Efforts to ensure tax compliance for foreign investments have increased significantly over the past decade. The Foreign Account Tax Compliance Act (FATCA) is a tax law that requires U.S. persons around the world to file annual tax returns for their foreign investments. FATCA was created in 2010 as part of the HIRE Act, which aims to bring transparency to the global financial market.
The law requires foreign financial institutions to inform the U.S. Internal Revenue Service (IRS) about financial accounts held by U.S. persons. This is intended to root out tax evasion by U.S. persons and companies that finance, operate, and earn taxable income overseas. Although it is not illegal to maintain an offshore account, failure to disclose the account is considered illegal because the U.S. taxes the income and holdings of its tax residents worldwide.
My fund purely operates in Europe and has no U.S. investors. Why does FATCA apply to me?
FATCA is not purely a U.S. ‘issue’. As a result of the U.S. tax law FATCA, approximately 100 countries and the U.S. have agreed to exchange information. Because of this, financial institutions are required to identify and report the aggregated amounts on accounts held by U.S. persons to the local tax authorities, who will then report to the IRS. In Russia and Switzerland, financial institutions report directly to the IRS.
U.S. persons are defined as persons who reside in the U.S., have U.S. citizenship (including dual citizenship) or hold a U.S. permanent residence permit (Green Card) or are corporations registered in the U.S.
If the fund, on undertaking the required due diligence, determines that there are no U.S. persons (investors), then its reporting requirements will be limited. That said, the global outlook means that it may be required to identify, not just whether investors are U.S. persons, but the jurisdiction in which they are tax resident.
What is the impact of FATCA?
As a result of FATCA, fund managers are required to identify those of their investors who are U.S. persons and then annually report information on financial/investment accounts held directly or indirectly by those investors. Fund managers report to local tax authorities in their respective countries.
As FATCA has been implemented in local law in Estonia, the fund manager must be fully compliant and therefore must review all current and prospective investors to confirm their FATCA status.
How can AlphaLAW help?
We are helping a number of fund managers from Estonia and Cyprus to prepare for FATCA, explaining how the rules relate to different funds they manage, presenting to their boards, assisting with classifying entities within the group and investors and providing guidance regarding the due diligence process that is required by the law.
Please contact a member of our team for further guidance.