control and expanded affiliated group under the US Regulations may be used by an FI instead. Under the US Regulations, the definition of control includes direct or indirect ownership of more than 50% of the vote and value in an Entity. To avoid potentially onerous identification, reporting and registration burdens resulting from being part of an Expanded Affiliated Group, an Entity may wish to use the US Regulations definition of control as the potential of meeting both vote and value tests is less likely. Chapters 3 and 4: Non-Reporting Financial Institutions (US Agreement) and Non-Reporting Financial Institutions (UK Agreement) US Agreement Exempted Financial Institutions Certified Deemed Compliant Financial Institutions (Annex II of the IGA) Expanded definitions and categories of Certified Deemed Compliant Financial Institutions (CDCFIs) are provided and include: (1) FIs with a local client base (required to be assessed annually via implemented policies and procedures), (2) certain collective investment vehicles, (3) local banks, (4) FIs with only low value accounts, (5) qualified credit card issuers, (6) sponsored closely held investment vehicles, (7) trustee-documented trusts, (8) sponsored investment entities and controlled foreign corporations, (9) limited life debt investment entities, (10) investment advisors, and (11) investment managers. The updated guidance notes have given more clarity around the investment advisor (IA) and investment manager (IM) definition, also giving an example of a general partner to a limited partnership. Each IM or IA should still determine its FATCA classification based on its specific duties and services provided per the regulations. The updated guidance notes have also added an additional type of CDCFI Excepted inter-affiliate FFI which is detailed in the new section A Cayman Islands FI that qualifies as one of the CDC categories above will not need to register to obtain a GIIN, save in limited circumstances detailed in section 3.3. It will need to certify its status by providing documentation regarding its owners to withholding agents where relevant. Registered Deemed Compliant Financial Institutions Cayman Islands FIs may also benefit from categories of Registered Deemed Compliant Financial Institutions under the US Regulations which include: (1) a non-reporting member of a group of related participating FIs, (2) a restricted fund, and (3) a qualified collective investment vehicle. A Cayman Islands FI that qualifies as one of the Registered Deemed Compliant categories above would need to register with the IRS to obtain a GIIN, or be registered by another Entity. Such an FI will not need to report, but details of Financial Accounts maintained by the FI may be reported by another entity. In order to benefit from certain exemptions, the guidance notes state that FIs must implement policies and procedures to monitor that these conditions are continuously being met. UK Agreement Exempted Financial Institutions Expanded definitions and categories of small or limited scope FIs qualifying as Non-Reporting Cayman Islands Financial Institutions include: (1) local credit unions, 6

7 (2) FIs with only low value accounts, and (3) qualified credit card issuers. Investment entities that qualify as Non-Reporting Cayman Islands Financial Institutions include: (1) Trustee- Documented Trusts, (2) Sponsored investment entities (3) Sponsored closely held investment vehicles, (4) Investment advisors and investment managers, and (5) Collective investment vehicles. This section also details special rules for reporting interests of investment entities in collective investment vehicles which, if the qualifications are met, may allow for the reporting obligations of the Investment Entity with respect to those interests to be met. The UK Agreement differs in many aspects from the US Agreement; thus, those institutions with reporting requirements to both the US and the UK should review the guidance notes in order to comply appropriately with each. Chapter 5: Exempt beneficial owners What types of entities and products qualify for this status? Entities regarded as Exempt Beneficial Owners are Non- Reporting Financial Institutions. Entities and products that qualify as Exempt Beneficial Owners include (1) government entities that, for the Cayman Islands, include the Cayman Islands Monetary Authority, (2) retirement/pension funds that, for the Cayman Islands, includes (a) Broad and Narrow Participation Retirement funds meeting the criteria in Annex II of the Agreements (under which subject to government regulation means they are registered with the Cayman Islands National Pensions Office) and (b) Pension Funds managed and administered by the Public Service Pensions Board. Exempt beneficial owners do not need to register with the IRS for a GIIN. Due to an addition