The Foreign Account Tax Compliance Act (“US FATCA”) was enacted in the United States in 2010 in order to reduce perceived offshore tax evasion by US persons holding assets through offshore accounts that were not subject to US information reporting to the Internal Revenue Service (the “IRS”). US FATCA requires a foreign entity that is a foreign financial institution (“Financial Institution” or “FI”) either (i) to enter into an agreement with the IRS relating to such reporting or (ii) to comply with local laws that implement an intergovernmental agreement (“IGA”). If a Financial Institution does not comply with US FATCA, a 30% withholding tax is imposed on US source income of that Financial Institution. Financial Institutions are also required to close accounts where their US customers do not provide information to be collected by it.
On 29 November 2013, the Cayman Islands government signed a Model 1B (i.e. non-reciprocal) IGA with the United States (the “US IGA”). As an IGA partner jurisdiction, the Cayman Islands based Financial Institutions will not be subject to a 30% withholding tax on US source income, unless they fail to meet the requirements set out in the US IGA and in the Cayman Islands implementing legislation referred to below.
On 5 November 2013, the Cayman Islands government signed an intergovernmental agreement with the United Kingdom (the “UK IGA”, and together with the US IGA, the “IGAs”) aimed at improving international tax compliance which provides a framework for the implementation in the Cayman Islands of a UK tax residents reporting regime (“UK FATCA”), which is similar in scope to US FATCA.
Unless there is an available exemption, Cayman Islands based Financial Institutions which are subject to the IGAs will be required to identify Financial Accounts1 held by United States or United Kingdom Specified Persons2 (as the case may be) and report specified information about those accounts to the Cayman Islands Tax Information Authority (the “Cayman TIA”). The Cayman TIA would then pass this information on to the IRS (in relation to US accounts) and Her Majesty’s Revenue and Customs (“HMRC”) (in relation to UK accounts) on an automatic basis annually.
Cayman Islands implementing Legislation and Guidance
On 4 July 2014, The Tax Information Authority (Amendment) (No.2) Law, 2014, The Tax Information Authority (International Tax Compliance) (United Kingdom) Regulations, 2014 (the “UK FATCA Regulations”), and The Tax Information Authority (International Tax Compliance) (United States) Regulations, 2014 (the “US Regulations”, and together with the UK Regulations, the “FATCA Regulations”) were gazetted and became effective. The FATCA Regulations provide legal obligations of Cayman Islands Financial Institutions in relation to US and UK FATCA as a matter of Cayman Islands law. The FATCA Regulations also permit the Cayman Islands government to exchange tax information automatically under the IGAs with the UK and the US without violating Cayman law.
On 22 July 2014, the Cayman Islands government released guidance notes concerning the compliance requirements of the IGAs (the “Guidance Notes”). The Guidance Notes are intended to provide practical assistance to businesses, their advisers and the Cayman TIA in interpreting the IGAs, and will be a key component of Cayman’s automatic exchange of information regime for implementing the IGAs. Since the IGAs are based on the same model, many of the provisions are the same and are covered by the Guidance Notes. Where applicable, differences between the IGAs are noted.
What is the scope of the IGAs and FATCA Regulations?
The IGAs and the FATCA Regulations apply to all Cayman Islands Financial Institutions (“CFIs”), regardless of whether they hold any Financial Accounts for Specified Persons.
Some action will be required of all CFIs that maintain Financial Accounts. The extent of that action will depend on a number of factors including whether account holders are Specified Persons and the value and nature of the Financial Account.
FATCA can also have an impact on entities which are not Financial Institutions. Any nonUS entity under the US IGA and non-UK entity under the UK IGA that is not a FI will be considered a Non-Financial Foreign Entity (“NFFE”) under US or UK FATCA. There are two categories of NFFE (i) an Active NFFE3 or (ii) a Passive NFFE. A NFFE, whether Passive or Active, has no obligations itself under the IGAs and FATCA Regulations but may have to confirm its status and provide details of Controlling Persons4 to another Financial Institution if requested to do so by the Financial Institution. A CFI may also have reporting obligations in respect of Financial Accounts it maintains for a Passive NFFE with Controlling Persons who are Specified Persons.
