The Foreign Account Tax Compliance Act (FATCA), also known as Chapter 4, requires certain foreign financial institutions and other foreign entities to identify and report specified U.S. persons and certain U.S. ownership interests. Understanding FATCA terminology, including FFI, GIIN, NFFE and specified U.S. person, is essential for applying these requirements correctly.
What is FATCA and how does Chapter 4 work?
The Foreign Account Tax Compliance Act (“FATCA”) falls within Chapter 4 of the Internal Revenue Code (“I.R.C.”), Code Sections 1471-1474, and introduced under the HIRE Act. The purpose of FATCA is to identify U.S. persons (individuals and entities) that are not reporting income earned from outside of the U.S. Operationally, this requires foreign financial institutions (“FFI”) and vehicles in which a person holds a substantial ownership interest to conduct due diligence on their account holders and report Specified U.S. persons to the Internal Revenue Service (“IRS”).
In some countries, local law restrictions prohibit the ability for direct reporting to the IRS. To remedy that issue, some foreign governments developed agreements with the U.S. Treasury. The agreement allows for the entity to provide the reportable information to the local government that will report that information to the IRS. Intergovernmental agreements (“IGAs”) designate these agreements. The agreement provides a framework for implementing Chapter 4 compliance in that country. These agreements are identified as a Model 1 or Model 2 Agreement.
- Model 1 Agreements require the submission of the required Chapter 4, U.S. person information to the local government. That local government will exchange the information with the United States.
- Model 2 Agreements enable sharing information directly with the IRS instead of routing it through the local government. Model 2 FFIs sign an FFI Agreement with the IRS. If a U.S. person is present for reporting by the FFI, then the FFI would submit this information to the IRS using Form 8966.
Below are some additional FATCA terms that you should know.
What are the key FATCA terms and definitions?
Foreign Financial Institution (FFI)
A foreign financial institution (“FFI”) is a financial institution organized outside of the United States.
Under Chapter 4, a financial Institution is a depository institution, broker, custodial institution, investment fund, or insurance company that issues annuities or certain cash value insurance contracts. It would not include property and casualty insurance.
Account Holder
An account holder is the person listed as owning the income of an account held with a financial institution. At a bank, the customer would be the account holder. In an investment fund, the investor would be the account holder. At an insurance company, the policy holder or beneficial owner of the policy would be the account holder. The term holder is also used within this article to identify persons with substantial ownership interest as provided below.
Recalcitrant Person
A Recalcitrant person is an account holder that refuses to provide required documentation to a withholding agent or participating FFI.
Specified U.S. Person
Another FATCA technical term to understand designates reportable U.S. persons as specified U.S. persons. In the event that they hold accounts at Foreign Financial Institutions or FFIs, individuals report to the United States Tax Authorities.
A specified U.S. person means any U.S. person other than:
- A publicly traded corporation, or a corporation that is related to a publicly traded corporation
- An organization exempt from U.S. federal tax
- Individual Retirement Plans or IRAs
- The United States or any agency of the United States
- Any state, the District of Columbia, any U.S. territory or any agency of each
- Any bank incorporated or doing business in the United States
- Any real estate investment trust
- Any regulated investment company
- Any common trust fund
- Any trust that is exempt from U.S. federal tax or that is a charitable trust
- Any registered dealers or brokers
- Any tax exempt trust under a tax exempt or public school annuity plan or governmental plan
In simpler terms, a specified U.S. person is any person that is not already subject to strict regulatory oversight. Specified U.S. persons generally are U.S. individuals, private corporations, and certain types of trusts.
Substantial Ownership Interest
A person with more than 10% of interest in the foreign entity (directly or indirectly). From a FATCA perspective, the analysis is looking for a Specified U.S. person with more than 10% of interest in the foreign entity (directly or indirectly) defined as a Substantial U.S. owner.