made to Annex II in the UK Agreement for Limited Capacity Exempt Beneficial Owners, the updated guidance notes added a new section 5.4, detailing that the Controlling Persons of a charity shall be treated as Exempt Beneficial Owners solely in their capacity as a Controlling Person of that charity, therefore removing the requirement to look through the charity to the Controlling Persons. Thus, the UK and US Agreements are now similar in this treatment. Chapter 6: Trusts How are Cayman Islands Resident Trusts viewed for the US and UK Agreements, and what are the general reporting and registration requirements? This section applies to all Cayman Islands Resident Trusts. A trust is resident in the Cayman Islands, for purposes of the Agreement, if it has a trustee that is a trust corporation which is incorporated, registered or licensed in the Cayman Islands. A Cayman Islands Resident Trust thus may be established under Cayman Islands law or the law of another jurisdiction. The updated guidance notes add the following language to the definition above prior to the last sentence or, in the case of an individual trustee, the person is resident in the Cayman Islands. Multi-jurisdictional trustees may be involved, thus for a Cayman Islands Resident Trust the Reporting Cayman Islands Financial Institution/Cayman Islands resident trustee must undertake the reporting obligations where required, unless it has actual knowledge that another FI has reported the required information (regardless of whether that FI is a Cayman Islands Financial Institution or not). Actual knowledge is defined as holding written confirmation from the trustee in the other jurisdiction that the trust has been reported for the US or UK Agreement. Reporting obligations under the Agreements only apply to Cayman Islands Resident Trusts where any of the following persons fall within the definition of Controlling Persons under section 9.7, and are identified as Specified Persons as defined under section 1.7: Settlor Beneficiary or class of beneficiary Trustee Protector Any other natural person exercising ultimate effective control over the trust Alternatively, persons described under the definition of equity interest in the US Regulations may be used. 7

8 If any of the above is identified as a Specified Person, then information related to the trust may need to be reported. How this information is reported, and by whom, depends on whether the trust is an FI or Non-Financial Foreign Entity. Financial Institution, or (5) a Participating Foreign Financial Institution. 2) The trustee agrees to report all the information required to be reported with respect to the trust. If none of the above is identified as a Specified Person, then no further reporting is required with respect to the trust. In this situation, the trust will not be required to register under the US Agreement, since the trustee will register by virtue of being an FI. Trusts are categorized for purposes of the Agreements as Investment Entities, FIs or Non-Financial Foreign Entities (NFFEs). The guidance notes in section 6.4 give a very good overview of the categories and provide examples of trust scenarios. The updated guidance notes add a paragraph to section 6.4, which says that a trust could meet any of the FI definitions, depending on the nature of its activities and the assets held. A trust is expected to be treated as an FI most commonly where it meets the definition of an Investment Entity. Section 6.4 sets out how a trust would be treated if it was an Investment Entity or an NFFE and not in regard to trusts that might be any other type of FI. Reporting and registration for trusts has various options. A trust that is an Investment Entity may be able to use one of four categories of FIs to simplify the process. These are as follows: 1) Trustee-Documented Trust 2) Sponsored Investment Entity 3) Owner-Documented Financial Institution (section 3.4) 4) Sponsored, closely held investment vehicle (section 4.3.3) For each of these, the trust will be a Non-Reporting Financial Institution. If none of these apply, and the trust is not an NFFE, the trust will be a Reporting Financial Institution and will need to register/report as applicable. Trustee-Documented Trusts (TDT) A trust may be treated as a TDT, if both of the following conditions are met: 1) A trustee of the trust is any of the following: (1) a Reporting US Financial Institution, (2) a Reporting UK Financial Institution, (3) a Reporting Cayman Islands Financial Institution, (4) a Reporting Model 1 It is expected that for most Cayman Islands Resident Trusts, there will be a trustee who will meet the requirements of condition 1 above and take on the reporting obligations as needed to qualify the trust under the Trustee Documented Trust scenario. Sponsored Investment Entity US Agreement A trust that