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FATCA impact on financial industries

These reports enlight the main impacts the FATCA regulation will have on each financial industry.

Introduction

Enacted in 2010 as part of the Hiring Incentives to Restore Employment (“HIRE”) Act, the Foreign Account Tax Compliance Act (“FATCA”) addresses perceived abuses by US taxpayers with respect to offshore financial assets. FATCA compels foreign financial institutions (“FFIs”) to report U.S. financial asset holders to the IRS beginning in 2014.

These institutions include banks, insurance and real estate companies, hedge funds, mutual funds, private equity firms and Professionals of the Financial Sector. 

FATCA impact on banking industry

Although the scope of the proposed FATCA regulations casts a relatively broad net over the types of entities and businesses that are defined as financial institutions, foreign entities that conduct banking or similar business (“foreign banks”) are squarely in the center of the net. 

FATCA impact on banking industry

FATCA impact on insurance industry

The draft FATCA regulations released on 8 February 2012 incorporate some of the changes and exclusions that the insurance industry has been lobbying to include. However, it is apparent the exclusions and reliefs do not go as far as many were hoping. 

FATCA impact on insurance industry

FATCA impact on funds industry

Any entity which makes a payment of US source income must consider whether it is subject to FATCA. FATCA may apply to both financial and non-financial operating companies..

As an FFI, the fund must enter into an agreement with the IRS in order to become a Participating FFI (PFFI). 

FATCA impact on funds industry

FATCA impact on private equity and hedge funds industry

The new rules will have a significant impact on all private equity and hedge funds which generate US source income because they will likely be considered either a US Withholding Agent or a Foreign Financial Institutions (“FFIs”) under these rules. 

FATCA impact on private equity and hedge funds industry

FATCA impact on real estate industry

For the real estate industry, the new FATCA rules will impose additional challenges for both US and non-US real estate funds because of the many complicated and diverse investment structures that have become common in recent years. 

FATCA impact on real estate industry

FATCA impact on Professionals of the Financial Sector (PSF)

Professionals of the Financial Sector (PSF) include investment professionals, such as investment advisers, brokers in financial instruments, wealth managers, professionals acting for their own account, registrar agents, etc…

These entities will need to determine their FATCA status based upon their actual activities.

Nevertheless, even those entities that would not qualify as FFI may be confronted with FATCA provisions, as it is likely that clients of such PFS may require assistance as to the application of FATCA.

PSF should thus determine their status for FATCA as to their own activities, but regardless the outcome, should reflect on the services to be offered to their own clients, e.g., providing assistance on the fields of:

  • Classification and identification provisions;
  • Reporting preparation; and
  • Withholding preparation.
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