The FATCA Regulations and Guidance Notes assist Cayman Islands entities in determining their status as a Financial Institution or NFFE including whether it would be an Active or Passive NFFE.
Is the Cayman Islands entity a Financial Institution?
The first step to be undertaken by a Cayman Islands entity is to establish whether, for the purposes of the IGAs, the entity is a Financial Institution. This, together with establishing the type of Financial Institution it is, will determine the extent of the obligations that need to be undertaken.
A CFI is any Financial Institution organised under the laws of or resident in the Cayman Islands. For these purposes, organised under the laws of the Cayman Islands means the following:
- for a company, if the company is incorporated in the Cayman Islands;
- for trusts, if any of the trustees are incorporated, registered or licensed in the Cayman Islands; and
- for partnerships, if the partnership is established in the Cayman Islands.
Having established that an entity is a Cayman Islands entity (for FATCA purposes), it should be determined whether it is a Financial Institution. Under the US IGA, the term Financial Institution applies to non-US entities which fall within any, or more than one, of the below categories. Under the UK IGA, the term applies to non-UK entities in the same categories. These are:
- Custodial Institution - any entity that earns a substantial portion (at least 20 percent) of its gross income from the holding of financial assets for the accounts of others and from related financial services.
- Depositary Institution - broadly any entity that is engaged in a banking or similar business.
- Investment Entity - an entity that conducts as a business, or is managed by an entity that conducts as a business, one or more of the following activities, for or on behalf of a customer, trading in:
- money market instruments (cheques, bills, certificates of deposit, derivatives etc.)
- foreign exchange
- exchange, interest rate and index instruments
- transferable securities and commodity futures trading
- individual and collective portfolio management
- otherwise investing, administering or managing funds or money on behalf of other persons
In practice, when applying this definition, an entity that is professionally managed will generally be an Investment Entity, by virtue of the managing entity being an Investment Entity.
- Specified Insurance Company - an insurance company is a Specified Insurance Company when the products written are classified as Cash Value Insurance or Annuity Contracts or if payments are made with respect to such contracts.
The definitions of the entities above are as provided by the IGAs, however, the FATCA Regulations and Guidance Notes provide that it is open for a CFI to choose to use a definition of Financial Institution set out in the US FATCA Treasury Regulations relating to US FATCA (the “US Treasury Regulations”). Whether that would be beneficial to a particular entity will need to be assessed on a case by case basis.
A subsidiary or branch of a non-Cayman Islands entity (including a US entity) carrying on a business, as a Custodial Institution, a Depository Institution, an Investment Entity, or a Specified Insurance Company in the Cayman Islands, will also be a Reporting Cayman Islands Financial Institution.
The FATCA Regulations and Guidance Notes assist Cayman Islands entities in determining whether it falls within one of the above categories and therefore whether it is a Financial Institution. In practice, most investment funds in the Cayman Islands (including hedge and private equity funds) will be considered an ‘Investment Entity’ and therefore a Financial Institution.
Is the CFI a Reporting FI or a Non-Reporting FI?
The next step to be undertaken is to establish whether the CFI is a “Reporting FI” or “NonReporting FI”. By default, all Financial Institutions are Reporting FIs, unless they qualify as Non-Reporting FIs.
What is a Non-Reporting FI?
