Impact of FATCA on Bermuda Entities
This publication provides a brief overview of the expected impact on entities established in Bermuda of (a) the foreign account tax compliance provisions (“FATCA”) of the Hiring Incentives to Restore Employment Act, 2010 of the United States of America (the “US”); and (b) equivalent rules implemented in relation to United Kingdom taxpayers. However, this publication is not intended to be a substitute for legal advice or a legal opinion.
1. Background
FATCA is a US federal law that aims to reduce tax evasion by US persons. FATCA has significant extraterritorial
implications and, most notably, requires foreign financial institutions (“FFIs”, discussed further below)
to report information on accounts of US taxpayers to the US Internal Revenue Service (“IRS”). If an FFI fails to
enter into the necessary reporting arrangements with the IRS, a 30% withholding tax is imposed on US source
income and other US related payments of the FFI.
In order to facilitate reporting under and reduce the burden of compliance with FATCA, Bermuda has signed a
Model 2 intergovernmental agreement with the US (the “US IGA”). The US IGA, together with the Bermuda
enabling legislation, requires Bermuda entities that are FFIs to register, and enter into an FFI agreement, with
the IRS. Bermuda FFIs must comply with the requirements of the FFI agreement, including with respect to due
diligence and reporting obligations, and must report directly to the IRS. Provided it complies with the relevant
procedures and reporting obligations, a Bermuda FFI will be treated as complying with the requirements of
FATCA and not subject to automatic withholding on US source income and other US-related payments.
While this publication is principally focused on FATCA and the US IGA, it is important to note that the United
Kingdom (the “UK”) has implemented an equivalent reporting regime in relation to UK residents (“UK FATCA”).
The UK regime, which is similar to FATCA, although it does not impose withholding on UK source income, has
been implemented by means of an intergovernmental agreement between Bermuda and the UK (the “UK
IGA”). A brief summary of UK FATCA and its impact on Bermuda entities is included in section 7 below.
2. What does FATCA mean for your Bermuda entity?
The impact FATCA will have on a Bermuda entity fundamentally depends on one key question: is the Bermuda
entity an FFI? While FATCA has significant implications for Bermuda entities that are FFIs – such as banks,
custodians, hedge funds, private equity funds, trust companies, trusts and other regulated entities – a typical
Bermuda holding company or joint venture vehicle will not generally be an FFI and should not be materially
affected by FATCA, although this needs to be considered in each case.
Accordingly, the first step a Bermuda entity needs to take is to determine its FATCA classification and in
particular whether or not it is an FFI. A broad summary of how to determine whether your Bermuda entity is an
FFI and a description of the steps that must be taken if the Bermuda entity is an FFI are addressed in sections
3 and 5 below.
Any Bermuda entity that is not an FFI – such as a typical Bermuda holding company – will be a non-financial
foreign entity (a “NFFE”) for the purposes of FATCA. Bermuda NFFEs are not generally subject to registration
or reporting requirements under FATCA, but they will be required to self-certify their status to financial
institutions and other withholding agents with whom they maintain accounts to avoid FATCA withholding. This
is discussed further in section 4 below.
3. When will a Bermuda entity be classified as a “Foreign Financial
Institution” or (“FFI”)?
FATCA is very complex and a detailed analysis is required in each case to determine if a Bermuda entity is in
fact a financial institution. However, generally, the following four categories of Bermuda entities will be FFIs
and be directly affected by FATCA’s registration and reporting requirements:
Investment Entities: Broadly, an entity that conducts as a business (or is managed by an entity that
conducts as a business) trading or portfolio and investment management activities for or on behalf of a
customer or otherwise invests, administers or manages funds or money on behalf of other persons.
Custodial Institutions: An entity that holds, as a substantial portion of its business (broadly, more than
20% of gross revenues), financial assets for the account of others.
Depository Institutions: An entity that accepts deposits in the ordinary course of a banking or similar
business and regularly engages in one or more of the following activities (a) providing credit; (b) trading
in receivables, notes or similar instruments; (c) issuing letters of credit; (d) providing trust or fiduciary
services; (e) financing foreign exchange transactions; or (f) dealing in finance leases or leased assets.
