Ninth Annual International Insurance Training Program FATCA and Insurance Stewart Kasner, Baker & McKenzie LLP, Miami Lyubomir Georgiev, Baker & McKenzie Zurich Four Points by Sheraton Zurich, Switzerland January 30, 2013 2012 Baker & McKenzie 2013 Baker & McKenzie 1
Foreign Account Tax Compliance Act (FATCA) Goal Incentive Actions Information reporting of US persons investing through a non- US ("foreign") financial institution ("FFI") 30% withholding tax on certain US source payments to an FFI that does not participate Passthru Payment Withholding by FFIs FFI to enter into an agreement with the IRS Non-US jurisdictions to enter into intergovernmental agreement with the USA 2013 Baker & McKenzie 2
FATCA - FFI Definition A Foreign Financial Institution (FFI) includes: a foreign entity that is an insurance company that issues or is obligated to make payments with respect to a cash value insurance or annuity contract a holding company that is a member of an expanded affiliated group that includes an insurance company if it issues or is obligated to make payments with respect to a cash value insurance contract or annuity contract 2013 Baker & McKenzie 3
FATCA - Insurance Company Definition Insurance company means an entity or arrangement i. That is regulated as an insurance business under the laws, regulations, or practices of any jurisdiction in which the company does business; or ii. The gross income of which arising from insurance, reinsurance, and annuity contracts (e.g. gross premiums and gross investment income) for the immediately preceding calendar year exceeds 50% of total gross income for such year; or 2013 Baker & McKenzie 4
FATCA - Insurance Company Definition Insurance company means an entity or arrangement iii. The aggregate value of the assets of which associated with insurance, reinsurance, and annuity contracts at any time during the immediately preceding calendar year exceeds 50% of total assets at any time during such year. Plain language definition Local law definitions and practices 2013 Baker & McKenzie 5
FATCA - Insurance Company Non-US insurance company that has made US Internal Revenue Code section 953(d) election but is not licensed to do business in any State of the USA Election for limited reporting: (1) a cash value or annuity contract s account balance or value; (2) any amount paid under the contract as a gross distribution on Form 1099-R; and (3) Indication that the taxable amount is not determined 2013 Baker & McKenzie 6
FATCA - Insurance Companies An insurance company that is not a specified insurance company must independently determine whether it is a depository institution, custodial institution, or investment entity The reserve activities with respect to its insurance contracts and annuity contracts are not taken into consideration in that determination An foreign insurance company that is not an FFI is an Non-Financial Foreign Entity (NFFE) 2013 Baker & McKenzie 7
FATCA - Insurance Contracts An insurance contract means a contract (other than an annuity contract) under which the issuer in exchange for consideration agrees to pay an amount upon the occurrence of a specified contingency involving mortality, morbidity, accident, liability, or property risk An investment-linked insurance contract means an insurance contract under which benefits, premiums, or the period of coverage are adjusted to reflect the investment return or market value of assets associated with the contract 2013 Baker & McKenzie 8
FATCA Cash Value Insurance Contracts A cash value insurance contract means an insurance contract (other than an indemnity reinsurance contract between two insurance companies and a term life insurance) that has an aggregate cash value greater than US$50,000 at any time during the calendar year A PFFI may elect to disregard the US$50,000 threshold by reporting all contracts with a cash value greater than zero 2013 Baker & McKenzie 9
FATCA Cash Value Definition The term cash value means any amount (determined without reduction for any charge or policy loan) that 1) is payable under the contract to any person upon surrender, termination, cancellation, or withdrawal; or 2) any person can borrow under or with regard to (for example, by pledging as collateral) the contract Cash value does not include an amount payable a) solely by reason of the death of the individual insured b) as a personal injury or sickness benefit or a benefit providing indemnification of an economic loss incurred upon the occurrence of the event insured against 2013 Baker & McKenzie 10
