FATCA Overview for Non-U.S. Insurance Companies

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1 Stewart Patton U.S. Tax Services P.O. Box 2651 Belize City, Belize (Belize phone number) (312) (U.S. VOIP number) stewart.patton1 (Skype ID) FATCA Overview for Non-U.S. Insurance Companies October 2014

2 FATCA Basics FATCA in five words: Name names or pay up. FATCA uses the threat of a withholding tax to motivate non-u.s. entities to reveal their U.S. owners or account holders. Non-U.S. entities that do not provide the required information will suffer a 30% FATCA withholding tax on the receipt of withholdable payments. Three types of withholdable payments: U.S. source dividends, interest, royalties, and other similar income (including reinsurance premiums) (withholding began July 1, 2014), the gross proceeds from the sale of stocks and debt (withholding begins January 1, 2017), and certain foreign payments attributable to the foregoing (withholding begins only once the IRS issues implementing regulations). A non-u.s. government can change how FATCA applies to FFIs within its jurisdiction by entering into an inter-governmental agreement (an IGA ) with the IRS. This presentation focuses on non-iga jurisdictions (such as Belize). 2

3 FFIs and NFFEs Every non-u.s. entity is classified for FATCA purposes as either a foreign financial institution (an FFI ) or a non-financial foreign entity (an NFFE ). A non-u.s. entity is an FFI if it falls into one of the following categories: depository institutions (e.g., banks), custodial institutions (e.g., broker-dealers), insurance companies that issue (i) life insurance policies with a cash value in excess of US$50,000 or (ii) annuities of any value, and investment entities (i.e., investment funds, trusts, and other entities that are professionally managed and earn passive income). A non-u.s. entity that doesn t fall into one of the above categories is an NFFE. 3

4 Types of FFIs Each FFI is further dividend into one of the following three categories: Non-Participating FFI: An FFI that takes no action this is the default. Non-participating FFIs are withheld upon and may have issues maintaining bank accounts. Participating FFI: An FFI that fulfills the following requirements: registration with the IRS (pursuant to which the FFI and IRS enter into an FFI agreement ), on-going compliance with the terms of the FFI agreement, determination of the FATCA treatment of each account holder, withholding on certain account holders and/or reporting of account holders FATCA treatment to U.S. withholding agents, and annual reporting of certain account holders and other information to the IRS. Deemed-compliant FFI: An FFI that falls into a specific category allowing it to be treated as FATCA compliant without the expense of achieving participating FFI status. 4

5 Deemed-Compliant FFIs Two categories of deemed-compliant FFIs are relevant for present purposes. A Local FFI is an FFI that meets the following requirements: the FFI is licensed and regulated under the laws of its country of incorporation; the FFI does not have a fixed place of business or solicit customers outside its country of incorporation; the FFI is required by law to determine whether its customers are local residents; at least 98% of the FFI s accounts are held by local residents; the FFI has policies and procedures in place to determine if it has customers who are nonresident U.S. citizens; and the FFI takes certain actions with respect to any nonresident U.S. citizen customers. An FFI with only low-value accounts is an FFI that meets the following requirements: all of the FFI s accounts are below US$50,000, and the FFI (together with all entities in its ownership group) has less than US$50 million in assets on its balance sheet. 5

6 Treatment of NFFEs An NFFE is either: a Passive NFFE if it derives more than 50% of its income from securities or an Active NFFE otherwise. An NFFE can avoid FATCA withholding simply by providing a properly completed IRS Form W-8BEN-E to a requester (e.g., a bank or a U.S. payor of reinsurance premiums). On the IRS Form W-8BEN-E, a Passive NFFE must either: provide the name, address, and taxpayer identification number of any substantial U.S. owner or certify that it has no substantial U.S. owners. A substantial U.S. owner is any U.S. person who owns more than 10% of the NFFE. An Active NFFE only needs to certify that it is an Active NFFE it is not required to provide information about any substantial U.S. owners. 6

7 P&C Companies A non-u.s. insurance company that issues only property and casualty insurance with no cash value (i.e., pure protection insurance) does not fall into any FFI category. Therefore, it is an NFFE. As an NFFE, it can avoid FATCA withholding simply by providing an IRS Form W-8BEN-E to any person who requests one (e.g., a bank, broker, or a U.S. payor of re-insurance premiums). The IRS Form W-8BEN-E would simply: identify whether the company is an Active NFFE or Passive NFFE (depending on its income) and, if it is a Passive NFFE, identify any substantial U.S. owners or certify that it does not have any. Any non-insurance activities (e.g., acting as a bank or brokerage) could cause the company to be classified as an FFI, but it cannot be treated as an FFI simply because of investment activities related to its reserves. 7

8 Life Companies A non-u.s. insurance company has a tougher FATCA compliance path if it issues either: life insurance policies with a cash value in excess of US$50,000 or annuities (of any value). In such case, the company is an FFI. If it takes no action, it will be a nonparticipating FFI, which would mean that: it would be subject to the nonrefundable 30% FATCA withholding tax and it may have issues maintaining a bank account. Therefore, it will want to make sure that it either (i) falls within one of the two applicable categories of deemed-compliant FFIs described on a previous slide or (ii) becomes a participating FFI. Determining whether a particular life insurance company and its ownership group can fall within a deemed-compliant category requires an intensive and specific investigation of all relevant facts. 8

9 Conclusion FATCA withholding has arrived are you prepared? I live in Belize and help non-u.s. entities with FATCA issues on a daily basis. While foreign financial institutions are exactly that to most U.S. tax attorneys (i.e., foreign ), to me they are simply my neighbors and clients. Let's discuss how we can put you in the best position to avoid FATCA s potential negative impacts. Stewart Patton U.S. Tax Services P.O. Box 2651 Belize City, Belize (Belize phone number) (312) (U.S. VOIP number) stewart.patton1 (Skype ID) stewart@ustax.bz 9