FATCA and UK Trusts

The US made significant amendments to its tax laws by passing the Foreign Account Tax Compliance Act (FATCA), which came into force on 1 July 2014. The aim of FATCA is to reduce global tax evasion and, therefore, tax authorities have agreed to collect and exchange information on each other’s tax residents.

The Act requires financial institutions and other entities outside the US to disclose information about accounts held by individuals and entities with US connections to the US Internal Revenue Service (IRS). The UK government has signed an Intergovernmental Agreement (IGA) with the US under which the provisions of FATCA are given effect in the UK by the implementation of regulations.

In addition, the UK government entered into similar reciprocal IGAs with each of the Crown Dependencies and Gibraltar (for the purposes of this document collectively CDs), also implemented by regulations. For the ease of reference for the purpose of this note, all regulations are referred to as FATCA.

According to the latest guidance a trust will be deemed to be a Financial Institution (FI) if:

• the trustee is an FI

• the trustee (on behalf of the trust) engages an FI to manage the trust, or

• the trustee (on behalf of the trust) engages an FI to manage the financial assets of the trust.

A number of financial advisers currently take the view that the provision of an execution-only or advisory service would not be considered managing assets and trusts holding only non discretionary portfolios may not be considered FIs. Such trusts may be classified as Non- Financial Foreign Entities (NFFEs), and need not take any action.

Any entity that meets the definition of a UK* FI under FATCA legislation must:

1. Perform due diligence to determine the tax residency and tax identification numbers of each of its clients or underlying beneficiaries (clients for the purposes of the trust being settlors and beneficiaries).

2. Report to HMRC if any clients are tax residents of Jersey, Guernsey, Gibraltar, Isle of Man or the US.

3. Even where there are no reportable clients the FI must still submit a “nil return” to HMRC.

Likewise, FIs based in the US, Jersey, Guernsey, Gibraltar and the Isle of Man must identify and disclose the identity of any UK (or US as appropriate) clients to their own tax authorities. (* Any other jurisdictions will be required to report accordingly under the relevant IGA).

In accordance with guidance available to date all reporting FIs must register with the IRS. Registration can be carried out via an online portal, confirming the FI’s intention to comply with the new regulations.

Following successful registration the trust should be issued a Global Intermediary Identification Number (GIIN). This GIIN can then in turn be provided to other FIs to confirm that the trust is a participating FI.

We understand that the requirement to register applies to all reporting FIs regardless of whether or not the entity actually has any reportable clients or beneficiaries.

If the trust is deemed to be an FI, the trustees are responsible for reviewing, documenting and where appropriate, reporting the tax residency status of:

• each settlor holding an interest in the trust

• each beneficiary that is entitled to a mandatory distribution (either directly or indirectly)

from the trust, and

• each beneficiary that receives a discretionary distribution (either directly or indirectly) from the trust in the calendar year.

Where there are no reportable persons, the trustees are still required to submit a ‘nil return’ to their local tax authority.

Where an FI does not register, or is otherwise found to be in breach of FATCA regulations, they may be blacklisted by tax authorities as a “non-participating FI”. If this happens, the nonparticipating FIs may be subject to a 30% withholding tax on all US income.

We further understand that all participating FIs are obliged to disclose payments made to any non-participating FI to the IRS via their local tax authority.

Registration of existing trusts should take place by 25 October 2014.

Trustees will find that they will be asked for the trust’s FATCA status with the usual anti-money laundering and client identification processes when dealing with other institutions such as banks, etc. Failure to comply may mean the trustees are not able to open or operate bank accounts, etc.

Instead of registering it may be possible for trustees to opt for owner documented status. They can only do so without challenge if they have enough regular information to prove that all owners (beneficiaries who receive one or more distributions) are and remain non-US Persons.

They will also have to recertify their status every three years via form W8-BEN-E and if at any time the trustees become aware that an owner has become a US person, they will have to register with the IRS and report to HMRC in the normal way.

Further, they will need to appoint a withholding agent. It is understood that banks and investment businesses are currently considering whether they will be prepared to offer this service. Trustees must notify withholding agents of any change in status within thirty days. They will need to have systems and procedures in place to ensure that this is adhered to. 

If the trust is ‘managed’ by an entity that acts for customers and where more than 50% of gross income is attributable to a business trading in money market instruments, etc., portfolio management or the investment and administration of funds, the trust is an Investment Entity and therefore a Financial Institution and may need to register with the IRS.

‘Managed’ is undefined in the UK regulations, but the US Regulations indicate that any financial institution undertaking the activities of an investment entity on behalf of the trust, typically either as a trustee or as discretionary fund manager, will be deemed to be a manager of the trust in this context. UK Guidance confirms that a trust will not become an investment entity if ‘it simply holds a Depository Account with a Financial Institution where that Financial Institution does not manage the account.

Trustees therefore need to consider whether they have to take any action.

 ©Lindsey Sherman and Associates Ltd.  2010: Registered Office Copthorne Farmhouse, Main Street, Great Ouseburn, York. YO26 9RE