FATCA Cash Value Definition Cash value does not include an amount payable c) As a refund of a previously paid premium (less cost of insurance charges whether or not actually imposed) under an insurance contract (other than a life insurance or annuity contract) due to cancellation or termination of the contract, decrease in risk exposure during the effective period of the contract, or arising from the correction of a posting or similar error with regard to the premium for the contract d) As a policyholder dividend (other than a termination dividend) related to certain insurance contracts e) As a return of an advance premium or premium deposit for an insurance contract for which the premium is payable at least annually if the amount in question does not exceed the next annual premium that will be payable under the contract 2013 Baker & McKenzie 11
FATCA - Annuity Contracts An annuity contract means i. a contract under which the issuer agrees to make payments for a period of time determined in whole or in part by reference to the life expectancy of one or more individuals, or ii. a contract that is considered to be an annuity contract in accordance with the law, regulation, or practice of the jurisdiction in which the contract was issued, and under which the issuer agrees to make payments for a term of years An investment-linked annuity contract means an means an annuity contract under which benefits or premiums are adjusted to reflect the investment return or market value of assets associated with the contract 2013 Baker & McKenzie 12
FATCA Depository Account A depository account includes an amount that an insurance company holds under a guaranteed investment contract or similar agreement to pay or credit interest A depository account does not include an advance premium or premium deposit received by an insurance company, if the prepayment or deposit relates to an insurance contract for which the premium is payable annually and the amount does not exceed the annual premium Such amounts are excluded from cash value for purposes of determining whether a contract is a cash value insurance contract 2013 Baker & McKenzie 13
FATCA Preexisting Obligation A preexisting account means a financial account that is a preexisting obligation A preexisting individual account is a preexisting account held by one or more individuals A preexisting obligation means any account, instrument, contract, debt, or equity interest maintained, executed, or issued by a withholding agent that is outstanding on December 31, 2013 A preexisting obligation means also any account, instrument, or contract (including any debt or equity interest) maintained, executed, or issued by a PFFI withholding agent that is outstanding on the effective date of its FFI agreement 2013 Baker & McKenzie 14
FATCA Identification and Documentation Not required to perform identification and documentation procedures for a preexisting individual account that is a cash value insurance or annuity contract the aggregate balance or value is $250,000 or less as of the effective date of the FFI agreement, until there is change in circumstances 2013 Baker & McKenzie 15
Potential FATCA Withholding Policy Level Withholding can apply upon receipt of US source premium payments Account Level When a custodian bank or other FI maintaining accounts supporting a contract makes a payment to the insurance company Investment Level Payment from investment to custodian bank or FI maintaining account 2013 Baker & McKenzie 16
FATCA Grandfathered Obligation A grandfathered obligation means any obligation outstanding on January 1, 2014 Solely for purposes of a foreign passthru payment, grandfathered obligation also includes any obligation that is executed on or before the date that is six months after the date on which final IRS regulations defining foreign passthru payment are filed with the US Federal Register An obligation means any legally binding agreement or instrument but does not include an investment linked insurance contract or an investment linked annuity contract 2013 Baker & McKenzie 17
FATCA Obligation An obligation does not include (i) a deferred annuity contract or (ii) a life insurance contract or annuity contract that permits a substitution of a new individual as the insured or as the annuitant under the contract A deferred annuity contract means an annuity contract other than an immediate annuity contract A immediate annuity means an annuity contract (i) is purchased with a single premium or annuity consideration and (ii) no later than one year from the purchase date of the contract commences to pay annually or more frequently substantially equal periodic payments 2013 Baker & McKenzie 18
FATCA Intergovernmental Agreements (IGA) Model 1 IGA signed by the UK, Denmark, Mexico and Ireland, initialed by Spain and Norway and to be concluded by France, Germany, and Italy Model 2 IGA initialed by Switzerland and to be concluded by Japan Generally following the definitions and rules of the US Treasury Regulations on FATCA 2013 Baker & McKenzie 19
FATCA Model IGA - Definitions Financial Institution includes Specified Insurance Company Specified Insurance Company means any entity: insurance company or holding company of an insurance company issues or is obligated to make payments with respect to a Cash Value Insurance Contract or an Annuity Contract Financial Account includes: Cash Value Insurance Contract or Annuity Contract issued or maintained by a Financial Institution 2013 Baker & McKenzie 20