is an Investment Entity may appoint a Sponsor to take on its due diligence, registration and reporting obligations, although this is not permitted for trusts that are withholding foreign trusts under the US regulations. If a Sponsoring Entity is appointed, there is no requirement for the trust to be registered, unless it has a US Reportable Account. If such an account is identified, the Sponsoring Entity must register the trust on or before the later of 31 December 2015 or 90 days after the reportable account is identified. UK Agreement A Cayman Islands Resident Trust that is an Investment Entity may only appoint a Cayman Islands Sponsoring Entity to take on its due diligence and reporting obligations. The Cayman Islands Sponsoring Entity must identify the trust in the reporting completed on behalf of the trust and notify the TIA of its status as the Sponsor. It should be noted that the US Agreement allows for any institution, regardless of jurisdiction, to be appointed as a Sponsoring Entity for an entity in any other jurisdiction. However, the UK Agreement limits the jurisdiction of the Sponsoring Entity to 8

9 being in the same jurisdiction as the Sponsored Entity (i.e., a Cayman Islands entity can only be a Sponsoring Entity for another Cayman Islands entity). The updated guidance notes added a new section covering Private Trust Companies (section 6.14) to give clarity to these institutions for FATCA compliance. In addition, the updated guidance notes in section 6.15 bring the US and UK Agreements in line for purposes of viewing charitable trusts as Active NFFEs, though the UK requirements for this status, as detailed, must be met. Chapter 7: Collective investment vehicles Generally, a Collective Investment Vehicle (CIV) includes any Entity that is defined under the Cayman Islands Mutual Funds Law (2013), as amended and revised. Any Entity treated as a CIV will be an Investment Entity and, thus, an FI. As applicable to fund entities, Investment Entities may include: (1) CIVs, detailed above, (2) fund managers, (3) investment managers, (4) fund administrators, (5) transfer agents, and (6) depositories and trustees of unit trusts. However, the only Financial Accounts relevant to the Agreements are equity/debt interests issued in CIVs. A financial institution must identify and report accounts only if the Entity maintains financial accounts. Thus, an Entity that is an Investment Entity because, for example, it administers CIVs but does not itself maintain financial accounts, will not have to identify and report. In addition, where fund interests are held through intermediaries, it will be the intermediary s responsibility to identify and report on its direct account holders. Distributors in the chain of legal ownership will be considered FIs maintaining financial accounts. This includes certain fund nominees, intermediaries and platforms. It is noted that such distributors will be required to aggregate accounts to determine whether exemption thresholds may apply, even if an account holder has accounts across various CIVs. Distributors that act in an advisory-only capacity and are not in the chain of legal ownership of a CIV will not be regarded as an FI in respect of any accounts on which they advise. Reporting can be done through a Sponsored Investment Entity Financial Institution. In addition, a CIV may delegate obligations to a third-party service provider, though ultimately the responsibility will remain with the CIV as the Reporting Financial Institution. Section 7.6 details Deemed Compliant Collective Investment Vehicles. Of specific note is the Qualified Collective Investment Vehicle (QCIV) status for which an Investment Entity could qualify to be treated as a Registered Deemed Compliant Financial Institution. A Cayman Islands FI that qualifies for Registered Deemed Compliant FI status would need to register with the IRS to obtain a GIIN, or be registered by another Entity. Such an FI will not need to report, but details of Financial Accounts maintained by the FI may be reported by another entity. To qualify as a QCIV, the Investment Entity must meet all of the following requirements: The QCIV must be an Investment Entity and must be regulated as an Investment Entity in the Cayman Islands and every country it operates in. If the manager is regulated with respect to the CIV in all countries in which the CIV is registered, then the fund is considered to be regulated. The QCIV s investors are limited to equity investors, direct debt investors with greater than US$50,000, Participating Foreign Financial Institutions, Registered Deemed Compliant Foreign Financial Institutions, retirement funds classified as Exempt Beneficial Owners, US Persons that are not Specified US Persons, Non- Reporting IGA Foreign Financial Institutions, or other Exempt Beneficial Owners. Each member of the group of Related Entities must be a Participating Foreign Financial Institution, Registered Deemed Compliant Foreign Financial Institution, Sponsored Foreign Financial Institution, Non-Reporting IGA Foreign Financial Institution, or an Exempt Beneficial Owner. 9

