Foreign Trusts and FATCA

Steven L. Cantor

Cantor & Webb P.A.

January 2014

Foreign Account Tax Compliance Act (FATCA)

Overview:

• A US tax information-gathering regime applicable to foreign

financial institutions ("FFIs") and nonfinancial foreign entities

("NFFEs") enforced by a 30% penalty tax regime applied to US

source interest, dividends and other similar income. The 30%

penalty tax will eventually apply as well to gross proceeds of

sale of US bonds and US shares. In most foreign trust and

private investment company circumstances the tax will not be

recoverable once withheld.

Foreign Account Tax Compliance Act (FATCA)

Overview:

• FATCA became law in 2010:

• FATCA targets tax non-compliance by U.S. taxpayers with

foreign accounts

• FATCA focuses on reporting:

• By U.S. taxpayers about certain foreign financial accounts

and offshore assets

• By foreign financial institutions about financial accounts

held by U.S. taxpayers or foreign entities in which U.S.

taxpayers hold a substantial ownership interest

Status of Trust

• Grantor (W-8IMY) - the grantor retains

sufficient control or enjoyment over the

trust administration to be considered

as owner of the trust property and income.

• Non-grantor - the grantor has given up all right, title, and

interest in the principal.

Simple (W-8IMY) Complex (W-8BEN-E)

Status of Trust/PIC

Foreign Financial Institutions Nonfinancial Foreign Entities

(FFI) (NFFE)

• Receives more than 50% of its grossincome from investing in financialassets and is "managed by" anotherentity that is a financial institution.

• Managing entity directly orindirectly manages investments oradministers assets.

• A foreign entity that isexcluded from the definitionof FFI.

Nonfinancial Foreign Entities (NFFE)

• Accepted NFFE

• Passive

• Active

Basic Reporting Options for a Passive NFFE

• Not required to register with IRS

• Certify that it has no substantial U.S. person owners or

provide information about its substantial U.S. person

owners

• In general, for a trust, a substantial U.S. owner is any

specified U.S. person treated as the owner of any portion of

the trust under applicable grantor trust rules, or that holds,

directly or indirectly, more than 10% of the beneficial

interests of the trust

Foreign Financial Institutions (FFI)

• Inter-governmental Agreements (IGA) - Foreign Financial

institutions (FFIs) in partner jurisdictions in over 50

countries will report information on U.S. account holders to

their national tax authorities, which in turn will provide this

information into the U.S. under an automatic exchange of

information.

Investment Entity (FFI)

• Gross Income Test

• Underlying companies owned by trusts

• Managed by Test

• Trustee classifications

Substantial U.S. Owner - FFI

• A U.S. person who (1) is treated as an owner under the grantor

trust rules; (2) a beneficiary who is, directly or indirectly,

entitled to more than 10% of the trust; or (3) may receive a

discretionary distribution from the trust and does receive

such a distribution in the applicable calendar year.

• Attribution and constructive ownership rules apply.

• Determinations of the presence of a substantial U.S.

ownership will vary by year and impact specific reporting

requirements for trusts and trustees.

Intergovermental Agreements (IGA)

Foreign Financial Institutions (FFI)

IGA

YES

NON-REPORTING

APENDIX II -EXEMPT ENTITY

DEEMED COMPLIANT

OWNER DOCUMENTED

REPORTING

SUBSTANTIAL U.S OWNER

NO

PFFI

SPONSOREDDIRECT

OWNER DOCUMENTED

NON-COMPLIANT

General Reporting Requirements for PFFI

• Register with IRS

• Identify U.S. person beneficiaries and owners, and their

interests

• Waivers must be obtained from account holders if reporting

of required information is prohibited by law

• Withhold on all withholdable payments to nonparticipating

FFIs

• Affiliate trusts (>50% owned by the same persons, directly or

indirectly) must also qualify

• File Form 8966 annually

• Adopt verification procedures

Registered Deemed Compliant (FFI)

• IGA Type I – No FFI agreement is required to be signed with

the IRS. Reporting is done with local tax authorities which

report to the IRS.

• IGA Type II – FFI signs agreement with IRS to transmit

information on U.S. Persons. IRS may make additional

specific information requests through agreed upon

procedures.

• IGAs trump the FATCA regulations when they differ. Intent

is to generally provide more favorable reporting for “IGA

countries” though this is not always the case.

• Participating FFI (PFFI) – Direct registration and reporting

with the IRS, governed by the FATCA regulations.

Model 1 IGA Reporting

• Trust is required to identify all controlling U.S. persons

(settlor, trustee, beneficiary, power of appointment, or any

other person having control of the trust, regardless of

beneficial interest and ownership)

• U.S. accounts if any U.S. controlling persons are present,

regardless of ownership share (no 10% substantial U.S. owner

threshold)

• Reporting is directly to local jurisdiction, but not always

simpler or requiring less information!

Registered Deemed Compliant –Sponsored Status (FFI)

• Sponsor eligibility and obligations

• Trustee-documented

Other FFI Options

• Owner documented

• Certified deemed compliant

• Certified letter from US attorney or auditor

Refunds of Overwithheld Tax

• Payments of U.S. FDAP to a non-participating FFI – refunds

only available if required by treaty or the trust is not the

beneficial owner

• For income distributed to a beneficiary, only the beneficiary

can seek a refund (requires actual distribution and there could

be a mismatch between the withholding and distribution)

• For FFI grantor trusts, grantors may be able to seek a refund

Steven L. Cantor

Cantor & Webb P.A.

1001 Brickell Bay Drive

Suite 3112, Miami, FL 33131

Contact Information

Phone: (305) 374-3886

Fax: (305) 371-4564

Email: steve@cantorwebb.com

Website: www.cantorwebb.com