In the US IGA, Non-Reporting FI means any CFI, or other entity organized under the laws of the Cayman Islands, that is described in Annex II of the US IGA as a Non-Reporting FI or that otherwise qualifies as a deemed-compliant FFI or an exempt beneficial owner under the US Treasury Regulations. Annex II of the US IGA provides that the following entities are each Non-Reporting FIs:
Exempt Beneficial Owners
- The government of the Cayman Islands, any political subdivision of the Cayman Islands or any wholly owned agency or instrumentality of the Cayman Island;
- International Organisation;
- Central Bank; and
- Certain participation retirement and pensions funds (i.e. a fund established in the Cayman Islands to provide retirement, disability or death benefits to beneficiaries that are current or former employees of one or more employers) subject to certain conditions;
- Financial Institution with a client base almost entirely within the Cayman Islands, subject to certain conditions;
- Local Bank with a client base almost entirely within the Cayman Islands, subject to certain conditions including balance sheet and total asset thresholds;
- Financial Institution with only low-value accounts (no financial accounts with a balance in excess of US$50,000) and no more than US$50m in assets provided it is not an Investment Entity;
- Qualified Credit Card Issuer, subject to certain conditions;
- Trustee-Documented Trust provided the trustee is a Reporting FI and reports all information required to be reported;
- Sponsored Investment Entity, where a sponsor of the Investment Entity is registered with the IRS, where required, the sponsor has registered the sponsored entity with the IRS and the sponsor performs all due diligence and reporting obligations of the sponsored entity;
- Sponsored, closely held investment vehicle;
- Investment advisors and investment managers which are Investment Entities solely because they render investment advice to, and act on behalf of, or manages portfolios for, and acts on behalf of, a customer for the purposes of investing, managing or administering funds deposited in the name of the customer with a FI; and
- Collective investment vehicle, subject to certain conditions.
The rules which may determine whether an entity would fall within one of the above exceptions and therefore qualify as a Non-Reporting FI are complex and will require careful analysis on a case by case basis. The Guidance Notes particularly focus on the classification of, and distinction between Reporting FIs and Non-Reporting FIs, as well as Registered Deemed Compliant and Certified Deemed Compliant entities under the US Treasure Regulations.
In the UK IGA, Non-Reporting FI means any CFI, or other entity resident in the Cayman Islands, that is described in Annex II of the UK IGA as a Non-Reporting FI other than a Sponsored Investment Entity or a Sponsored Closely Held Investment Vehicle where the sponsoring entity has failed to comply with its obligations set out in that Annex II. Annex II of the UK IGA is similar to that of the US IGA except exceptions (iii), (v) and (vi) above do not apply. Again, the Guidance Notes assist a CFI in determining whether it might fall within one of the exemptions in Annex II of the UK IGA.
If the Cayman entity is a Reporting FI, what steps does it have to take?
A Reporting FI will (for the purposes of the US IGA and US FATCA Regulations) need to register with the IRS and obtain a Global Intermediary Identification Number (“GIIN”). An application for registration should be made as soon as possible but prior to 22 December, 2014 or, if the FFI has not commenced to carry on business on that date, not later than 30 days following the date of commencement of that business. Registration can be completed through the IRS FATCA registration online portal and the IRS has issued guidance to assist with this process. Withholding agents that verify the GIIN for Cayman Islands Reporting FIs are not required to withhold tax on payments to those Cayman FIs.
Where the Financial Institution is a member of an expanded affiliated group, current IRS procedures require that the lead of this group registers and has obtained their GIIN so that when other group members/ Related Entities5 are registering they are also able to use this information.
2. Due Diligence
In relation to all Financial Accounts maintained by a Reporting FI, that Reporting FI will need to establish and maintain:
- arrangements that are designed to identify Reportable Accounts6; and
- arrangements that are designed to establish the jurisdictions of residence and, where applicable, (in relation to US FATCA only) the US citizenship of an account holder.
A Reporting FI will be taken to have complied with such obligations only if:
- the arrangements meet certain due diligence requirements set out in the relevant FATCA Regulations and IGA; and
- the arrangements secure that the evidence used in its due diligence requirements, or a record of the steps taken in relation thereto, is kept for a period of six years.
For the purposes of US FATCA only, a Reporting FI will also be required to establish and maintain arrangements that are designed to identify payments made by that FI to a Non-Participating FI7 in the calendar years 2015 or 2016. Annex 1 of the US IGA sets out steps which can be taken by a Reporting FI to identify whether an account holder is a Non-Participating FI.
