US FATCA and Cayman Funds: Entity Classification

2014年 1月 15日

On 29 November 2013, the Cayman Islands government signed a Model 1B (i.e. non-reciprocal) intergovernmental agreement with the United States (the "US IGA").  The US IGA provides a framework for the implementation of the US Foreign Account Tax Compliance Act ("FATCA") in the Cayman Islands.  More detail on the US IGA and FATCA and its impact on the fund industry in Cayman can be found in our previous update.  

Although signed, the US IGA has not come into force yet.  The US IGA will come into force once the Cayman Islands government completes its necessary internal procedures (which includes giving notice of such to the US).  Cayman supporting legislation, regulations and guidance notes will be published in early 2014.  While certain provisions of the US IGA will need to be expanded upon and clarified in the Cayman Islands enabling legislation, a number of other provisions in the US IGA require no further clarification and can therefore be acted upon now. 

Please refer to our update announcing the signing of the US IGA for the meaning of certain terms used herein.  

Fund Industry - Required Analysis 

For clients that have an investment fund, an investment manager or an investment advisor incorporated in the Cayman Islands, it is likely that the US IGA will apply and therefore an analysis should be undertaken in preparation for the US IGA and the Cayman legislation coming into effect.  At a minimum, the following should be considered: 

(a)  Entity classification - Is the relevant entity an FI?  As noted in previous updates, FI is a very broad definition and includes many types of Investment Entity.  If the entity in question is an FI, is it a Reporting FI or a Non-Reporting FI?  Non-Reporting FIs do not need to register with the IRS for a GIIN.

(b)  Registration - If the entity is a Reporting FI, a registration application should be submitted to the IRS for a GIIN.  Although not required by the US IGA, query whether a Responsible Officer should also be appointed.  Note the relevant deadlines for registration. 

(c)  Due diligence - For Reporting FIs, a due diligence programme should be put in place which meets the requirements of Annex I to the US IGA.  Note the relevant deadlines for capturing due diligence and determining if financial accounts are US Reportable Accounts.

(d)  Reporting - For Reporting FIs, procedures should also be implemented in due course so that the required information on any US Reportable Accounts is reported to the Cayman Tax Information Authority within the prescribed time limits. 

Entity Classification 

As a reminder, the definition of an FI includes, amongst other things, a Custodial Institution and an Investment Entity.  In practice, this will likely cover custodians, nominees, trust companies and trusts, investment funds (including hedge and private equity funds), administrators, investment managers and investment advisers. 

The US IGA categorises FIs as either "Reporting FIs" or "Non-Reporting FIs".  By default, all FIs are Reporting FIs, unless they qualify as Non-Reporting FIs.  Only Reporting FIs are required to register with the IRS and obtain a GIIN.  Further information on registration will be provided in our next client update on the matter. 

The types of Non-Reporting FI are specified in Annex II to the US IGA.  Annex II is significant because it allows entities that can be classified as 'exempt beneficial owners' and 'deemed compliant FIs' to operate as Non-Reporting FIs.  Notably, there are no due diligence or reporting obligations on Non-Reporting FIs and there is no requirement to register with the IRS for a GIIN.  Instead, Non-Reporting FIs will need to self-certify with withholding agents to evidence their status and avoid the imposition of 30% withholding on US source payments. 

Annex II includes exemptions for sponsored investment entities as well as investment managers and investment advisors who meet certain conditions.  In addition, there is a category of 'collective investment vehicle' of which some investment funds may be able to take advantage.  Conditions of this category include being 'regulated' and where all debt and equity interests are held by limited categories of investor. 

It should be noted that the structure of the US IGA is such that the list of entities in Annex II may be expanded by the inclusion of additional categories of entity either expressly or by reference to categories of deemed compliant entities under the US FATCA Regulations.  For example, it is anticipated that a category of structured finance vehicle will be introduced in the US FATCA Regulations in time. 

Relevant Timelines 

It is now possible for Reporting FIs to register with the IRS.  Any applications lodged before 25 April 2014 will, if approved, appear on a list published in June 2014, i.e. prior to the imposition of withholding tax on 1 July 2014. 

Withholding agents, however, are not required to verify GIINs on payments made prior to 1 January 2015 where the payee is a Reporting FI in a Model 1 jurisdiction such as the Cayman Islands.  Accordingly, Reporting FIs can effect registration through to the end of 2014 and, if necessary, may self-certify their status to withholding agents after 1 July 2014 to avoid withholding. 

Action Points

Clients should be taking the following steps as soon as possible: 

(a)  Identify whether the relevant entities are FIs; 

(b)  Identify whether any exclusions (or possible other exclusions) under Annex II of the US IGA apply; and 

(c)  If unable to take advantage of any exclusions under Annex II, consider whether to register prior to 1 July 2014 or whether it is better to wait and effect before 1 January 2015. 

If clients require legal advice or have any concerns about FATCA and the US IGA, Maples and Calder has leading expertise on the relevant provisions, having established a FATCA team which has worked closely with the Cayman Islands government over the past two years.

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