10 Analysis of a fund s investors to ensure the qualifications above are met is crucial, as well as implementing safeguards to ensure no future investors who might taint the fund s QCIV status are allowed into the fund. Sponsored Investment Entities Any FI which is an Investment Entity may appoint a Sponsor to take on its due diligence, registration and reporting obligations though not permitted for an Entity that is a Qualified Intermediary (QI), Withholding Foreign Partnership (WP), or Withholding Foreign Trust (WT) under the US regulations. If a Sponsoring Entity is appointed, it must register as such with the IRS under the US Agreement, and take on all due diligence and reporting obligations of the Sponsored Investment Entity. This includes account identification and documentation for new investors as well. In classifying an account as New or Pre-Existing, a Sponsor acting on behalf of a range of CIVs can look to whether the account is new to the Sponsor and not the CIV itself. This will alleviate duplicative document requests of the same investors invested in more than one CIV. Where a Sponsor is able to link accounts in this manner, the accounts will also need to be aggregated. If a Sponsoring Entity is appointed, there is no requirement to register the Sponsored Entity, unless it has a US Reportable Account. If such an account is identified, the Sponsored Entity must register and obtain its own GIIN on or before the later of 31 December 2015 or 90 days after the reportable account is identified. Where a Sponsoring Entity is the Sponsor for funds in multiple jurisdictions, the Sponsor would need to report on behalf of each fund based on the reporting requirements in each fund s jurisdiction. One fund may be in a Model 1 IGA location and thus report to the TIA, while another fund may be in a non-iga location and thus the Sponsor would need to report directly to the IRS. The updated guidance notes add a final section (7.10), covering the requirements of Transfer Agents or Service Providers in obtaining due diligence documentation from investors with multiple accounts with that Transfer Agent of Service Provider. Where such an Agent or Provider has been appointed a FATCA services provider to a number of FIs, they are not required to obtain documentation for each account held by the same investor. They may obtain one set of FATCA due-diligence documentation for an investor to validate the same investor s status in all FIs serviced by that Transfer Agent. Chapter 8: Other specific vehicles Securitization or structured finance vehicles A typical structure consists of an Issuing Entity (SPV), Noteholder, Seller or Originator, Trustee, Collateral Manager (CLO), Swap Counterparty, and other service providers. Whether any of these entities meets the definition of an FI under section 2 should be reviewed. However, issuing entities are likely to be classified as Investment Entities and typically would be a (1) collateralized loan obligation or CLO transaction, (2) Cat bond or Insurance Linked Securities transaction, and (3) a repackaging or other form of structured finance transaction as detailed in section 8.2. The updated guidance notes have added collateralized debt obligation (CDO) or CDO transaction as a fourth type of entity for this section. This section also adds additional definitions around SPVs. Entities that may not fall within the definition of an Investment Entity include Asset Finance SPVs. These entities typically own one or more aircraft, ships or other form of moveable asset and finance the acquisition through debt financing. An Asset Finance SPV would typically be categorized as a Passive NFFE. As a Passive NFFE, an Asset Finance SPV would still be required to certify if it had any financial accounts held by Specified US Persons or Non-US Entities with Controlling Persons that are Specified US Persons. 10