A Reporting FI must also implement arrangements to obtain the United States federal taxpayer identifying number (“TIN”) or United Kingdom national insurance number (“NI number”) and date of birth (as applicable) of every Specified Person who is an account holder of a Reportable Account. This obligations takes effect from 1 July 2014 in the case of new accounts opened on or after that date and from 1 January 2017 in the case or pre-existing accounts as at 30 June 2014.
A Financial Institution which has reporting obligations summarised below, should notify the Cayman TIA of that fact (in the form that the Cayman TIA) may require no later than 31 March in the first calendar year in which it is required to comply with reporting obligations. Such notification should include:
- the name of the Reporting FI;
- the categorisation of the FI as determined under the relevant IGA;
- where it is registered with the IRS, the GIIN number allocated to it; and
- the full name, address, designation and contact details of the natural person identified and authorised by the FI to be the principal point of contact for the FI for all purposes of compliance with the relevant FATCA Regulations.
In respect of 2014 and every following calendar year, a Reporting FI will then be required to prepare a return setting out:
- certain information (described below) in relation to every Reportable Account that is maintained by the FI at any time during the calendar year in question (if it maintains no Reportable Accounts during the calendar year in question, the return should state that fact);
- the FI’s GIIN (or if it has not been allocated such a number, a relevant local reference number); and
- in relation to US FATCA only, a statement relating to whether the FI has a Related Entity or branch which is unable to fulfill its FATCA obligations.
Such return should be sent to the Cayman TIA on or before 31 May of the year following the calendar year to which the return relates (in the form required by the Cayman TIA), whether electronically or otherwise.
- The information required to be provided includes, subject to certain exceptions:
- the name and address of the account holder;
- the account holder’s TIN or the account holder’s NI number (as the case may be);
- if an account is identifiable by an account number, that number or, if not, its functional equivalent;
- balance or value of the account;
- the relevant total gross credits (e.g. interest and dividends paid during the year) if any;
- if the account holder is an individual, that person’s date of birth (UK FATCA only); and
- if the account holder is a passive NFFE that has Controlling Persons who are Specified Persons, the names and addresses of those Specified Persons and, if any of those persons is an individual, that person’s TIN or NI number and date of birth (as applicable).
For the purposes of US FATCA only, in respect of each of the 2015 and 2016 calendar years, a Reporting FI must also prepare a return setting out the names of the nonparticipating FIs to whom payments have been made and the total amount of those payments made to each of the non-participating FIs in question. If no payments were made, the return should state that fact. As with the other return mentioned above, this return should be sent to the Cayman TIA on or before 31 May of the year following the calendar year to which the return relates (in the form required by the Cayman TIA), whether electronically or otherwise.
In respect of the US IGA only, the concept of Related Entity is relevant in the context of the reporting obligations of the CFIs in respect of any Related Entities that are Non-Participating Financial Institutions. When a CFI has any Related Entity that, as a result of the jurisdiction in which they operate, is unable to comply with US FATCA, then in order to maintain compliance the CFI must fulfil the obligations set out in the US IGA.
In certain circumstances the due diligence, reporting obligations and registration with the IRS can be undertaken by a third party service provider although the responsibility for compliance with the IGAs and FATCA Regulations (and any liability for failure to comply) remains with the Reporting FI.
If the Cayman entity is a Reporting FI, what steps does it have to take?
Financial Institutions referred to as ‘Registered Deemed Compliant’ (under the US Treasury Regulations8) will be obliged to register with the IRS and obtain a GIIN. Financial Institutions referred to as ‘Certified Deemed Compliant’ (under Annex II of the US IGA) will not need to register with the IRS (save for certain limited exceptions). Rather than register with the IRS, Certified Deemed Compliant Financial Institutions should self-certify with withholding agents to evidence their status and avoid the imposition of 30% withholding on US source payments.
Exempt Beneficial Owners and Deemed Compliant Financial Institutions have no reporting obligations in respect of Financial Accounts that they maintain under the US IGA.
Financial Institutions which are Non-Reporting FIs under the UK IGA have no reporting obligations in respect of Financial Accounts that they maintain under the UK IGA.
What are the due diligence requirements?
