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FATCA - Considerations for trusts and trustees

FATCA (the Foreign Account Tax Compliance Act) is US legislation designed to stop those with US
connections evading US tax through non-US investments, but its reach is so broad that many trusts, trustees, companies and other entities (whether associated with the US or not, and wherever established) will be caught within the FATCA net.

All “financial institutions” will have to consider what action, if any, they need to take as a consequence of FATCA. However, the definition of “financial institution” under FATCA is so broad that it encompasses a wide variety of entities and structures, which can include trusts, their trustees and holding companies.

FATCA applies to structures in specific jurisdictions in different ways – most jurisdictions have entered orwill enter into “intergovernmental agreements” (IGAs) with the US, implementing FATCA at a local leveland providing a framework for compliance with FATCA within that jurisdiction.

FATCA applies to financial institutions worldwide and therefore it is important that all trustees, and all directors of investment holding companies, consider their position under FATCA and, if need be, take further advice.

Depending on their status, those seeking advice may have no registration (and reporting) requirements. At its most onerous, FATCA provides that an entity (or a representative for that entity) will need to register with the Internal Revenue Service and submit information to the relevant reporting body on a regular basis. In some cases, however, registration accompanied by a “nil return” will be sufficient. If registration is not required, FATCA may still have an impact – in almost all cases, entities will now be required to certify their FATCA status to withholding agents and those with whom they hold accounts, and they may need to supply details of key individuals connected to the trust and distributions received. It is therefore important that appropriate advice is taken.

Failure to comply is likely to result in a 30% withholding tax on certain US source payments and can result in penalties. It may also be a breach of local law (eg. failure to comply with UK tax regulations).

If you are a trustee (or director of a trust company) we recommend that you seek specialist advice unless:

  1. the trust is a charity (within the scope of the US/UK IGA); or
  2. you are an individual trustee and either (a) the trust or the trust assets are not professionally managed(for example, the trust assets comprise only land, or cash in a bank account); or (b) the trust or trust assets are professionally managed, but less than 50% of the income arising to the trustee(s) derives from “financial assets” (which includes stocks, shares, securities, derivatives, insurance/annuity contracts and/or units in a collective investment scheme).

The deadline for registration (if it is indeed necessary) depends on the relevant jurisdiction. Entities falling within IGAs of certain jurisdictions (such as Bermuda and Switzerland) are being advised to register before 5 May 2014, although we understand that there may be some flexibility in practice and appropriate advice should therefore be sought.

If you have any questions on how FATCA may affect you please do not hesitate to speak to Clare Maurice (clare.maurice@mtgllp.com), Emma-Jane Weider (emma-jane.weider@mtgllp.com) or your usual contact at MTG.

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