FATCA and the Cayman IGA - Key Points for Cayman CLO Issuers
Further to our prior client updates on the US Foreign Account Tax Compliance Act ("FATCA") and the signing by the Cayman Islands government of a Model 1(b) (non-reciprocal) intergovernmental agreement ("IGA") with the US on 29 November 2013, this update provides a concise summary of the current position for SPVs, specifically, CLO issuers incorporated in the Cayman Islands ("CLO Issuers")1.
We are aware that there is confusion in relation to the foregoing, particularly in light of some of the recent market commentary on the subject.
Taking the analysis below into consideration, our current view is that CLO Issuers should not rush to register at this stage, or officially appoint a responsible officer (FATCA Responsible Officer or "FRO").
The first quarter of 2014 will provide a clearer picture on two current unknowns: (i) potential amendments to the FATCA Regulations which could obviate the need to register at all; and (ii) Cayman Islands legislation being adopted to support the implementation of the IGA ("Cayman FATCA Legislation"). Additionally, there may be clarificatory changes to the IRS FATCA registration form/website which may resolve some of the confusion on identifying an FRO for Model 1 foreign financial institutions ("FFIs").
Cayman Islands Legislation
Although the IGA has now been signed (and will come into force in due course), the Cayman FATCA Legislation will need to be adopted in order to clarify, inter alia, the powers and responsibilities of the Cayman Islands Tax Information Authority.
We understand from the Cayman Islands government that this process will start shortly, with a view to adoption in the first half of 2014.
Based on previous experience in adopting legislation that implemented the European Union Savings Directive, we anticipate the Cayman FATCA Legislation will be modelled on the UK FATCA regulations.
The Cayman FATCA Legislation and guidance notes will provide an opportunity to clarify the application of FATCA to CLO Issuers.
Proposals have been submitted to the US Treasury and the IRS by ISDA, LSTA and SIFMA to modify the Limited Life Debt Investment Entities ("LLDIE") provisions in the US Treasury Regulations (the "FATCA Regulations"), to bring CLO Issuers under those provisions. If these proposals are successful then we understand the following points will apply:2
(a) CLO Issuers would be treated as 'certified deemed-compliant' FFIs under FATCA.
(b) Certified deemed-compliant FFIs are not required to register for a Global Intermediary Identification Number ("GIIN") with the IRS. The CLO Issuer would provide self-certification of its status to withholding agents: probably through a modified W-8BEN form.
(c) The IGA specifically contemplates the ability of the parties to take the benefit of definitions in the FATCA Regulations (i.e. the final FATCA Regulations as amended).
(d) We have confirmed with the Cayman Islands government that, through the Cayman FATCA Legislation, a CLO Issuer will obtain the benefit of any amendment to the LLDIE provisions under the FATCA Regulations and the CLO Issuer would then be treated as a "Non-Reporting Cayman Islands Financial Institution".
No LLDIE Modification
In the event that there is no modification to the LLDIE provisions under the FATCA Regulations, or to any other potential certified-deemed compliant category that may become applicable under the IGA or the Cayman FATCA Legislation, the following points will apply:
(a) A CLO Issuer under the IGA would fall under the definition of a Reporting Cayman Islands Financial Institution, or to use the FATCA Regulations terminology, a "Reporting Model 1 FFI".
(b) The CLO Issuer would report information on US account holders to the Cayman Islands government, specifically the Cayman Islands Tax Information Authority, pursuant to the Cayman FATCA Legislation, which in turn would transfer the relevant information to the IRS.
(c) The Model 1 IGA does not include the concept of an FRO which is only relevant to FFIs in non IGA countries ("Participating FFIs") and Reporting Model 2 FFIs as both are required to have an FFI agreement with the IRS. The IRS draft FFI agreement contains, amongst other things, a requirement to maintain a compliance program and for the FRO to provide periodic certifications to the IRS as to its adequacy.
(d) CLO Issuers, being Reporting Model 1 FFIs, are therefore not required to appoint their own FRO. However, confusion has arisen over the FATCA IRS form 8957 and the FATCA portal for registration, each of which still references the identification and involvement of the FRO.
(e) The FATCA registration website guidance and form 8957 instructions both state, for Reporting Model 1 FFIs that registration is for the purpose of authorising one or more points of contact to receive information related to the registration on the entity's behalf as well as to obtain a GIIN. The purpose for Participating and Reporting Model 2 FFIs is registration and also to confirm acceptance of the terms of their applicable FFI agreement, including the on-going compliance requirements.
(f) Furthermore, the FATCA registration website guidance and form 8957 instructions state the term "RO" means the individual with authority under local law to confirm the FFIs status and submit the information provided on its behalf. A director of a CLO Issuer has, as a matter of Cayman Islands law, authority to confirm the CLO Issuer's status as a 'Registered Deemed-Compliant Financial Institution under Model 1 IGA' and to submit the CLO Issuer's registration application, which registration is being made for the limited purpose of obtaining the GIIN.
(g) Accordingly, whilst an officer or director of the CLO Issuer may need to be identified for registration purposes, the on-going responsibilities and liabilities of an FRO, as described under and required to be appointed pursuant to an FFI Agreement, will not extend to Reporting Model 1 FFIs and therefore CLO Issuers should not need to appoint an additional officer to its board of directors to undertake the role of FRO.
(h) Withholding agents are not required to verify a GIIN on payments made prior to 1 January 2015 where the payee is a Reporting Model 1 FFI and, as such, CLO Issuers will not require a GIIN before 1 January 2015.
To the extent that registration with the IRS is required, the directors or Cayman Islands based administrator providing the directors can facilitate the registration process and work with the trustee and collateral manager to ensure that the CLO Issuer is in compliance by 1 January 2015.
MaplesFS has already set up a FATCA working group to provide such services and will work with the relevant CLO Issuer and transaction parties to register and obtain the GIIN, if necessary.
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 final regulations issued pursuant to FATCA, 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 IGA that could be applicable.
2 Maples and Calder has been assisting ISDA, LTSA and SIFMA and their onshore counsel with the proposals.