Global Intermediary Identification Number (GIIN)
A Global Intermediary Identification Number (“GIIN”) is the identification number assigned to an entity that has registered with the IRS for chapter 4 purposes.
Types of FFIs:
Nonparticipating FFI
A nonparticipating FFI is a foreign financial institution that will not comply with the FATCA requirements.
Reporting Model 1 FFI
A reporting Model 1 Foreign Financial Institution is a Foreign Financial Institution located within a country that has restrictions preventing the FFI from reporting information directly to the IRS. A Reporting Model 1 FFI conducts due diligence on account holders to identify and report Specified U.S. Persons. If identified, Specified U.S. Person are reported by the FFI to the local government that reports these persons and their account information to the IRS.
Participating FFI
A Participating FFI is a Foreign Financial Institution that conducts due diligence on account holders to identify and report Specified U.S. Persons directly to the U.S. Treasury department. These requirements are documented between the FFI and the US department directly within an FFI agreement. All FFIs that fall under a Model 2 Intergovernmental Agreement and all FFIs that are not located in a country with an IGA, are considered Participating FFIs.
Deemed-Compliant FFI
A deemed compliant FFI is a Foreign Financial Institution that meets the requirement of FATCA. A registered deemed-compliant FFI registers with the IRS and attests to the IRS that it satisfies certain procedural requirements. Separately a certified deemed compliant FFI, is not required to register with the IRS but is required to certify that it meets the certified status on an IRS Form W-8. The Form W-8 has numerous types of deemed-compliant FFIs listed and the Form W-8 instructions should be reviewed for a more in depth understanding of the different categories.
Other Entity Types under FATCA:
Exempt Beneficial Owner
Another FATCA technical term is an exempt beneficial owner. A person must be a beneficial owner of a payment to be treated as an exempt beneficial owner with respect to the payment. Examples of persons who are exempt beneficial owners, include but are not limited to: i) foreign governments, any political subdivision of a foreign government, or any wholly owned agency or instrumentality of the foreign government, which may not include a government owned retirement fund; ii) Any international organization or any wholly owned agency or instrumentality of the international organization ; iii) any foreign central bank of issue, which may not include securities held by foreign centra banks of issue; iv) certain foreign retirement funds depending on their composition; and v) certain entities that are wholly owned by one or more other exempt beneficial owners.
Nonfinancial Foreign Entity (NFFE)
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. What does this mean?
A Active NFFE is an entity that has an active trade or business. Generally, 50 percent or more of that business generates active income and 50 percent or more of the assets held by that entity would produce active income. Active NFFEs are usually operating companies, professional service firms, or charitable organizations.
A Passive NFFE is the opposite. More than half of the business generates passive income (such as interest, dividends, etc.) and more than half of the assets held will generate passive income. Passive NFFEs are usually trusts that are meant to hold passive income for their beneficial owners or other types of investment entities. Passive NFFEs are important, because any U.S. person who owns more than 10 percent of that NFFE will need to be disclosed as a Substantial U.S. Owner. This information is provided on the Form W-8BEN-E of the Passive NFFE.
We hope that these FATCA technical terms provided an initial understanding to FATCA.
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Frequently Asked Questions
A Foreign Financial Institution (FFI) is a foreign entity that meets the definition of a financial institution under FATCA, such as certain banks, investment entities or custodial institutions. A Nonfinancial Foreign Entity (NFFE) is a foreign entity that is not classified as a financial institution and may be categorized as either an Active NFFE or Passive NFFE.
A Global Intermediary Identification Number (GIIN) is an identification number issued by the IRS to certain entities that register for FATCA purposes. Withholding agents can use a GIIN to help verify an entity’s FATCA status and registration.
An Active NFFE generally meets specific FATCA requirements relating to its income and assets or another qualifying exception. A Passive NFFE does not qualify as an Active NFFE and may be required to provide information about its substantial U.S. owners or controlling persons, depending on the applicable FATCA requirements.