11 Segregated Portfolio Companies, Umbrella Funds and Multi-issuance Entities Section 8.4 provides insight on these entities. These types of entities may be treated as a whole and it is not necessary to treat each separately, unless the Entity wishes to do so. This section provides flexibility for these types of entities to either treat them as one or separately for registration and reporting. The determination should be made by these structures after consideration of the relevant issues for each situation. To avoid potential certification issues with brokers or custodians in relation to each portfolio, fund or series, it may be more practical, in some cases, to treat each separately and register each separately so that, for US Agreement purposes, a GIIN is acquired by each to be provided with any Form W- 8BEN-E that might be requested by third parties. Chapter 9: NFFEs Active NFFEs (as defined in section 9.3) and Passive NFFEs (as defined in section 9.2) have no registration or reporting requirements to the TIA or the IRS. Passive NFFEs may however choose to be Direct Reporting NFFEs and Sponsored Direct Reporting NFFEs under the modified US regulations. Active and Passive NFFEs are required to determine their FATCA/IGA classification and self-certify to any FI that maintains accounts held by that NFFE. Passive NFFEs may be required to obtain a selfcertification from a Controlling Person of that NFFE. An FI will have to report Financial Accounts held by Passive NFFEs with Controlling Persons that are Specified Persons. The updated guidance notes, to be in line with the US Regulation changes, have added the new Passive NFFE category (Direct Reporting NFFEs and Sponsored Direct Reporting NFFEs) in section 9.4. Controlling Person means a natural person who exercises direct or indirect control over an Entity. For trusts, this includes the settlor, trustees, protector, identifiable beneficiary or class of beneficiaries, and other natural persons exercising ultimate control over the trust. In relation only to NFFEs, a 25% ownership threshold applies for companies, partnerships, trusts and foundations. Details around the income requirements for Active versus Passive NFFE status, as well as examples, are provided in sections 9.3 through 9.5 and section 9.8. Chapter 10: Financial accounts An FI, unless exempt, must identify (1) whether it maintains any Financial Accounts, (2) the type of Financial Accounts maintained, and (3) whether the account holder of the Financial Accounts is a Specified Person or a Passive NFFE with one or more Controlling Persons who are Specified Persons. An FI acting as an executing broker (simply executing trading instructions, or receiving/transmitting trading instructions to another executing broker), and not a custodian will not be required to treat those facilities as a Financial Account. The updated guidance notes have added a new section , which provides clarity around when accounts might cease to be Reportable Accounts. Joint accounts Where a Financial Account is jointly held, the value will be attributed in full to each joint holder of the account. This applies to both aggregation and reporting requirements. Products exempt from being Financial Accounts include (1) retirement accounts and products as set out in Annex II of the Agreements, (2) certain other tax favored accounts or products, for which there are none currently identified specific to the Cayman Islands, (3) accounts of deceased persons, as long as certification of death is held by the FI, and (4) intermediary/escrow accounts established for certain purposes as defined in section

12 Dormant accounts Dormant accounts fall under the reporting requirements for recalcitrant account holders. FIs may use their current operating policy for classifying these accounts or, if not applicable, the following may be used in classifying an account as dormant: No activity in the past three years Account holder has not contacted FI regarding any account in past six years Account is not linked to an active account held by the same account holder Dormant funds The updated guidance notes have expanded the Dormant Funds section ( ), renaming it Dormant and Liquidating Investment Entities. This updated section better defines the requirements when an Entity that has been an Investment Entity is (1) closed, or (2) a Liquidator has been formally appointed but there remain residual assets and debtors and realization or recovery actions are being pursued. In these situations, the Investment Entity will not be an Investment Entity for the purposes of the Agreements. If the Entity was closed or in liquidation before 30 June 2014, then no registration or reporting is required in relation to that business. However, when the Entity is no longer considered an Investment Entity after 1 July 2014, a final return should be made in accordance with the reporting requirements if applicable by or before the next reporting deadline. Chapter 11: Registration Registration is a requirement under the US Agreement and not a current requirement under the UK Agreement. As part of this process, the FI will receive a GIIN. The following have registration requirements: All Cayman Islands Reporting Financial Institutions and Registered Deemed Compliant Financial Institutions as defined under the US Agreement Any FI with a local client base that has a reporting obligation due to some reportable accounts Any Sponsored Investment Entity that has reportable accounts will need to be registered by its Sponsoring Entity FIs