Entity Classification Glossary: Tax Status Terms & Definitions
Entity Classification Terms
Explore key entity classification terms and definitions used in tax compliance, including entity types, tax status, FATCA classifications and reporting requirements.
Financial Institution
An entity that conducts financial activities such as accepting deposits, holding financial assets, investing or trading, or providing certain insurance products. Under regimes such as FATCA and CRS, specific rules determine whether an entity qualifies as a financial institution and its associated reporting obligations.
Participating FFI
A foreign financial institution that has entered into an FFI agreement with the IRS, agreeing to conduct due diligence on its account holders, report accounts held by Specified U.S. Persons directly to the IRS and, where required, withhold on certain payments. FFIs in Model 2 IGA jurisdictions generally become participating FFIs.
Reporting Model 1 FFI
A foreign financial institution resident in a jurisdiction that has signed a Model 1 intergovernmental agreement with the United States. It conducts due diligence to identify accounts held by Specified U.S. Persons and reports them to its local tax authority, which then exchanges the information with the IRS.
Deemed-Compliant FFI
A foreign financial institution that is treated as meeting FATCA requirements without entering into an FFI agreement. A registered deemed-compliant FFI registers with the IRS and obtains a GIIN; a certified deemed-compliant FFI does not register but certifies its status on Form W-8BEN-E. The Form W-8BEN-E instructions list the categories.
Exempt Beneficial Owner
Exempt Beneficial Owner is a person that is exempt from FATCA withholding on payments it beneficially owns. The main categories are foreign governments and their political subdivisions and wholly owned agencies; international organizations; foreign central banks of issue; certain foreign retirement funds; and entities wholly owned by exempt beneficial owners. The exemption generally does not extend to income from commercial financial activities.
Nonparticipating FFI
A foreign financial institution that is not a participating FFI, a deemed-compliant FFI or an exempt beneficial owner. Withholdable payments made to a nonparticipating FFI are generally subject to 30% FATCA withholding.
Nonfinancial Foreign Entity
Entities that do not meet the definition of a foreign financial institution are called a nonfinancial foreign entity or NFFE. As with FFIs, NFFEs have more than one type. NFFEs will be either active or passive.
Active NFFE
A nonfinancial foreign entity (NFFE) that meets the active NFFE test: less than 50% of its gross income for the preceding calendar year is passive income, and less than 50% of the assets it held during that year are assets that produce, or are held to produce, passive income. Active NFFEs are typically operating companies.
Passive NFFE
A nonfinancial foreign entity (NFFE) that is not an active NFFE and does not fall within another excepted NFFE category (such as a publicly traded NFFE or a direct reporting NFFE). A passive NFFE must identify any substantial U.S. owners — or certify that it has none — on Form W-8BEN-E.
Corporation
A legal entity that is separate from its owners and is generally treated as a distinct taxpayer for U.S. tax purposes. Its classification can affect applicable withholding, reporting, and tax documentation requirements.
Partnership
A business or investment entity owned by two or more partners. For U.S. tax purposes, a partnership is generally treated as a pass-through entity, with income, deductions, and other tax items allocated to its partners.
Limited Liability Company (LLC)
A U.S. business entity that generally provides its owners with limited liability protection. For U.S. tax purposes, an LLC may be classified as a corporation, partnership, or disregarded entity, depending on its ownership and elections.
Trust
A legal arrangement in which a trustee holds and manages assets for the benefit of one or more beneficiaries. For U.S. tax purposes, a trust’s classification can affect its tax treatment, withholding, and reporting requirements.
Estate
The assets, property, and financial interests left by an individual after their death, which may be managed by an executor or administrator. For U.S. tax purposes, an estate can be treated as a separate entity for certain tax and reporting purposes.
Sole Proprietorship
An unincorporated business owned and operated by one individual. For U.S. tax purposes, the business is generally not treated as a separate entity from its owner, with income and expenses reported by the individual.
Disregarded Entity
A business entity that is generally treated as separate from its owner for legal purposes but not as a separate entity for U.S. federal income tax purposes. Its income and tax information are generally reported by its owner.
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