Specified Insurance Companies: An insurance company (or its holding company) that issues, or is
liable under, certain cash value or annuity contracts.
Set out below are categories of Bermuda entities that Conyers and Codan frequently deal with alongside some
basic guidance on whether such Bermuda entities are likely to be FFIs. In cases where such entities may be
FFIs, we also consider whether any exemption to registration and reporting may be available.
Hedge funds and private equity funds
Almost all hedge funds and private equity funds will be Investment Entities and therefore qualify as FFIs under
FATCA. The one exception is that funds where more than 50% of the gross revenues are from real estate (or
other non-financial assets) will generally fall outside the definition of Investment Entity (and therefore FFI) for the purposes of FATCA.1
There are some other limited exemptions available to hedge funds and private equity
funds, but these are expected to be of limited practical utility for the vast majority of such funds.
It is important to note that, where a master-feeder structure is used, both the master fund and the feeder fund
will be FFIs. Furthermore, a subsidiary Bermuda trading entity of a hedge fund is also likely to be an
Investment Entity and therefore an FFI.2
In section 6 below, we discuss the possibility of using a “Sponsoring
Entity” to facilitate FATCA compliance for structures with multiple FFIs.
Bermuda managers and advisers of hedge funds and private equity funds
Bermuda entities that act solely as managers and advisers of hedge funds and private equity funds will
typically not need to register and report as FFIs.
Although Bermuda managers and advisers fall within the definition of Investment Entity (and therefore FFI), the
US IGA contains an exemption for a Bermuda FFI that qualifies as an Investment Entity solely because it (a)
renders investment advice to, and acts on behalf of, or (b) manages portfolios for, and acts on behalf of, a
customer for the purposes of investing, managing, or administering funds deposited in the name of the
customer with a participating FFI. Accordingly, Bermuda managers and advisers of funds will generally not be
required to register with the IRS and report on their own account.
Bermuda holding companies and joint ventures
As noted above, a typical Bermuda holding company or joint venture vehicle that owns assets on its own
account and does not operate as an investment fund (and is not managed by a financial institution) would not
generally be expected to be an FFI for the purposes of FATCA. Rather, this type of Bermuda holding company
will generally be an NFFE (discussed in section 4 below).
However, the directors of a Bermuda holding company that has or wishes to open a bank or securities account
will still need to consider their FATCA classification carefully. Such a Bermuda holding company will likely be
required to certify their status to the relevant financial institution to avoid withholding, as discussed in section 4
below.
Bermuda securitization vehicles
A typical Bermuda securitization vehicle will normally be an Investment Entity and therefore an FFI for the
purposes of FATCA, subject to limited transitional relief for pre-existing vehicles.
Financing SPVs
Bermuda entities that are established solely for the purpose of borrowing or granting security in relation to the
provision of debt finance to an underlying business typically will not be FFIs. Similarly, Bermuda entities which
are established to own and finance aircraft, ships or other forms of moveable assets of a similar nature would not typically fall within the definition of an FFI.
Trusts with a Bermuda trustee
The treatment of trusts under FATCA is complex. Bermuda FATCA rules only apply to a trust if a trustee is a
Bermuda entity or is an individual resident in Bermuda. Subject to some complex optionality for trustees, the
majority of trusts that have a Bermuda trust company acting as trustee will likely be FFIs for FATCA purposes.
Private trust companies (“PTCs”) are also likely to be FFIs for the purposes of FATCA, although this needs to
be considered in each case. In particular, if the PTC and its directors are not remunerated for acting as trustee,
the PTC and the underlying trust may conclude that it does not meet the definition of an FFI on the basis that
the PTC is not conducting business.
Clients with trusts that have a Bermuda trustee or a Bermuda PTC are advised to liaise with their advisers to
determine the most appropriate course of action for their trust.
Insurance companies
Only insurance companies that issue or are required to make payments with respect to a cash value insurance
contract or an annuity contract will be FFIs pursuant to FATCA. Captive insurers and insurance companies that
do not write annuities or whole life insurance products will generally be NFFEs.