A Financial Institution will need to follow one or more of the following processes for identification of account holders depending on whether the account holder is an individual or entity:
- Indicia search – searching relevant indicia by reference to documentation or information held or collected in accordance with opening or maintaining an account eg information held for the purpose of complying with AML rules;
- Self-certification – requesting self-certification from an account holder or a Controlling Person of a Passive NFFE where applicable;
- Publicly available information (entities only) – searching publicly available information to determine the FATCA status of an entity, for example whether it is a Financial Institution that has registered and obtained a GIIN.
It should be noted that a self-certification cannot be relied upon if a Financial Institution has reason to know that it is incorrect, unreliable or there is a change in circumstance which changes the account holder’s status.
We set out below a summary of the relevant procedures that a Cayman Islands Reporting FI will need to follow to perform its due diligence obligations which are dependent upon whether the financial account is pre-existing (i.e. held on or before 30 June 2014) or new and whether it is held by an individual or entity. There are also exemptions for accounts with a balance below certain threshold amounts. Some of these procedures may allow a Financial Institution to not have to seek self-certification from an account holder but in practice, given the complexity of the various rules and regulations, we expect that many Financial Institution will adopt a general approach to obtain, as a matter of course, self-certification from both its existing and new account holders, although that remains to be seen.
Pre-existing Individual Accounts
- A Pre-existing Individual Account is a Financial Account maintained by a Financial Institution as of 30 June 2014. Depending on the balance of the account, they will fall into four categories:
- Financial Accounts below the threshold exemption limit – Accounts which have a balance equal or less than US$50,000 (or US$250,000 in respect of Cash Value Insurance Contracts or Annuity Contracts) do not need to be reviewed, identified or reported to the Cayman TIA unless the Financial Institution has elected to disregard such threshold exemptions
- Cash Value Insurance Contracts and Annuity Contracts unable to be sold to US residents (US IGA only) - these do not need to be reviewed, identified or reported to the Cayman TIA
- Lower Value Accounts – these are accounts with a balance or value that exceeds US$50,000 (or US$250,000 for Cash Value Insurance Contracts or Annuity Contracts), but does not exceed US$1,000,000 – a Financial Institution must review its electronically searchable data for evidence of certain US or UK indicia (e.g. identification as a US citizen or UK resident, birthplace, current mailing address, US phone number, power of attorney in favour of a person who has a US or UK address). Where such indicia are found, the account would generally be reportable unless an exemption is available. Where no such indicia are discovered through an electronic search, no further action is required unless there is a subsequent change of circumstances.
- High Value Accounts – these are accounts with a balance or value that exceeds US$1,000,000 – a Financial Institution must review its electronically searchable data as with Lower Value Accounts plus, where certain information cannot be obtained by an electronic search, a paper record search must be carried out (e.g. its AML/KYC documentation) to identify such information. In addition, if there is a relationship manager for an account holder, the FI must consider whether that relationship manager has actual knowledge that would identify the account holder as a Specified Person. As with the Lower-Value Accounts, if indicia are found, the account would generally be reportable unless an exemption is available.
A new Individual Account
A new Individual Account is a Financial Account opened on or after 1 July 2014. When opening a new Individual Account, the Financial Institution must obtain the TIN for US Persons or the date of birth and NI Number for UK Persons.
The threshold exemption for new Individual Accounts is a balance or value which does not exceed US$50,000 for Depository Accounts and Cash Value Insurance Contracts only. These do not need to be reviewed, identified or reported to the Cayman TIA unless the Financial Institution has elected to disregard such threshold exemption.
There the threshold exemption does not apply, the Financial Institution must obtain self-certification to determine where the account holder is tax resident and confirm the reasonableness of this based on the information the FI obtains in connection with the opening of the account.
