FATCA Trusts and PICs 8 October 2014 Samatha Bradley, TEP LLB Sir Elly Kadoorie & Sons Ltd. Richard Weisman, Principal Baker & McKenzie, Hong Kong This presentation has been prepared for clients and professional associates of Baker & McKenzie. Whilst every effort has been made to ensure accuracy, this presentation is not an exhaustive treatment of the area of law discussed and no responsibility for any loss occasioned to any person acting or refraining from action as a result of material in this presentation is accepted by Baker & McKenzie. Baker & McKenzie, a Hong Kong Partnership, is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organisations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an "office" means an office of any such law firm.
FATCA Overview What is FATCA? The Foreign Account Tax Compliance Act ( FATCA ) provisions of US tax law were enacted as part of the Hiring Incentives to Restore Employment ( HIRE ) Act on 18 March 2010 What is the purpose? What do we do? The purpose of FATCA is to provide the IRS with additional tools in the form of information reporting to counter tax evasion by US taxpayers - Enter into agreement with IRS - Non-US government enters into agreement with IRS - Do not enter into agreement with IRS and accept withholding on US payments and potentially non-us source payments and collateral consequences through relationships with other financial institutions who participate 2
Key Dates for Withholding 1 July 2014 Withholding began on US source FDAP income payments to s Grandfather relief applies for some payments 1 January 2017 Withholding on gross proceeds Withholding on foreign passthru payments Grandfather relief applies for some payments Note: date of withholding commencement for gross proceeds and foreign passthru payments paid to IGA s depends on further agreement between the US and the IGA jurisdiction 3
FATCA Classification of Trusts and PICs
Types of s Category of Key Classification Factor Depository Institution Accepts deposits in the ordinary course of a banking or similar business Custodial Institution Investment Entity* *IGAs modify the tests to qualify as an investment entity Specified Insurance Company Certain Holding Companies and Treasury Centers** **IGAs generally eliminate this category 20% or more of the entity s gross income is attributable to holding financial assets Investment funds and investment managers primarily engaged in the business of investing, reinvesting, or trading in financial assets Insurance company or holding company of a group that includes an insurance company if the insurance company (or holding company) issues or is obligated to make payments on a cash value insurance or annuity contract Holding companies and treasury centers that are (1) part of an EAG that includes a depository institution, custodial institution, insurance company, or investment entity under (b) and (c) above, and (2) a holding company or treasury center formed in connection with or availed of by an investment fund 5
Account Held by PIC Customer Who manages and administers PIC s assets? Depository Institution What does it mean to manage and administer assets? Account PIC NFFE 6
Trust Managed By a Trust Company Son and Daughter Investment entity (more than 50% income from financial assets) Depository Institution Trust A (FNGT) Manages and administers Trust A s assets Account PIC 1 Trustee Investment entity (more than 50% income from financial assets) 7
Who Is the Account Holder? Account Holder if: Trustee Protector (IGA only) - Ultimate effective control over the trust (consider local implementation guidance in Model 1 jurisdictions) PIC 1? Non-US Trust NFFE PIC 2 Grantor Mandatory beneficiary Discretionary beneficiary - Any part of the trust is treated as owned by the grantor - The beneficiary is entitled to a mandatory distribution - The beneficiary may receive a distribution during the year* e.g., bank account or financial investments e.g., real estate or tangible personal property 8
Deemed Compliance Options US beneficiaries Trustee Model 1 FATCA Partner / IRS Non-US beneficiaries Non-US Trust PIC 1 Trustee documented Owner documented Sponsored 9
FATCA Issues for Private Client Structures FATCA classification of PICs and trusts small structural differences may make material FATCA classification differences Documentation and reporting issues regarding beneficiaries/shareholders/settlors Watch implementation in local jurisdictions for substantive differences (Canada) and challenges 10
CRS versus FATCA
OECD: CRS and the Standard The OECD standard for automatic exchange of financial account information consists of two parts The common reporting standard (CRS) contains the reporting and due diligence rules for financial accounts The Model Competent Authority Agreement (MCAA) contains the rules on exchange of information 12
CRS Developments G20 finance ministers and central bank governors endorsed CRS in February 2014 with the expectation of making automatic exchange of tax information within the G20 by the end of 2015 By May, 60 jurisdictions committed to swiftly implement CRS, including: Australia, Canada, China, France, Germany, India, Indonesia, Israel, Japan, Korea, Malaysia, New Zealand, Saudi Arabia, Singapore, Switzerland, UK, US, EU 13
CRS Overview What information gets reported? Investment income (e.g., interest and dividends) Account balance Sales proceeds from financial assets Whose information is reported? Individuals Entities Trusts & Foundations Look-through rules apply to passive entities Who reports? s Custodians Brokers Certain collective investment vehicles Certain insurance companies 14
FATCA versus CRS Framework for exchange Compliance key Reportable persons FATCA Unilateral or bilateral Withholding tax on noncompliers or domestic enforcement for noncompliance in Model 1 jurisdictions US persons, including US citizens and US tax residents living overseas CRS Multilateral Domestic enforcement for non-compliance Non-residents of the jurisdiction 15
FATCA Model of Information Exchange Non-US Customer US Customer US 1 Non-US US IRS 2 Model 1 Tax Authority 1. Model 2 IGA and no IGA 2. Model 1 IGA 16
CRS Model of Information Exchange Non-resident Customer Non-resident Customer Non-resident Customer Non-resident Customer US Malaysia Singapore UK Italy Germany France Spain Non-resident Customer Non-resident Customer Non-resident Customer Non-resident Customer 17
Concluding Thoughts
FATCA Trusts and PICs 8 October 2014 Samatha Bradley, TEP LLB Sir Elly Kadoorie & Sons Ltd. Richard Weisman, Principal Baker & McKenzie, Hong Kong This presentation has been prepared for clients and professional associates of Baker & McKenzie. Whilst every effort has been made to ensure accuracy, this presentation is not an exhaustive treatment of the area of law discussed and no responsibility for any loss occasioned to any person acting or refraining from action as a result of material in this presentation is accepted by Baker & McKenzie. Baker & McKenzie, a Hong Kong Partnership, is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organisations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an "office" means an office of any such law firm.