FATCA Final Regulations - Update for Cayman and Irish CLO Issuers
On 20 February 2014 the US Treasury and the IRS released a set of revisions to the US Foreign Account Tax Compliance Act ("FATCA") final regulations (the "FATCA Regulations"). Such revisions include modifications to the Limited Life Debt Investment Entities ("LLDIE") provisions in the FATCA Regulations.
Further to our prior client updates on (i) the Cayman Islands Model 1B (non-reciprocal) intergovernmental agreement with the US (the "Cayman IGA"), and (ii) the Irish Model 1A reciprocal intergovernmental agreement with the US (the "Irish IGA" and together with the Cayman IGA, the "IGAs"), this update provides a summary of the latest position for CLO issuers incorporated in the Cayman Islands and Ireland ("CLO Issuers").1
CLO 1.0 Deals
The revisions to the LLDIE provisions are potentially helpful for the "old and cold" deals, i.e. those CLO (and indeed CDO) issuers that were set up pre-FATCA (essentially prior to March 2010).
If a CLO qualifies as an LLDIE then the entity will be "certified deemed compliant" under the applicable IGA and will not be required to register with the IRS and report to the Cayman Tax Information Authority (the "Cayman TIA") or Irish Revenue Commissioners ("Irish Revenue"), as applicable, under the local legislation that implements the relevant IGA.
The CLO will then be able to certify this fact through an amended W-8BEN to agent banks and other paying agents.
So which CLO 1.0 deals qualify?
There are six criteria contained in the revised LLDIE provisions (listed (A) to (F)) which all must be met in order for the CLO to qualify as an LLDIE. We have set out all of the criteria in Annex 1 but set out below a brief analysis of the most critical criteria.
For CLO 1.0 deals the key criteria to be analysed are likely to be:
(1) Asset Mix Test
This is contained in item D which states: "substantially all of the assets of the [CLO] consist of debt instruments or interests therein".
We understand from preliminary discussions with the US Treasury that:
(a) "substantially all" is intended to mean 80% by value; and
(b) "interests therein" would include equity interests in wholly owned 'blocker' entities which in turn holds debt instruments as well as credit default and total return swaps which reference debt instruments.
Another point to be clarified is at what stage this test is to be applied. While many, if not all, CLOs should be able to satisfy this test during the reinvestment period, the same may not be the case when the CLO is in the process of being unwound. We, along with colleagues in the CLO industry, will seek to obtain clarity from the US Treasury on this point.
(2) Authority Test
This is contained in item (F). This provides that the LLDIE exemption is not available where the "[CLO]'s trustee or other fiduciary" or indeed "any other person" is authorised "to fulfil the obligations of a participating FFI".
Industry has raised the concern that as drafted the directors of the CLO could be said to be "authorised" in the general sense and thus the CLO would not be able to qualify as an LLDIE.
We have been engaging with key industry participants such as the LSTA and ISDA to clarify the above point with the US Treasury and to the extent necessary with the Cayman TIA and Irish Revenue.
Existing CLO 2.0 Deals
In the revised LLDIE provisions there is a "cut off" date of 17 January 2013 such that all deals that issued all its securities before that date and which otherwise comply with the other criteria could be eligible to qualify as an LLDIE. For the purposes of this update, we will refer to these deals as "existing CLO 2.0 deals".
The main issue with this category of deals is going to be the question of whether the trustee (or some other person) has the authority to ensure compliance with FATCA. Transaction parties should therefore check the deal documents to ascertain whether the existing CLO 2.0 deal is able to qualify as an LLDIE or not.
If the existing CLO 2.0 deal is unable to fall within the LLDIE definition then we expect those CLOs to be treated as a Reporting Financial Institution, or to use the FATCA Regulations terminology, a "Reporting Model 1 FFI".
A Reporting Model 1 FFI will need to obtain a Global Intermediary Identification Number ("GIIN") before 1 January 2015 and will be required to report information on US reportable accounts ("US Reportable Accounts") to the Cayman TIA for Cayman Islands based CLO Issuers or Irish Revenue for Irish based CLO Issuers, which, in turn, will transfer the relevant information to the IRS.
Transaction parties and their counsel should undertake due diligence on all US Reportable Accounts so that the CLO is in a position to register with the IRS for a GIIN in a timely and ordered manner before the 1 January 2015 deadline and thereafter comply with reporting obligations by the due date.