Branches and foreign subsidiaries
Branches of entities are treated separately for FATCA purposes – an overseas branch of a Bermuda FFI will
not be covered by the US IGA and must consider the rules applicable in that branch’s jurisdiction, whether
under an IGA or the US regulations. A foreign subsidiary of a Bermuda FFI must also comply with the FATCA
rules in its home jurisdiction.
4. Bermuda entities that are not FFIs
As noted above, any Bermuda entity that is not an FFI – such as a typical Bermuda holding company – will be
a NFFE. Although NFFEs are not generally subject to registration or reporting requirements, they will still be
required to self-certify their status to financial institutions with which they maintain financial accounts to avoid
FATCA withholding.
In this regard, the US W8-BEN-E form has recently been amended to require entities to confirm their FATCA
classification to US withholding agents and provide related information with respect thereto. Bermuda entities
that hold accounts with financial institutions can certainly expect to complete these W8-BEN-E forms and
provide other FATCA related certifications.
There are two categories of NFFE:
Active NFFE: The criteria which would qualify an NFFE as being an Active NFFE are numerous, and
include circumstances where less than 50% of its gross income for the preceding calendar year is
passive income (such as dividends, interest, royalties, annuities and rent) and less than 50% of the assets held during the preceding calendar year or other appropriate reporting period are assets that
produce or are held for the production of passive income. Completion of the W8-BEN-E form for
Active NFFEs essentially only requires completing the information on the first page, ticking “Active
NFFE” on question 5 and then certifying that the entity is an Active NFFE in question 39.
Passive NFFE: Broadly, a Passive NFFE is an NFFE that is not an Active NFFE. For Passive
NFFE’s, the W8-BEN-E form also requires the NFFE to certify whether or not it has any substantial
US owners (broadly, a US person with a 10% or more interest). To the extent it has substantial US
owners, the name, address and US taxpayer identification number of each substantial US owner must
be provided.
It is important that each Bermuda NFFE establishes which category it falls into so it can provide the necessary
certification to financial institutions with which it maintains accounts.
5. What does a Bermuda FFI need to do to comply with FATCA?
If your Bermuda entity is an FFI for which an exemption under FATCA or Annex II of the US IGA is not
available, you will need to take the following steps:
1. Obtain a GIIN: Bermuda FFIs that are not exempt (“Reporting FFIs”) and certain “registered
deemed compliant” FIs are required to register on the IRS FATCA registration portal
(https://sa2.www4.irs.gov/
have occurred no later than 1 July 2014. If a non-exempt Bermuda FFI did not register for a GIIN
by that date, the entity will not benefit from the IGA and it will be subject to withholding from US
payors and other FFIs until it has registered.
FFIs to identify and report details of “reportable accounts” directly to the IRS. “Reportable accounts”
are financial accounts where the account holder is either a “Specified US Person” (broadly, any US
person or person liable to pay US tax, with some exceptions) or is a Passive NFFE the controlling
persons of which include one or more Specified US persons. Financial accounts include any
depositary or custodial accounts and also, in the case of certain Investment Entities, any debt or
equity holdings in the FFI. In the case of Bermuda funds, the relevant account is the shares each
investor holds in the fund.
Identifying Reportable Accounts involves two separate processes, one for existing accounts and one
for new accounts:
a. Existing accounts: FFIs will also need to perform due diligence on “financial accounts” that
they maintained as at 30 June 2014 (subject to certain de minimis thresholds for small
accounts). Specifically, accounts that are reviewed must be searched for prescribed US
indicia, including US place of birth and US address if the account holder is a Specified US
Person, details of their account must be reported (as described below). If the account holder
is not a Specified US Person but there are US indicia in relation to its account, the Bermuda
FFI must take steps to “cure” the US indicia. In particular, self-certification by the account
holder and further documentation evidencing the person is not a Specified US Person is
likely required. If the account holder does not respond or it is not otherwise possible to cure
the US indicia, the account should be treated as reportable. The deadline for completing due
diligence on existing accounts depends on a number of factors, including the balance of the account. Most critically, remediation of US indicia needs to be completed on all accounts
held by individuals with a balance over US$1 million by 30 June 2015.
