FATCA compliance: no time to waste


FATCA compliance: no time to waste

On February 8, 2012, the long-awaited FATCA proposed regulations were issued by the IRS. Ian Bridges and Paul Eldridge assess the next steps for fund managers.

The Foreign Account Tax Compliance Act (FATCA) was enacted as part of the Hiring Incentives to Restore Employment Act of 2010, and imposed an information-reporting and documentation regime on foreign financial institutions (FFIs), which is to be enforced by a potential 30 percent withholding tax. FATCA was designed to detect, deter and discourage tax evasion by US persons using non-US structures and institutions.

Certain offshore investment funds which are considered FFIs are required to enter into, and comply with, an agreement with the Internal Revenue Service (IRS) or be subject to a 30 percent withholding tax on “withholdable” payments such as payments of certain US -sourced interest and dividends, and gross proceeds of sales of US securities. An FFI which has an agreement with the IRS is considered to be a “participating” FFI and will not be subject to the withholding tax; it will, however, be subject to numerous reporting and record-keeping requirements.

Of interest to offshore investment funds was the expansion of entities included as “deemed-compliant” FFIs. There are a number of advantages such an FFI has over a “participating” FFI as outlined below.

Participating FFIs

An FFI which cannot satisfy the requirements to be deemed-compliant, will be required to participate in the FATCA programme by entering into an agreement with the IRS, or be subject to the 30 percent withholding tax as a non-participating FFI. A participating FFI will have to determine the US , or non-US , status of its account holders, obtain appropriate documentation from account holders to support this classification, withhold on certain pass-through payments and report information on US accounts to the IRS. The benefit of becoming a participating FFI is the elimination of the FATCA withholding tax, but at a cost of implementing systems, processes and procedures to comply with various functions of the FFI agreement. A responsible officer of an FFI will be required periodically to certify to the IRS the FFI’s compliance with the FFI agreement.

Deemed-compliant FFIs

In 2011, Notice 2011-34 provided initial guidance on FFIs that may be classified as deemed-compliant. A deemed-compliant FFI may avoid the FATCA withholding tax, similar to a participating FFI, but without the necessity of an FFI agreement, and without the related administrative reporting and withholding requirements to comply with the agreement. However, deemed-compliant FFIs do not avoid all administrative requirements.

The proposed regulations provide for two types of deemed compliant FFIs, including a registered deemed-compliant FFI, which is of particular interest to offshore investment funds.

Registered deemed-compliant FFIs

Registered deemed-compliant FFIs are required to register with the IRS and to satisfy certain “procedural requirements”. They will be required to comply with rules regarding information-gathering and monitoring procedures to certify their status as registered deemed compliantevery three years, and ensure the requirements for deemed-compliant status remain accurate.

Included in this category are qualified collective investment vehicles (QCIVs), restricted funds and FFIs that comply with the requirements of FATCA under an agreement between the US and a foreign government via an intergovernmental approach, each of which is discussed further below.

Qualified collective investment vehicles

In general, an FFI can qualify as a QCIV if:

• The FFI is regulated in its country of incorporation or organisation as an investment fund;

• All holders of record of a direct interest (debt in excess of $50,000 or equity interests) in the FFI are either participating FFIs, registered deemed-compliant FFIs, or exempt beneficial owners; and

• In the case when an FFI is part of an expanded affiliated group, any other FFI is either a participating FFI or a registered, deemed compliant FFI.

Restricted funds

A restricted fund is a deemed-compliant FFI that is regulated as an investment fund under the law of its country of organisation, which must be a Financial Action Tax Force-compliant country such as the Cayman Islands. Each distributor (underwriter, broker, dealer, or other person who participates in the distribution of securities) of the investment fund’s interest must be one of the following:

• A participating FFI;

• A registered deemed-compliant FFI;

• A non-registering local bank; or

• A restricted distributor.

Agreements that govern the distribution of the restricted fund’s debt or equity must prohibit the sale of fund interests to US persons, nonparticipating FFIs or non-foreign financial entities with one or more substantial (10 percent or more) US owners. In the event of any change, the fund would need to take remedial action or risk losing its status.

The intergovernmental approach

Alongside the proposed FATCA regulations, a two-page joint statement was released indicating that the US, France, Germany, Italy, Spain and the UK were exploring an intergovernmental approach to FATCA compliance, under which domestic tax information reporting would be exchanged between participating countries. For example, an FFI in a participating country may be required to report domestically, as opposed to becoming a participating FFI. 

