Cayman Islands Financial Account Reporting for Investment Funds What Must Be Done, By When?

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1 ealert November 2014 Cayman Islands Financial Account Reporting for Investment Funds What Must Be Done, By When? The Cayman Islands currently has in place an intergovernmental agreement (IGA) with each of the United States and the United Kingdom and has passed domestic legislation to make compliance with the IGAs a matter of Cayman Islands law (Cayman FATCA). The Cayman Islands Tax Information Authority (TIA) issued Guidance Notes on Cayman FATCA (Guidance Notes) in July On 29 October 2014, the government of the Cayman Islands signed the OECD sponsored Multilateral Competent Authority Agreement and made a commitment to implement the new common reporting standard on automatic exchange of information (CRS) with various countries by This means that there will be more IGAs in coming years. Investment managers, general partners and investment funds located in the Cayman Islands need to have arrangements in place to allow them and the funds that they operate or sponsor to comply with Cayman FATCA. What follows is a high level summary of the IGAs and the Guidance Notes. What managers, operators and promoters of Cayman Islands investment funds should be doing right now? Are you a Financial Institution? Registration and reporting requirements generally only apply to Financial Institutions (FIs). Therefore, the first and most important question to determine, is, whether or not the Cayman Islands entity in question is an FI. FIs are defined as Investment Entities, Custodial Institutions, Depositary Institutions or Specified Insurance Companies. Cayman Islands entities that are either licenced or registered as excluded persons under the Securities Investment Business Law, general partners and most investment funds will be Investment Entities and therefore Cayman Islands FIs. Are you a Reporting FI? Investment managers and general partners will generally be Non-Reporting FIs under the IGAs. In respect of the US IGA, they are Non-Reporting Certified Deemed Compliant FIs and should use this option when completing self-certification forms, including IRS W8 forms. There are no separate categories of Non-Reporting FI under the UK IGA. Unless some of a number of limited exemptions are available, all Cayman Islands investment funds will be Reporting FIs.

2 For trustees of unit trusts, assuming that the trustee is also a Reporting FI, the trustee can register the unit trust itself as a Reporting FI or the trustee can chose to report on accounts in the unit trust itself through its own reporting obligations. Sponsored Entities are Non-Reporting FIs. For the purposes of the US IGA and obtaining a GIIN (see below), the Sponsoring Entity does not need to be an FI or located in the Cayman Islands. However, for the UK IGA, a Sponsoring Entity of a Cayman FI must themselves be a Cayman FI and must register with the TIA as such. Applying for the GIIN Reporting FIs must register with the IRS to obtain a GIIN before 22 December 2014 (to ensure that they are in the list that will be published by the IRS on 1 January 2015). From 1 January 2015, Reporting FIs should obtain their GIIN as soon as possible after formation because it will be demanded by counterparties such as banks and prime brokers to avoid withholding being applied on certain US source payments. If the Reporting FI hasn t started to carry on business by or on 31 December 2014, then under Cayman FATCA, they have 30 days to apply for their GIIN after the date on which they do start to carry on business. There is no equivalent of a GIIN under the UK IGA or the CRS. Every Reporting FI must appoint an authorised person to obtain a GIIN and establish and oversee Cayman FATCA compliance program for the FI. Although the IRS portal and forms refer to a Responsible Officer, the authorised person need not be an officer or director of the FI and could, for example, be an employee of the investment manager. However, they must have authority to: submit the application under Cayman Islands law (eg delegated authority from the board of the FI); certify that the FI meets the requirements of the status being submitted; certify that to the best of their knowledge, the information on the form is accurate and complete; and designate points of contact under Cayman Islands law. For this reason, we recommend that there be some form of formal corporate delegation which establishes this authority. Information on the registration procedure can be found here. I don t have any US investments or US investors so don t need to worry about FATCA, right? Wrong. Compliance with financial account reporting isn t just a US based issue and is now both a matter of Cayman Islands domestic law and right now at least the UK is an issue and through the CRS many more countries will be relevant. A Cayman Islands entity s classification under Cayman FATCA is unrelated to the location of its investments or assets and, although, for example, the identity of a fund s investors might have a bearing on whether or not it is a Reporting or Non-Reporting FI, the mere fact that a fund has no US investors doesn t rule it out of Cayman FATCA. If a Cayman Islands entity is a Reporting FI, it is obliged to obtain a GIIN, implement a compliance program and submit reports to the TIA regardless of the identity of its investors or the nature of its investments. Failure to do so is likely to constitute a criminal offence under Cayman FATCA. If the entity is a company, this means that directors or officers would be committing the offence and in the case of a partnership, the general partner and its officers. Funds need to establish a compliance program and review existing client on-boarding documentation to determine Reportable US or UK Accounts. As noted above, all Reporting FIs must establish a program to allow them to carry out due diligence on Pre- Existing Entity Accounts and Pre-Existing Individual Accounts and update their client on-boarding