Reporting of information on US Reportable Accounts by a Reporting Model 1 FFI is not required until September 2015. However, as the information will first be submitted to the Cayman TIA or Irish Revenue, as applicable, it is likely that reporting to the Cayman TIA or Irish Revenue will need this to occur by an earlier date, expected to be the end of June 2015.
We are aware that there is a concern that agent banks and other potential withholding agents may simply take the view that come 1 July 2014, if the CLO either (i) does not have a GIIN (which would require registration by 25 April 2014) or (ii) is unable to certify itself as a certified deemed compliant entity, then they withhold.
We are liaising with trustees and paying agents to ensure that they understand that CLOs in Model 1 IGA countries have until the end of this year to register.
Newer CLO 2.0 Deals
For those deals that have closed after 17 January 2013 it is clear that the LLDIE provisions will not apply. Therefore as for those existing CLO 2.0 deals that do not qualify as an LLDIE steps should be taken to prepare for registration and reporting as set out above.
Where MaplesFS can assist
The MaplesFS FATCA Taskforce has undertaken an analysis of its CLOs over the past 24 months and is now in an advanced position to undertake all necessary action for CLOs that will be classified as Reporting Model 1 FFIs. An update highlighting the current action points being undertaken in practice for CLO Issuers administered by MaplesFS in the Cayman Islands and Ireland will be sent out shortly.
Where registration is required for a CLO that is administered by MaplesFS, an existing director of that entity will procure the GIIN registration on behalf of the CLO. As indicated in our previous updates, there is no requirement to appoint a distinct FATCA 'responsible officer'. A press release issued by the Cayman Islands government on 12 March 2014 confirming the same can be viewed here.
Cayman Islands Legislation Update
Although signed, the Cayman IGA has not come into force yet. The Cayman IGA will come into force once the Cayman Islands government completes its necessary internal procedures (which includes giving notice of such to the US).
We understand from the Cayman Islands government that they are working towards adopting supporting legislation in the first half of 2014 through (i) an amendment to the existing Cayman Islands Tax Information Authority Law (primary legislation) expected to adopted in about May 2014; (ii) new Cayman Islands regulations ("Cayman FATCA Regulations"); and (iii) guidance notes to the Cayman FATCA Regulations (the "Guidance Notes"). The Cayman FATCA Regulations and Guidance Notes are expected to be published in July 2014 or soon thereafter.
Irish Legislation Update
It is intended that Irish regulations will be enacted into Irish law by May 2014, accompanied by detailed guidance notes, so that the Irish IGA is fully effective in Ireland from 1 July 2014 (at present the regulations and guidance notes are in draft form).
(A) The FFI2 is an investment entity that issued one or more classes of debt or equity interests to investors pursuant to a trust indenture or similar agreement and all of such interests were issued on or before January 17, 2013.
(B) The FFI was in existence as of January 17, 2013, and has entered into a trust indenture or similar agreement that requires the FFI to pay to investors holding substantially all of the interests in the FFI, no later than a set date or period following the maturity of the last asset held by the FFI, all amounts that such investors are entitled to receive from the FFI.
(C) The FFI was formed and operated for the purpose of purchasing or acquiring specific types of debt instruments or interests therein and holding those assets subject to reinvestment only under prescribed circumstances to maturity.
(D) Substantially all of the assets of the FFI consist of debt instruments or interests therein.
(E) All payments made to the investors of the FFI (other than holders of a de minimis interest) are either cleared through a clearing organization or custodial institution that is a participating FFI, reporting Model 1 FFI, or U.S. financial institution or made through a transfer agent that is a participating FFI, reporting Model 1 FFI, or U.S.
(F) The FFI's trustee or fiduciary is not authorized through a fiduciary duty or otherwise to fulfill the obligations of a participating FFI under §1.1471-4 and no other person has the authority to fulfill the obligations of a participating FFI under §1.1471-4 on behalf of the FFI.
1 Maples and Calder is only qualified to advise on Cayman Islands, British Virgin Islands and Irish law and does not purport to offer any legal advice on FATCA or the FATCA Regulations, being US legislation. In order to provide the summary in this update, this involves reference, however, to various provisions under FATCA, but only for the purpose of highlighting the relevant terms of the IGAs that could be applicable.
2A CLO Issuer is an FFI (foreign financial institution).