This approach may succeed in working within the parameters of each participating country’s own privacy laws, account closure and reporting requirements, while allowing each participating country to benefit from the shared tax information.

Members of the Cayman Islands’ offshore investment industry have begun to speculate how Cayman may be affected by this approach as, perhaps, a future participating country. However, according to the joint statement, the intergovernmental approach is still at the exploratory stage, and little has been explained beyond the joint statement.

The reciprocity offered by the intergovernmental approach is not likely to yield any immediate direct benefits locally, but if it were available the Cayman Islands may be inclined to evaluate it and, perhaps, fully participate. The current Confidential Relationships (Preservation) Law (2009 Revision) is a likely significant hurdle that Cayman Islands FFIs must navigate in any FATCA compliance strategy, though the intergovernmental approach may be part of the solution. The costs of this approach are another unknown factor.

“An FFI which has an agreement with the IRS is considered to be a ‘participating’ FFI and will not be subject to the withholding tax.”

The Cayman Islands is focused on transparency and integrity and currently has 27 signed tax information exchange agreements (TIEAs) in place with countries including the UK, Ireland, Japan, France, Germany and the US. The TIEAs operate as an exchange of information upon request. The intergovernmental FATCA approach would appear to expand the sharing of information on an automatic bilateral basis, which could have an impact on the current Tax Information Reporting Law (2009 Revision) in the Cayman Islands, should Cayman participate in this approach.

Currently there is no indication that the reporting requirements of the intergovernmental approach will be materially different from those required under the proposed regulations. In fact FFIs reporting under this approach may find compliance even more challenging and, perhaps, more costly. Nonetheless, the intergovernmental approach could present an opportunity for the Cayman Islands to distinguish itself further as a leading offshore financial centre.

Alongside the European Union Savings Directive, FATCA could very well become the catalyst in what could evolve into a multilateral approach to information exchange, although the programme outlined in the joint statement remains hypothetical.


The proposed regulations have introduced a complex set of rules to FFIs for FATCA compliance, including that the FFI itself is required to comply, whether it is as a participating FFI or a registered deemed compliant FFI. Otherwise, it risks becoming a non-participating FFI and subject to withholding tax.

Each FFI must quickly determine whether it can meet the requirements for a deemed-compliant FFI, and if not, whether the FFI will participate in FATCA compliance. FFIs may require technical assistance from other service providers to achieve deemed-compliant status. Many in the industry are hopeful that Cayman Islands regulated investment funds will qualify under a registered deemed-compliant category. 

Once an FFI has determined its FATCA strategy, the FFI must begin to put the strategy into action. Many fund administrators seem to believe that the administrators will assist in FATCA compliance, though this may differ from fund to fund. While fund administrators for a participating FFI may not be the responsible officers to certify compliance, they may be requested to provide the administrative functions required for compliance. Fund administrators for deemed compliant FFIs may be requested to perform continued administrative burdens to ensure a deemed-compliant FFI’s continued compliance.

Under the current proposed rules, participating FFIs can enter into an FFI agreement online with the IRS from January 1, 2013. For participating FFIs the responsible officer must certify to the IRS by July 1, 2013, that the new account-opening procedures are in place to identify US account holders. In general, a deemed-compliant FFI should probably be registered with the IRS before withholding is scheduled to begin on January 1, 2014.


A significant number of offshore investment funds may not qualify for deemed-compliant status and will, therefore, need to become a participating FFI or be subject to the withholding. Assistance may be required by each FFI in its deemed-compliant determination, as well as registration and compliance with the administrative burdens thereafter. Similarly, an FFI that becomes a participating FFI may also require assistance with the process.

The intergovernmental approach is an intriguing option and should be monitored as the approach evolves from its current joint statement status. What is certain is that each FFI must devise a stategy for FATCA compliance.

Ian Bridges is a tax director at PwC Cayman Islands. He can be contacted at: ian.l.bridges@ky.pwc.com

Paul Eldridge is the managing director of the PwC Bermuda tax practice. He can be contacted at: paul.eldridge@bm.pwc.com


Ian Bridges specialises in tax engagements for financial services clients. He has 15 years of combined experience with both ‘Big Four’ public accounting firms and the private sector, including 10 years of extensive financial services industry experience. He is a Certified Public Accountant licensed in the US state of Illinois and a member of the Canadian Institute of Chartered Accountants.

Paul Eldridge is a member of the PwC US and Global FATCA networks, and the lead FATCA partner for the PwC Caribbean region. He has 30 years of experience in senior positions in both accounting and tax as a partner at PwC US and as the chief tax officer of a Fortune 500 company.

Cayman Funds