3 documentation, such as subscription documents and packages, to ensure that they obtain relevant information from New Account holders when they subscribe for equity interests in the relevant FI. Aren t there special rules about Pre-Existing Accounts? Yes! Both the US and the UK IGA provide that Entity and Individual Accounts that were opened on or before 30 June 2014 may be treated as Pre-Existing Accounts. In addition, the IRS has issued guidance which confirms that FIs may treat Entity Accounts that have been opened between 1 July 2014 and 31 December 2014 as Pre- Existing Entity Accounts. There are financial minimum thresholds for both Pre-Existing Entity (US$250,000) and Individual (US$50,000) Accounts which means that accounts under those values need not be reviewed at all unless they later become higher value accounts in certain circumstances. However, Reporting FIs can voluntarily elect to dispense with this threshold and review all accounts. The importance of designating accounts as Pre-Existing or New is that FIs have a grace period within which they are able to carry out due diligence on Pre-Existing Accounts as follows: Type of Account Deadline for Due Diligence and Reporting Pre-Existing High Value Individual 30 June 2015 Pre-Existing Lower Value Individual 30 June 2016 Pre-Existing Entity 30 June 2016 What about New Accounts? For the US IGA, a New Individual Account is one that has been opened on or after 1 July 2014 and a New Entity Account is one that will be opened on or after 1 January For the UK IGA, a New Account is any account that was opened on or after 1 July There are no threshold exemptions for New Accounts for FIs that are investment funds and therefore information on all new investors should be obtained on subscription. For New Individual Accounts, the Reporting FI must obtain self-certification forms from the account holder at our around the time that the account is opened and confirm the reasonableness of the self-certification based on a review of the documentation provided by the investor, including any AML/KYC documentation. For example, if the self-certification form confirms that the individual is not a US taxable person, but they provide a US contact address, this should be investigated before the account is classified. For New Entity Accounts, the Reporting FI must classify the Entity as either: a Specified Person (UK or US); UK or US Person other than a Specified Person; A Cayman FI or a Partner Jurisdiction FI; A Participating FFI, a Deemed Compliance FFI or an Exempt Beneficial Owner; An Active or Passive NFFE; or A Non-Participating FI. In order to be able to classify New Accounts appropriately, investment managers and funds should now be updating subscription packages to make sure that in addition to any W8 or W9 form that may already have been requested, the subscription package contains a self-certification form which covers both the UK IGA and potentially any future IGAs.

4 There is no prescribed form that this must take and funds can use the self-certification forms that have been issued by the Cayman Islands government or include relevant questions in the subscriber questionnaires that are contained in subscription packages. Once further IGAs are entered into as a result of the CRS, subscription packages should be reviewed to ensure that relevant certification documents and information are provided which cover all relevant jurisdictions. What if a Pre-Existing Account is closed before the due diligence and reporting is complete? If a Pre-Existing Reportable Account is closed before the due diligence work has been completed, it must be included in any filing with the TIA. What if the FI has no Reportable Accounts? If the FI has no Reportable Accounts, then the FI must make a report to that effect to the TIA. When do filings with the TIA need to be made? Filings with the TIA begin on 31 May 2015 with respect to US Reportable Accounts. If an FI establishes that it has no US Reportable Accounts, then it must still make a nil filing with the TIA as noted above. This will be through an online portal which is yet to be released. Funds can take some comfort in that the only filings that must be made on this date will be for New Individual Accounts that have been opened between 1 July 2014 and 31 December 2014 because all New Entity Accounts for that period can be treated as Pre-Existing Entity Accounts and the due diligence and reporting for those must be completed by 30 June Reporting in respect of UK Reportable Accounts begins on 31 May 2015 in respect of the 2014 reporting year. What needs to be reported? US IGA The first reporting deadline is 31 May We expect that the TIA portal will be online in the early part of Q Reporting Year In respect of Information to be reported 2014 Each Specified US Person either holding a Reportable Account Or as a Controlling Person of an Entity Account Name Address US TIN (where applicable or DoB for Pre-existing Accounts) Account number or functional equivalent Reporting date to the TIA 31 May 2015 Name and identifying number of Reporting Financial Institution Account balance or value 2015 As 2014 As 2014 plus: 31 May 2016 The total gross amount paid or credited to the account including the aggregate amount of any redemption payments.

5 After 2015, the information that must be reported increases and for Cayman Islands investment funds that are Reporting FIs, the full reporting obligations come into force in 2016 for the 2015 reporting year. UK IGA - For the UK IGA, full reporting in respect of the 2015 year is also required by 31 May 2016, so in effect there will be two reports in Reporting Year In respect of Information to be reported 2014 Each Specified UK Person either holding a Reportable Account Or as a Controlling Person of an Entity Account Name Address Date of birth and National Insurance number (where applicable for Pre- Existing Accounts) Reporting date to the TIA 31 May 2016 Account number or functional equivalent Name and identifying number (GIIN or local tax identification number) of Reporting Financial Institution Account balance or value 2015 As 2014 As 2014 plus: 31 May 2016 The total gross amount paid or credited to the account including the aggregate amount of any redemption payments. For detailed assistance, please get in touch with your usual Appleby contact for advice. Key Contacts Matthew Taber Counsel Corporate & Commercial Appleby (Cayman) Ltd mtaber@applebyglobal.com Ian Gobin Partner Global Head, Funds & Investment Services Corporate & Commercial Appleby (Cayman) Ltd igobin@applebyglobal.com

6 Offshore Legal & Fiduciary Services applebyglobal.com Bermuda British Virgin Islands Cayman Islands Guernsey Hong Kong Isle of Man Jersey London Mauritius Seychelles Shanghai Zurich Appleby Global Group Services Limited 2014 All Rights Reserved This ealert is published by APPLEBY and is not intended to be, nor should it be used as, a substitute for specific legal advice on any particular transaction or set of circumstances. It does not purport to be comprehensive or to render legal advice and is only intended to provide general information for the clients and professional contacts of Appleby as of the date hereof. Appleby (Cayman) Ltd. (the Legal Practice) is a limited liability company incorporated in the Cayman Islands and approved and recognised under the Legal Practitioners (Incorporated Practice) Regulations 2006 (as amended). Partner is a title referring to a director, shareholder or an employee of the Legal Practice. A list of such persons can be obtained from your relationship partner.