in a Model 1 IGA jurisdiction, such as the Cayman Islands, were not required to provide verification of a GIIN to withholding agents prior to 1 January Prior to that date, an FI could have confirmed its status by any of the following: Providing a Withholding Certificate Providing FATCA W-8BEN-E certifying the Entity s FATCA classification and other required information Note that a Reporting FI in a Model 1 IGA must have registered prior to 1 July 2014 if (1) it maintains one or more branches (other than a limited branch or US branch) in non-model 1 IGA locations, (2) if it is renewing Qualified Intermediary (QI), Withholding Foreign Partnership (WP), or Withholding Foreign Trust (WT) Agreement, and (3) if it intends to be a Lead FI for one or more Member Financial Institutions that are not established in, and operating exclusively in, other Model 1 IGA jurisdictions. Reporting Financial Institutions should still consider registering to obtain their GIIN. This may be a preferable option to avoid any delays or run afoul of any internal policies or investor requirements. To have been on the 1 January 2015 IRS List, a Reporting Financial Institution should have registered and obtained a GIIN by 22 December Failure to have been registered by 1 January 2015 would result in an Entity not being compliant with the Model 1 IGA and thus subject to withholding as of 1 January 2015 by withholding agents. Now that the IRS has issued the W-8BEN-E form and instructions, it is recommended that this be the document completed and submitted to withholding agents. The Cayman Islands is allowing selfcertification forms to be used in lieu of US tax forms for FATCA compliance; however, US withholding agents may still require the US forms for compliance with US regulations separate from FATCA. 12

13 Chapter 12: Due diligence General requirements FIs are responsible for identification and reporting of Financial Accounts held by Specified Persons or by Passive NFFEs with one or more Controlling Persons who are Specified Persons or by Non-Participating Financial Institutions. FIs can rely on third-party providers to fulfill their obligations, but the obligations remain the responsibility of the FI and any failure to comply with the regulations falls on the FI. FIs must follow one or more of the following processes for account holder identification, depending on whether the account holder is an individual/entity and whether the account is preexisting/new: Indicia Search this may include information held for Cayman Islands AML/CFT (Anti-Money Laundering/Countering the Financing of Terrorism) rules Self-certification from account holder or Controlling Person of a Passive NFFE Publicly available information (entities only) Self-certifications As part of the identification process, FIs can rely on self-certifications in relation to individuals and entities as follows: In relation to Individual account holders, selfcertification may be used to (a) capture name, permanent residence address and country of birth, (b) establish countries where new account holder is resident for tax purposes, (c) to obtain a TIN or similar number from new account holders for each country where they are resident for tax purposes, and (d) show that an individual is not in fact a resident for tax purposes of a country, even if indicia are found indicating such residency in relation to a low-value or a highvalue Pre-Existing Account that they hold. In relation to Entity account holders, selfcertification must be used if the FI cannot determine status from information in its possession or readily available to (a) capture name and country of incorporation or organization, (b) establish status of the entity where not reasonably determined that the account holder is not a Specified Person, (c) establish status of FI that is neither a Cayman Islands FI nor an FI in an IGA jurisdiction, (d) establish whether an entity is a Passive NFFE or (e) establish status of a Controlling Person of a Passive NFFE and whether he/she is resident in a relevant country for tax purposes. The form must be signed and dated by the account holder, and can be in paper or electronic format. It can include the use of withholding certificates (i.e., US Forms W-8/W-9). Alternatively, the Cayman Islands Government issued self-certification form templates for industry usage in July of A specific form for Individuals and Entities was developed by the FATCA Working Group and the Cayman Islands TIA is satisfied that these forms may be used for the purposes of FATCA Compliance. Cayman Islands FIs may use these forms as a basis for self-certification and adapt or modify them as necessary to suit their own usage. These forms can be found on the following website: A self-certification cannot be relied upon if an FI has reason to believe it is incorrect, unreliable, or if