Pre-existing Entity Accounts
A Pre-existing Entity Account is a Financial Account maintained by a Financial Institution as of 30 June 2014. An account holder must be classified as either:
- a Specified Person;
- a US or UK Person other than a Specified Person;
- a Cayman Islands Financial Institution or other Financial Institution in an IGA jurisdiction;
- a Participating FFI, a Deemed Compliant FFI or an Exempt Beneficial Owner;
- an Active NFFE or Passive NFFE; or
- a Non-Participating Financial Institution
A Pre-existing Entity Account is only reportable where the account is held by one of more entities that are Specified Persons or by Passive NFFEs with one or more Controlling Persons who are Specified Persons. If the account holder is a Non-Participating Financial Institution, only payments made to it are reportable.
The threshold exemption for Pre-existing Entity Accounts applies to a balance or value which does not exceed US$250,000 for any financial account. These do not need to be reviewed, identified or reported to the Cayman TIA until the account balance exceeds US$1,000,000 at 31 December of a calendar year, unless the Financial Institution has elected to disregard such threshold exemption.
A Financial Institution must use information previously recorded on its files, standardised industry codes, electronic searches (provided all AML information is stored electronically) and paper review to determine an entity’s status. If there are US or UK indicia indicating the account holder is a US or UK Specified Person, the account will generally be reportable. A Financial Institution can also obtain self-certifications if it is believed an entity is a Specified Person for example and it does not want to unnecessarily report on that account. The FI should also determine whether the account is held by another FI – and if it is a Cayman FI or another IGA partner jurisdiction and the GIIN has been verified, no further action will be required. To establish whether an entity is a Passive NFFE, the FI must obtain selfcertification from the account holder unless the FI can reasonably determine it is an Active NFFE. For accounts of Passive NFFEs, if an account has a balance that exceeds US$1,000,000, the FI will need to obtain self-certification as to the Passive NFFE’s Controlling Persons’ status as Specified Persons
New Entity Accounts
A New Entity Account is a Financial Account opened on or after 1 July 2014. An account holder of a new Entity Account must be classified as one of the categories of persons as set out above for Pre-existing Entity Accounts. The same rules apply in relation to which categories of persons are reportable as with Pre-existing Entity Accounts except that there are no threshold exemptions for new Entity Accounts. A Financial Institution will generally be required to obtain self-certification if account holders are identified as being a Specified Person, Passive NFFE with Controlling Persons who are Specified Persons, a Financial Institution (unless a GIIN has been obtained) or NPFIs.
Aggregation of account balances
For purposes of determining the aggregate balance or value of Financial Accounts, all accounts belonging to an individual or entity will need to be aggregated unless the Financial Institution has elected under the FATCA Regulations to not apply the thresholds. In this regard, a Financial Institution is required to aggregate all Financial Accounts, belonging to an individual or entity, maintained by it or by a Related Entity, but only to the extent that the Financial Institution’s current computerised systems link the Financial Accounts by reference to a data element, for example a customer or taxpayer identification number, and allow account balances or values to be aggregated. Each holder of a jointly held Financial Account shall be attributed the entire balance or value for the purposes of applying the aggregation requirements.
It should also be noted that for the purposes of determining if there is a High Value Account, account balances need to be aggregated where there is a relationship manager who knows or has reason to know that accounts are directly or indirectly owned, controlled or established by the same person.
By when should the due diligence be carried out?
|Type||US IGA||UK IGA|
|Pre-existing individual - Low Value Account||30 June 2016||30 June 2016|
|Pre-existing individual – High Value Account on 30 June 2014||30 June 2015||30 June 2015|
|Pre-existing individual – not a High Value Account on 30 June 2014 but became one by 31 December 2015||Within six months of the relevant year end||Within six months of the relevant year end|
|New individual||On account opening||Procedures need to be in place from 1 July 2014|
|Pre-existing entity with balance below US$250,000 at 30 June 2014||Not until balance exceeds US$1,000,000||Not until balance exceeds US$1,000,000|
|Pre-existing entity with balance below US$250,000 on 30 June 2014 but exceeding US$1,000,000 by 31 December 2015||Within six months of the relevant year end||Within six months of the relevant year end|
|Pre-existing entity with balance exceeding US$250,000 on 30 June 2014||30 June 2016||30 June 2016|
|New entity account||On account opening||Procedures need to be in place from 1 July 2014|
What are the consequences of non-compliance?
