STEP organized a presentation about FATCA

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ON THE 10TH OF JULY, 2014 OLIESERVE’S TEAM ATTENDED A PRESENTATION ORGANIZED BY THE SOCIETY OF TRUST AND ESTATE PRACTITIONERS (STEP) ON FATCA ESSENTIALS AND DEADLINES.

THE PRESENTATION WAS SPONSORED BY EUROBANK AND A GUEST SPEAKER WAS MR. TASSOS YIASEMIDES, BOARD MEMBER OF KPMG, CYPRUS.

WHAT IS FATCA?

FATCA stands for Foreign Account Tax Compliance Act, a United States taxation legislation that was enacted in March 2010 with the core purpose to detect and prevent fraud in the US, and furthermore to ensure tax compliance. FATCA aims at enhancing information reporting and withholding compliance issues for people from the US directly and/or indirectly. That means that it refers to investments made in entities or by entities outside the US, which includes financial institutions that are based in the Republic of Cyprus.

WHO DOES FACTA APPLY TO?

In accordance to FATCA, foreign financial institutions (FFIs), and Non-Financial Foreign entities (NFFE), must identify US account holders, as well as any entities that are under American control such as people from the US that hold a good amount of shares in an entity, and in addition provide IRS information about their income payments, assets and trade movements during the relevant financial year. FATCA regulations came into force on the 1st of July, 2014 and it is expected to affect the majority of financial institutions that are located in Cyprus, which will include investment services providers, regardless whether or not the customers derive from the US.

A US citizen has been defined as:

  • Holder of citizenship (including dual citizenship); or
  • US resident alien for tax purposes; or
  • Domestic partnership; or
  • Domestic corporation; or
  • Estate other than a foreign one; or
  • Trust may be primarily supervised by a US court with regards to its administration;
  • A Trust that has one or more persons exercising authority over it and decision making; or
  • Any person that is not a foreigner.

WHO ARE THE FOREIGN FINANCIAL INSTITUTIONS (FFIs)?

A Foreign Financial Institution (FFI) any foreign entity, being a financial institution, that is not organized and/or created in light of the laws of possession of the US. Essentially, an FFI is a financial institution that:

  • a. accepts deposits as a part of its ordinary course of business, as would a bank or similar business would; or
  • b. deals or appears to be dealing with investing, reinvesting, trading in securities, commodities, partnership interests or otherwise similar business;
  • c. deal with custodian issues (i.e. mutual funds);
  • d. some types of insurance companies that have cash value products or annuities.

Cyprus based banks, custodians, investment and pension funds, insurance and brokerage companies are all examples of FFIs

WHAT IS EXPECTED BY THE FFIs SO AS TO COMPLY WITH FATCA?

The FFIs are expected by FATCA to apply advanced due diligence procedures so as to fully recognize, register, and refer all US persons to the Internal Revenue Service (IRS). Furthermore, the FFIs are also expected to withhold and provide the IRS with 30% of any payments that are relevant to any income deriving from the US. Such income may be made to either:

  • FFIs that are not taking part;
  • Unruly account holders, such as those that have submitted insufficient information with reference to either being fully owned or being from the US.

The payments that shall be withheld, are deemed to include US sources of income that is fixed and determined on an annual or otherwise payment, such as wages, interests, rents, gross sale proceeds made by sale of land or otherwise.

Non compliance with FATCA shall include as a penalty a 30% withholding tax with regards to any payments made on income that was originated in the US, and furthermore will effect the reputation of the failing organization which will in turn bring about legal issues and complications and in addition negatively affecting their business. In addition this 30% withholding tax shall also apply to payment made to an NFFE, save the NFFE has identified each substantial US person that holds directly and/or indirectly an interest to the company, which usually applies to owners that hold more than 10% interest in the company, or that the NFFE proves that they have no such substantial US owner.

WHO ARE THE FOREIGN NON-FINANCIAL INSTITUTIONS (NFFE)?

A Non-Financial Foreign Entity (NFFE) is a foreign entity that does not fall within the definition of the FFI. Such entities include professional services firms, some non-publicly traded entities but who are not involved in banking or investing or privately held operating businesses.

WHAT IS EXPECTED BY THE NFFEs SO AS TO COMPLY WITH FATCA?

An NFFE that is not accepted, in order to ensure compliance with FATCA, and thereby avoid the 30% withholding tax must provide the withholding agent with:

  • a. certification that the NFFE does not have substantial US owners that have a more than 10% interest; or
  • b. provide the said agent with the name, address and TIN (Taxpayer Identification Number) of each US owner involved.

Any information with regards to substantial US owners obtained by the withholding agent, must be submitted to the IRS.

HOW CAN SOMEONE APPLY?

According the FATCA, FFIs that fall within the definition of one or more of the below, are considered as exempted from the FATCA regulations:

  • Most governmental entities;
  • Non-profit organizations;
  • Certain small, local financial institutions;
  • Certain retirement entities;

It is common knowledge that unless the relevant FFI falls within the definition of being exempted by the application of FATCA, the relevant FFI shall not both register and agree to report; face the said 30% withholding tax for some US source payments made to them. In addition an FFI that has registered on the FATCA Registration Website shall upon approval receive the so called GIIN code (Global Intermediary Identification Number) from the IRS unless the said FFI hold in fact the nature of a Limited FFI instead.

The new deadline for Registering with FATCA is by the 31st day of December, 2014 and the Reporting has been extended up to the 31st of December, 2015.

DISCLAIMER: This Article was construed for information purposes only and any liability arising from reliance onto this Article shall not be held to be justified. For any further information with regards to FATCA, the reader should refer to the original text of the said legislation.