Conformity and discrepancies between Fatca regulations and the IGAs explained by Alfi


Susanne Weismüller, legal adviser at the Association of the Luxembourg Fund Industry (Alfi) has looked into what discrepancies may exist between Fatca regulations and the Intergovernmental Agreements required to make the US legislation reality.


Investment entities falling under the definition of financial institutions

In terms of the substantive changes, it is worth noting the clarification of the term “financial institution”. The FATCA statutory provisions defined the latter as any entity that:

   – accepts deposits in the ordinary course of a banking or similar business;

   – as a substantial portion of its business, holds financial assets for the account of others; or

   – is engaged primarily in the business of investing, reinvesting or trading in securities, partnership interests, commodities or any interest in such securities, etc.

The final regulations confirm the first two categories (depositary or custodial institutions), and add specified insurance companies, certain holding companies and treasury centres. However, the aforementioned third category comprises re-qualified investment entities.

Taking into consideration comments that the provisions of the final regulations should conform as closely as possible to the provisions of the IGAs, the final regulations provide that an investment entity includes any entity that primarily conducts as a business on behalf of customers:

   – trading in an enumerated list of financial instruments;

   – individual or collective portfolio management; or

   – otherwise investing, administering, or managing funds, money, or certain financial assets on behalf of other persons.

In addition, the final regulations treat an entity (other than an entity that primarily conducts as a business on behalf of customers one of the activities enumerated above) the gross income of which is primarily attributable to investing, reinvesting, or trading as an investment entity, provided that the entity is managed by a depository institution, a custodial institution, another investment entity, or an insurance company that qualifies as a financial institution. An entity primarily conducts an activity as a business if gross income attributable to such activity equals or exceeds 50% of the entity’s gross income.

Accordingly, passive entities that are not professionally managed are generally treated as passive non-financial foreign entities (NFFEs) rather than as FFIs. A passive NFFE must only provide a certification that it has no substantial US owners, or provide the name, address and taxpayer identification number of each such owner.

However, entities that function or define themselves as mutual funds, hedge funds, or any similar investment vehicle established with an investment strategy of investing, reinvesting, or trading in financial assets are investment entities. As a consequence, the latter have to fulfil the full identification and reporting obligations for financial institutions, unless they benefit from a deemed-compliant status bringing certain reliefs.

Last but not least, it is important to note that the final regulations’ definition of investment entities does not provide that the latter shall be interpreted in a manner consistent with similar language set forth in the definition of “financial institution” in the Financial Action Task Force Recommendations.

Considering the interaction of the final regulations with the IGAs as described above, there may be discrepancies for FFIs acting under the regulations and those acting in an IGA jurisdiction.


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