As mentioned above, in respect of the US IGA and US FATCA, a the Cayman Islands based Financial Institutions that is significantly non-compliant with the US IGA and in the US Regulations, will be subject to a 30% withholding tax on US source income.
As the UK IGA is not part of a withholding tax regime, there is no withholding tax that will arise as a result of being regarded as significantly non-compliant.
If corrupted or incomplete information is reported, the Cayman TIA will give the Reporting FI an opportunity to resolve the problem, which could lead to information having to be resubmitted. Compliance measures may be exercised by the Cayman TIA if the error is considered to contravene the FATCA Regulations. Continual or repeated administrative or minor errors could be considered as significant non-compliance where they disrupt and prevent transfer of the information.
Significant non-compliance (e.g. repeated failure to file a return or repeated later filing, ongoing or repeated failure to establish appropriate due diligence processes, deliberate or negligent omission of required information) may be determined by the IRS (in relation to the US IGA) or HMRC (in relation to the UK IGA) or in either case the Cayman TIA. Upon notification of significant non-compliance, there will be an 18-month period for the Financial Institution to resolve the non-compliance and if it does not so resolve the issue, under the US IGA only, the FI will be considered a Non-participating Financial Institution.
The Cayman TIA may also exercise its compliance measures under the FATCA Regulations.
Offences under the FATCA Regulations
For the purposes of determining whether information provided by a FI was correct and complete, the Cayman TIA may request that the FI to provide or make available information including copies of relevant books and records (“Disclosure Regulation”).
A Reporting FI which:
- without reasonable excuse, fails to comply with a requirement of the Competent Authority under the Disclosure Regulation;
- without reasonable cause, fails to make a report required under the FATCA Regulations;
- fraudulently or negligently makes a false report, whether in its entirety or in any particular part;
- fails to implement arrangements or procedures in order to comply with the FATCA Regulations;
- with intent to avoid the provisions of these regulations, alters, destroys, mutilates, defaces, hides or removes any document or information, including documents or information electronically held ; or
- wilfully obstructs an inquiry by the Cayman TAI under the Disclosure Regulation
commits an offence and is liable on summary conviction to a fine of five thousand dollars, or in the case of subparagraphs 1), 3), 4), 5) and 6) to imprisonment for a term of 2 years, or to both. That offence can be considered to be committed by any director, manager, secretary or other similar officer of the body corporate where the offence committed by the relevant body corporate is proved to have been committed with the consent or connivance of, or to be attributable to any neglect on the part of, any such person who was purporting to act in the capacity of director, manager, secretary or other similar officer of the body corporate.
What steps should a Cayman Entity be taking?
- Determine whether it, and any of its Related Entities or members of its expanded affiliated group, is a Financial Institution and, if so, whether it is a Reporting Financial Institution;
- If it, and any of its Related Entities or members of its expanded affiliated group, is a Reporting Financial Institution (or a Registered Deemed Compliant FI), each such Financial Institution should register with the IRS to obtain a GIIN;
- Implement relevant due diligence onboarding processes and procedures in relation to new accounts from 1 July 2014 to identify whether such accounts would be a reportable account, which in practice is likely to include obtaining self-certification from an account holder as to its FATCA status;
- For pre-existing accounts, review account balances and existing due diligence to determine whether sufficient information is available to identify whether an account is reportable and if not, obtain self-certification;
- Appoint a natural person to be the point of contact for all purposes of compliance with the FATCA Regulations;
- In due course, notify the Cayman TIA whether it will be required to report on financial accounts;
- When required, file relevant reports with the Cayman TIA; and
- For funds, update the PPM to reflect FATCA disclosures.
In practice, it is likely that most Funds’ administrators will take on the due diligence requirements as they typically deal with existing onboarding and KYC requirements. It will be extremely important for an entity to show that it has taken the due diligence requirements seriously and that such procedures are auditable so that it can prove what steps it has taken.
Any technology/software solution that a Cayman entity invests in to deal with FATCA should not be limited to a FATCA only solution. Other countries are developing their own FATCA reporting regime (e.g. China) and it is increasingly likely that the regulatory landscape will change and a global FATCA reporting regime could be implemented.
