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Impact of FATCA on Cayman Islands Entities

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  1. Background
  2. What does FATCA mean for your Cayman Islands entity?
  3. When will a Cayman Islands entity be classified as a “Foreign
  • Investment Entities: Broadly, an entity that conducts (or is managed by an entity that conducts) trading or portfolio and investment management activities as a business on behalf of a customer or otherwise invests, administers or manages funds or money on behalf of other persons.
  • Custodial Institutions: An entity that holds, as a substantial portion of its business (broadly, more than 20% of gross revenues), financial assets for the account of others.
  • Depository Institutions: An entity that accepts deposits in the ordinary course of a banking or similar business and regularly engages in one or more of the following activities (a) provision of credit; (b) trading in receivables, notes or similar instruments; (c) issues letters of credit; (d) provides trust or fiduciary services; (e) finances foreign exchange transactions; or (f) deals in finance leases or leased assets.
  • Specified Insurance Companies: An insurance company (or its holding company) that issues, or is liable under, certain cash value or annuity contracts.
  1. Cayman Islands entities that are not FFIs
  • Active NFFE: The criteria which would qualify a NFFE as being an Active NFFE are numerous, and include where less than 50% of its gross income for the preceding calendar year is passive income (such as dividends, interest, royalties, annuities and rent) and less than 50% of the assets held during the preceding calendar year or other appropriate reporting period are assets that produce or are held for the production of passive income. For Active NFFEs, completion of the W8-BEN-E form essentially only requires completing the information on the first page, ticking “Active NFFE” on question 5 and then certifying that the entity is an Active NFFE in question 39.
  • Passive NFFE: Broadly, a Passive NFFE is a NFFE that is not an Active NFFE. For Passive NFFEs, the W8-BEN-E form also requires the NFFE to certify (having done appropriate due diligence) whether or not it has any substantial US owners (broadly, a US person with a 10% or more interest).
  1. What does a Cayman Islands FFI need to do to comply with FATCA?
  2. Obtain a Global Intermediary Identification Number (“GIIN”) by 31 December 2014: Cayman Islands FFIs that are not exempt (“Reporting FFIs”)and certain “registered deemed compliant ” FFIs are required to register on the IRS FATCA registration portal (https://sa2.www4.irs.gov/fatca-rup/) for the purpose of obtaining a GIIN. This registration must occur no later than 31 December 2014, although it is recommended you register as soon as possible to avoid registration congestion at the
  3. Identify Reportable Accounts: FATCA and the US IGA impose an obligation on Cayman Islands Reporting FFIs to identify and report details of “reportable accounts” to the TIA. “Reportable accounts” are financial accounts where the account holder is either a “Specified US Person” (broadly, any US person or person liable to pay US tax with some exceptions) or is a non-US entity the controlling persons of which include one or more Specified US Persons. Financial accounts include any depositary or custodial accounts and also, in the case of certain Investment Entities, any debt or equity holdings in the FFI. In the case of Cayman Islands funds, the relevant account is the shares/interests each investor holds in the fund.
  4. Existing accounts: FFIs will also need to perform due diligence on “financial accounts” that they maintained as at 30 June, 2014 (subject to certain de minimis thresholds for small accounts). Specifically, accounts that are reviewed must be searched for prescribed US indicia, including US place of birth and US address. If the account holder is a Specified US Person, details of their account must be reported (as described below). If the account holder is not a Specified US Person but there are US indicia in relation to its account, the Cayman
  5. New account procedures and due diligence: For new accounts opened with the FFI after 1 July 2014,4 it is necessary to carry out due diligence and obtain self-certification regarding whether the account holder is a Specified US Person. If US Indicia are found that suggest the person may be a US taxpayer, prescribed steps will need to be taken to confirm this. For accounts opened by another participating FFI, the FFI’s GIIN should be obtained and verified against the publicly available IRS FFI list. In general terms, all Cayman Islands FFIs should be revising their account opening forms and/or subscription agreements to ensure they comply with FATCA rules in relation to new accounts. For funds, it is also important to update offering and constitutional documents to ensure FATCA is appropriately addressed.
  6. Reporting: On or before 31 May 2015, Cayman Islands FFIs must make their first report to the TIA in relation to accounts held by Specified US Persons or a non-US entity with one or more controlling persons that are Specified US Persons. The US IGA prescribes the information that needs to be reported. Most significantly, it requires the balance of value of the relevant account held by the Specified US Person to be reported. Expanded information is required for the subsequent reporting period ending 31 May 2016. Upon receipt of a report, the TIA will pass the reported information to the IRS.
  7. Simplified reporting for groups of FFIs
  8. The Sponsoring Entity must be authorized to act on behalf of the sponsored Investment Entities and agree to carry out all due diligence and reporting obligations on behalf of the sponsored Investment Entities.
  9. The Sponsoring Entity has to register and obtain a sponsoring GIIN.
  10. If the sponsored Investment Entities hold reportable accounts, the Sponsoring Entity will ultimately be required to register each Sponsored Investment Entity that it manages.
  11. UK FATCA and future reporting
  12. Conclusion

Published November 11, 2014

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