It is important that fund managers understand their responsibilities under the Foreign Account Tax Compliance Act (“FATCA”). FATCA imposes a 30% withholding tax on U.S. source payments to foreign financial institutions (“FFI”) that do not comply with requirements to identify their U.S. account holders, as well as to non-financial foreign entities that do not identify their substantial U.S. owners, unless an exception applies. For offshore funds, understanding their FATCA reporting requirements is of the utmost importance to avoid withholding tax.
There are three different reporting regimes under FATCA, two of which are dependent on whether the jurisdiction where the fund is formed has entered into an intergovernmental agreement (“IGA”) with the United States, and the third is for countries without an IGA with the United States. A fund with FATCA reporting requirements located in a jurisdiction with a Model 1 IGA with the United States will report information regarding their U.S. account holders directly to the relevant authorities in that jurisdiction who then transmit the information to the IRS. For reporting funds with a Model 2 IGA, the fund will report the information directly to the IRS. Reporting funds not located in a jurisdiction with a Model 1 or Model 2 IGA comply with FATCA by entering into an FFI agreement with the IRS and reporting the U.S. accountholders information directly to the IRS.
The first step for a private equity fund is to determine if there are any reporting obligations. The definition of FFIs includes investment entities such as foreign private equity funds. A foreign fund would typically be an FFI subject to FATCA reporting. For foreign general partners of the private equity funds and other collective investment vehicles, determining whether FATCA reporting is required would be similar to that of the foreign private equity fund. Foreign management companies will technically be treated as FFIs since they primarily conduct the business of investing funds and financial assets on behalf of other investors.
U.S. funds are not required to register for FATCA purposes but must otherwise comply with FATCA requirements such as due diligence, withholding, and reporting requirements. Other components of a U.S. fund may need to register under FATCA such as master and feeder funds.
To comply with their withholding and other obligations under FATCA, FFIs must ascertain the FATCA status of their investors. This is generally done by obtaining a Form W-9 from U.S. investors and the applicable form W-8 from foreign investors. FFIs due diligence requirements under FATCA extend beyond collecting forms, the FFI must perform specified due diligence to validate its withholding certificates to avoid potential liability for tax, interest, and penalties resulting from the failure to perform FATCA withholding.
FATCA compliance requires important legal determinations and processes to ensure due diligence procedures are properly carried out and monitored. By closely coordinating legal, accounting, and fund administration, our fund manager clients have a streamlined FATCA compliance team they can rely on to establish efficient procedures and reporting.
We understand the importance of being responsive to fund managers, ensuring the FATCA compliance is completed accurately and on a timely basis, and coordinating with the necessary professionals for efficient results. We provide this solution while having the feel of dealing with a single platform.
Praestans Global Advisors is neither a law firm nor a CPA firm.
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