1 The term “Financial Account” means an account maintained by a Financial Institution, and includes: (i) in the case of an Entity that is a Financial Institution solely because it is an Investment Entity, any equity or debt interest (other than interests that are regularly traded on an established securities market) in the Financial Institution; (ii) in the case of a Financial Institution not described in subparagraph (i), any equity or debt interest in the Financial Institution (other than interests that are regularly traded on an established securities market), if [(i) the value of the debt or equity interest is determined, directly or indirectly, primarily by reference to assets that give rise to U.S. Source Withholdable Payments, and (ii)] the class of interests was established with a purpose of avoiding reporting in accordance with the [relevant] IGA; and (iii) any Cash Value Insurance Contract and any Annuity Contract issued or maintained by a Financial Institution, other than a noninvestment-linked, nontransferable immediate life annuity that is issued to an individual and monetizes a pension or disability benefit provided under an account that is excluded from the definition of Financial Account in Annex II. Notwithstanding the foregoing, the term “Financial Account” does not include any account that is excluded from the definition of Financial Account in Annex II of the relevant IGA.
2 The term “Specified Person” means: (i) in respect of the US IGA, a U.S. citizen or resident individual, a partnership or corporation organized in the United States or under the laws of the United States or any State thereof, a trust if (i) a court within the United States would have authority under applicable law to render orders or judgments concerning substantially all issues regarding administration of the trust, and (ii) one or more U.S. persons have the authority to control all substantial decisions of the trust, or an estate of a decedent that is a citizen or resident of the United States, subject to certain exceptions set out in the US IGA; and (ii) in respect of the UK IGA, a person or Entity who is resident in the United Kingdom for tax purposes, and includes a person or Entity who is resident in both the United Kingdom and the Cayman Islands, under the respective domestic law of country, subject to certain exceptions set out in the UK IGA..
3 An “Active NFFE” is essentially an entity that conducts an actual business activity other than holding assets that produce investment income such as interest, dividends etc and less than 50% of that entity’s gross income for the preceding year is passive income (i.e. income other than trading income) and less than 50% of its assets are assets that produce passive income. A Passive NFFE is any NFFE that is not an Active NFFE.
4 “Controlling Person” means a natural person who exercises direct or indirect control over an entity. For this purpose, a 25% ownership threshold applies for companies, partnerships, trusts and foundations.
5 An entity is a “Related Entity” of another entity if either entity controls the other entity, or the two entities are under common control. For this purpose control includes direct or indirect ownership of more than 50 percent of the vote or value in an entity. Notwithstanding the foregoing, the Cayman Islands may treat an entity as not a Related Entity of another entity if the two entities are not members of the same expanded affiliated group as defined in section 1471(e) (2) of the U.S. Internal Revenue Code.
6 “Reportable Account” in relation to a Reporting FI, means:
- in respect of US FATCA, a Financial Account maintained by a Cayman Islands Reporting FI and held by one or more US Specified Persons or by a non-U.S. entity with one or more Controlling Persons that is a US Specified Person; or
- in respect of UK FATCA, means a Financial Account maintained by a Cayman Islands Reporting FI and held by one or more UK Specified Persons or by a non-United Kingdom entity with one or more Controlling Person
- in each case maintained by that institution in the Cayman Islands for the purposes of its business as a custodial institution, a depository institution, an investment Entity or a specified insurance company.
7 “Nonparticipating Financial Institution” means a Financial Institution that is not compliant with US FATCA by virtue of either (i) the FI is located in a jurisdiction that does not have an IGA and the FI has not entered into an agreement with the IRS or (ii) the FI is classified by the IRS as being a Non-participating Financial Institution.
8 This note does not include consideration of what entities might fall within the Registered Deemed Compliant category pursuant to the US Treasury Regulations. However, this is covered in the Guidance Notes.
This publication is for general guidance and is not intended to be a substitute for specific legal advice. Specialist advice should be sought about specific circumstances.