FATCA Model 1 IGA - Definitions Insurance Contract the issuer agrees to pay an amount upon the occurrence of a specified contingency involving mortality, morbidity, accident, liability, or property risk. Cash Value Insurance Contract Cash Value greater than $50,000 not an indemnity reinsurance contract between two insurance companies 2013 Baker & McKenzie 21
FATCA Model 1 IGA - Definitions Cash Value: the greater of (i) the amount that the policyholder is entitled to receive upon surrender or termination (without reduction for any surrender charge or policy loan), and (ii) the amount the policyholder can borrow Cash Value does not include: a personal injury or sickness benefit or other benefit providing indemnification of an economic loss incurred upon the occurrence of the event insured against 2013 Baker & McKenzie 22
FATCA Model 1 IGA - Definitions Cash Value does not include: a personal injury or sickness benefit or other benefit providing indemnification of an economic loss incurred upon the occurrence of the event insured against a refund to the policyholder of a previously paid premium (other than under a life insurance contract) due to policy cancellation or termination, decrease in risk exposure during the effective period of the Insurance Contract, or arising from a redetermination of the premium due to correction of posting or other similar error a policyholder dividend based upon the underwriting experience 2013 Baker & McKenzie 23
FATCA Model 1 Registration & Transition Yes, FATCA registration with the IRS No FATCA Agreement between FFI and the IRS Pre-existing accounts potentially require less or no due diligence depending on the account s balance or value Expanded transition for pre-existing accounts: transition relief to accounts that are in existence as of December 31, 2013 Review of pre-existing entity accounts with an account balance or value that exceeds US$250,000 must be completed by December 31, 2015 2013 Baker & McKenzie 24
FATCA Model 1 IGA - Review No review of Preexisting Individual Accounts of US$250,000 or less for a Cash Value Insurance Contract or Annuity Contract No review of Preexisting Individual Accounts that are Cash Value Insurance Contracts or Annuity Contracts if the law of the IGA partner country or US law or regulations effectively prevents their sale to U.S. residents (e.g. without registration under U.S. law or UK law requires reporting or withholding with respect to insurance products held by UK residents) 2013 Baker & McKenzie 25
FATCA Model 1 IGA - Review Review of individual high-value accounts (balance or value exceeds US$1 million) by December 31, 2014 Review of individual lower value accounts (balance or value exceeds US$250,000 for a Cash Value Insurance Contract or Annuity Contract but does not exceed US$1 million) by December 31, 2015 2013 Baker & McKenzie 26
FATCA Model 1 IGA - Reporting Reporting dates: Foreign tax authority to transfer the 2013 information collected from FFIs to the IRS by September 30, 2015 Foreign tax authority to transfer the 2014 information collected from FFIs to the IRS by September 30 of the following calendar year FFI not to report cash value insurance or annuity contracts if FATCA partner country law or US law prohibit such contracts from being sold to US residents, and if the FATCA implementing rules permit the FFI not to report 2013 Baker & McKenzie 27
FATCA Model 1 IGAs - Withholding Yes, withholding on withholdable payments to nonparticipating FFIs No FATCA withholding for payments to other FFIs in FATCA partner country or to recalcitrant account holders if FFI in the FATCA partner country comply with requirements to identify US accounts and report information to the FATCA partner tax authority The FATCA partner tax authority provides the IRS information (e.g. name, TIN, and account balance) on each US account maintained by each FFI in the FATCA partner country that reports to the FATCA partner tax authority Yes, withholding on payments to non-compliant branches outside the FATCA partner country but FFI with such branches qualifies as compliant under the IGA indefinitely 2013 Baker & McKenzie 28
Circular 230 Pursuant to requirements relating to practice before the Internal Revenue Service, any tax advice in this communication (including any attachments) is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties imposed under the United States Internal Revenue Code, or (ii) promoting, marketing or recommending to another person any tax related matter. 2013 Baker & McKenzie 29
Questions? Stewart Kasner Baker & McKenzie LLP 1111 Brickell Ave., Ste. 1700 Miami, Florida 33131, USA Phone: +1 305.789.8940 stewart.kasner@bakermckenzie.com Lyubomir Georgiev Baker & McKenzie Zurich Holbeinstrasse 30 CH-8034 Zurich, Switzerland Phone: +41 44 384 1490 lyubomir.georgiev@bakermckenzie.com 2013 Baker & McKenzie 30