IEIM401120 - NRFI: FATCA Only: Sponsored Investment Entity and Sponsored Controlled Foreign Corporation

NRFI: FATCA Only: Sponsored Investment Entity and Sponsored Controlled Foreign Corporation

In February 2019, HMRC and the US Internal Revenue Service entered into a Competent Authority Agreement (CAA) to update Annex II of the UK/US Intergovernmental Agreement (IGA) to implement FATCA.

The CAA adds additional entities to Section II (Deemed Compliant Financial Institutions) of Annex II of the IGA, including sponsored investment entities and sponsored controlled foreign corporations, as Non-Reporting United Kingdom Financial Institutions that are treated as deemed-compliant FFIs for purposes of section 1471 of the Internal Revenue Code.

Prior to February 2019, such entities could be Registered Deemed Compliant Financial Institutions by virtue of the US regulations at §1471-5 (f)(1)(i)(F).

A Sponsored Investment Entity is an entity that has a contractual arrangement for its due diligence and reporting responsibilities to be carried out by a sponsoring entity.

A sponsoring entity (typically a fund manager) is an entity that is authorised to manage the sponsored Financial Institution (typically a fund, or a sub-fund that is an investment entity but is not a US qualified intermediary, withholding foreign partnership or withholding foreign trust) and to enter into contracts on behalf of the sponsored Financial Institution. A sponsor must register with the IRS as a sponsoring entity, and must, where a sponsored entity has Reportable Accounts, register each of the funds or sub-funds it manages (or a subset of these) with the IRS as “Sponsored Entities”.

A sponsor must undertake all FATCA compliance on behalf of the sponsored funds (and, where appropriate, outsource FATCA compliance obligations to third party service providers). This will include, for example, account identification and documentation. A sponsor will need to ensure that new investors in the funds it manages are appropriately documented for FATCA purposes (and this will typically be done by a transfer agent, acting as a third party service provider).

Where there is a sponsor/sponsored entity relationship the legal responsibility for undertaking the required due diligence and reporting remains that of the sponsored entity.

Where a sponsor acts on behalf of a range of funds, the classification of an account as a new account or a pre-existing account can be done by reference to whether the account is new to the sponsor (fund manager) and not the fund (but see comment below in relation to offshore funds and multiple service providers). This prevents a fund manager from having to seek FATCA documentation from the same Account Holder repeatedly, where that Account Holder is invested in more than one of the sponsored funds. Where a sponsor is able to link accounts in this manner, the accounts will need to be aggregated for the purpose of determining whether the accounts exceed the de minimis for reporting [see IEIM403560].

A sponsor will then report to HMRC on all the Account Holders of the funds it manages.

Reporting of sponsored offshore funds

In practice a fund manager will act for funds located in a number of jurisdictions. When acting as sponsor, the fund manager will need to act on behalf of the sponsored fund ranges independently, with respect to each tax authority in which the funds are domiciled.

Example 1

A UK fund manager manages fund ranges in UK and IGA Country 1. The UK manager can register as sponsor for all or some of the funds in each of these jurisdictions. The sponsor would;

• Report to HMRC on behalf of the UK fund range, and

• would report to the tax authorities in IGA Country 1 on behalf of the funds domiciled there.

Example 2

As above, but in addition the UK fund manager manages funds in a non-IGA country. Additionally the fund manager will need to report to the US on behalf of funds domiciled in non-IGA countries.

Multiple service providers

Similarly, a fund manager may use different transfer agents for different fund ranges within the same country. In such cases the fund manager itself cannot know whether an existing Account Holder in one of the fund ranges opens a new account in the other fund range. This in itself should not preclude the same fund manager from acting as a sponsor for both fund ranges. It does mean that the full benefits of sponsoring (such as not re-documenting existing account holders when they make new investments) might not be realised where different service providers are used.

February 2019 CAA

Under the CAA, a Financial Institution that is a sponsored investment entity or a sponsored controlled foreign corporation, as defined below, and having a sponsoring entity that complies with the requirements set out below, will be treated as a deemed-compliant FFI.

A Financial Institution is a sponsored investment entity if (a) it is an Investment Entity established in the United Kingdom that is not a qualified intermediary, withholding foreign partnership, or withholding foreign trust pursuant to relevant U.S. Treasury Regulations; and (b) an Entity has agreed with the Financial Institution to act as a sponsoring entity for the Financial Institution.

A Financial Institution is a sponsored controlled foreign corporation if (a) the Financial Institution is a controlled foreign corporation[1] organized under the laws of the United Kingdom that is not a qualified intermediary, withholding foreign partnership, or withholding foreign trust pursuant to relevant U.S. Treasury Regulations; (b) the Financial Institution is wholly owned, directly or indirectly, by a Reporting U.S. Financial Institution that agrees to act, or requires an affiliate of the Financial Institution to act, as a sponsoring entity for the Financial Institution; and (c) the Financial Institution shares a common electronic account system with the sponsoring entity that enables the sponsoring entity to identify all Account Holders and payees of the Financial Institution and to access all account and customer information maintained by the Financial Institution including, but not limited to, customer identification information, customer documentation, account balance, and all payments made to the Account Holder or payee.

The sponsoring entity must comply with the following requirements:

  1. The sponsoring entity is authorized to act on behalf of the Financial Institution (such as a fund manager, trustee, corporate director, or managing partner) to fulfill applicable registration requirements on the IRS FATCA registration website;
  2. The sponsoring entity has registered as a sponsoring entity with the IRS on the IRS FATCA registration website;
  3. If the sponsoring entity identifies any U.S. Reportable Accounts with respect to the Financial Institution, the sponsoring entity registers the Financial Institution pursuant to applicable registration requirements on the IRS FATCA registration website on or before the date that is 90 days after such a U.S. Reportable Account is first identified;
  4. The sponsoring entity agrees to perform, on behalf of the Financial Institution, all due diligence, withholding, reporting, and other requirements that the Financial Institution would have been required to perform if it were a Reporting United Kingdom Financial Institution;
  5. The sponsoring entity identifies the Financial Institution and includes the identifying number of the Financial Institution (obtained by following applicable registration requirements on the IRS FATCA registration website) in all reporting completed on the Financial Institution’s behalf; and
  6. The sponsoring entity has not had its status as a sponsor revoked.

The CAA also provides that if an entity has met the requirements of a Sponsored Investment Entity or Sponsored Controlled Foreign Corporation described in HMRC’s guidance at all relevant times prior to the date of the CAA, the Competent Authority of the USA shall not determine that such entity is a Reporting United Kingdom Financial Institution that is in significant non-compliance with the IGA.

[1] A “controlled foreign corporation” means any foreign corporation if more than 50 percent of the total combined voting power of all classes of stock of such corporation entitled to vote, or the total value of the stock of such corporation, is owned, or is considered as owned, by “United States shareholders” on any day during the taxable year of such foreign corporation. The term a “United States shareholder” means, with respect to any foreign corporation, a United States person who owns, or is considered as owning, 10 percent or more of the total combined voting power of all classes of stock entitled to vote of such foreign corporation.