there is a change in circumstances regarding the account holder s status. The updated guidance notes have added new sections, and , which provide additional insight on the requirements where an FI already holds a self-certification for an account holder, and the timing of self-certifications. For all new individual accounts, there is no prescriptive wording that must be used for such self-certification. However, a determination of whether or not the individual is a citizen or resident of the US must be able to be made from the certification. It should be sufficient for an account holder to confirm they are or are not resident in the US for tax purposes, and that they are or are not a US citizen. For the UK Agreement, residence is important and citizenship is not relevant. Examples of how to administer the collection of 13

14 self-certifications are provided in the guidance notes in section 12.4 (e.g., telephone applications, online applications and paper applications). For Pre-Existing individual accounts, FIs that identify US indicia while performing due diligence of accounts must report on these accounts unless selfcertification proving that the account holder is not a US person, such as IRS Form W-8BEN or approved self-certification form, is obtained and valid. IRS Forms W-8 and W-9 may be used for selfcertification and, as stated above, the Cayman Islands Government has issued self-certification templates for industry usage which may be used for the purposes of FATCA Compliance. It is important to note, however, many institutions may still be required to submit the US forms (W-8 and W-9) to US withholding agents who are required by US law to receive the IRS forms for non-fatca reporting requirements on non-us account holders. For New Entity Accounts, unless the FI can identify or rely on information it holds or is publicly available, it must obtain self-certification from Entity account holders identified as the following: (1) Specified Person, (2) FI that is neither a Cayman Islands FI, an FI in an IGA jurisdiction, a Participating Financial Institution, a Deemed Compliant FI or an Exempt Beneficial Owner, or (3) a Passive NFFE. If the Entity is an NFFE and is passive, FIs must identify Controlling Persons and obtain selfcertification from them to determine whether or not they are US persons. For Pre-Existing Entity Accounts, self-certification may be obtained where an Entity is identified as a possible US person in due diligence so as to allow the Entity to confirm or deny that they are or are not a US person. 1 For Pre-Existing Entity Accounts selfcertification must be obtained: Where an Entity is an FI not domiciled in the Cayman Islands or another partner jurisdiction unless the FI is able to otherwise verify the Entity s FATCA status Where an Entity is a passive NFFE (unless information is available to determine that the Entity is an active NFFE) Where one or more passive NFFEs hold the account and the account s balance exceeds US$1 million Section 12.8 details confirming the reasonableness of self-certifications by an FI. An FI receiving a selfcertification must consider other information it has obtained concerning the account holder, including any documentation collected pursuant to Anti- Money Laundering (AML) and Know Your Client (KYC) procedures to determine whether the selfcertification is reasonable. If any apparent conflicts are evident, then further inquiries are required by the FI. If a third party performs AML for an FI, the FI may request that the third party obtain selfcertifications for purposes of the legislation. The third party should then confirm the reasonableness of the self-certification. Chapter 13: Pre-Existing individual accounts Chapter 13 distinguishes accounts as (1) exempt by threshold, (2) exempt Cash Value Insurance and Annuity contracts unable to be sold to US residents (US Agreement only), (3) low value, and (4) high value. The assignment of an insurance contract will be treated as a new account and should be treated under the review procedures for new accounts. Reportable depository accounts must be reviewed annually for the US$50,000 threshold (assuming the de minimis limit is applicable) and if, in a subsequent year, these accounts fall below the threshold, the account is no longer reportable. 1 Note that the account is reportable, unless valid selfcertification is received confirming that the Entity is not a US person, i.e., an IRS Form W-8BEN-E or self-certification form approved for use by the Cayman Islands Government. In practice, therefore, it would seem essential for an FI to make a reasonable effort to give the account holder an opportunity to self-certify. Low Value Accounts are those with a balance or value exceeding US$50,000 (or US$250,000 for Cash Value Insurance and Annuity Contracts), but do not exceed US$1,000,