b. New account procedures and due diligence: For new accounts opened with the FFI on or
after 1 July 2014,
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it is necessary to carry out due diligence and obtain self-certification
regarding whether the account holder is a Specified US Person. If US Indicia are found that
suggest the person may be a US taxpayer, prescribed steps will need to be taken to confirm
this. For accounts opened by another participating FFI, the FFI’s GIIN should be obtained
and verified against the publicly available IRS FFI list. In general terms, all Bermuda FFIs
should be revising their account opening forms and/or subscription agreements to ensure
they comply with FATCA rules in relation to new accounts. For funds, it is also important to
update offering and constitutional documents to ensure FATCA is appropriately addressed.
3. Reporting: On or before 29 June 2015, Bermuda FFIs must make their first report to the IRS in relation to
accounts held by Specified US Persons or a non-US entity with one or more controlling persons that are
Specified US Persons. The US IGA prescribes the information that needs to be reported. Most
significantly, it requires the balance of value of the relevant account held by the Specified US Person to be
reported. Expanded information for the subsequent reporting period ending 31 December 2015 is required
to be reported by 31 March 2016.
6. Simplified reporting for groups of FFIs
If a group has one or more eligible Investment Entities, the group may elect to register one “Sponsoring Entity”
for FATCA reporting purposes. The appointment of a Sponsoring Entity effectively allows all FATCA
compliance and reporting to be delegated to one entity in the group. To appoint a Sponsoring Entity:
a. The Sponsoring Entity must be authorised to act on behalf of the sponsored Investment Entities and
agree to carry out all due diligence and reporting obligations on behalf of the sponsored Investment
Entities.
b. The Sponsoring Entity has to register and obtain a sponsoring GIIN.
c. If the sponsored Investment Entities hold reportable accounts, the Sponsoring Entity will ultimately be
required to register each Sponsored Investment Entity that it is sponsoring.
A Sponsoring Entity must report to the IRS all reportable accounts of its sponsored Bermuda Investment
Entities.
7. UK FATCA and future reporting
UK FATCA follows the FATCA model very closely, although there are some important differences in the detail.
In particular, it requires Bermuda FFIs to undertake due diligence to identify and then report on financial
accounts of specified UK persons. As UK citizens are not subject to universal taxation, the definition of
specified UK persons is not as extensive as under FATCA and generally includes a person or entity who is
resident in the UK for tax purposes. A non-UK entity controlled by specified UK persons is also subject to the
reporting obligation.
UK FATCA requires Bermuda FFIs to start carrying out due diligence on its accounts and identify UK Specified
Persons now, although the first reporting date for UK FATCA is not until 30 September 2016. On the first
reporting date, specified information on the accounts of specified UK persons and non-UK entities controlled by
specified UK persons must be reported to Her Majesty’s Revenue and Customs.
No withholding tax will be imposed for non-compliant FFIs under UK FATCA. However, it is expected that
under the Bermuda implementing legislation (which is still to be enacted) there will be specific offences for
Bermuda entities that fail to comply with the reporting obligations of UK FATCA.
A number of banks in the UK have already begun requiring Bermuda companies that hold accounts to certify
their status under UK FATCA. Accordingly, just as with FATCA, it is important that all Bermuda entities
determine their UK FATCA classification as soon as possible (which will almost always be the same as under
FATCA).
8. Conclusion
FATCA is a controversial piece of legislation, not least because it imposes a significant compliance burden on
FFIs. However, the automatic exchange of information and increased transparency introduced by FATCA looks
to become the global standard. In addition to UK FATCA, forty-seven countries (including Bermuda and all
other OECD countries) have committed to implement the OECD’s Common Reporting Standard (the “CRS”).
The CRS, which is based on FATCA and requires the automatic exchange of information on assets and
income of citizens of all signatory countries, will likely be brought into force around 2017. Accordingly, the
implementation of robust systems by Bermuda FFIs to comply with FATCA can be viewed as important
preparation for what is likely to be a new global standard on information exchange.
For the majority of Bermuda companies which are not FFIs, it is very much a case of “business as usual”.
Other than having to determine their FATCA classification and certify/evidence their status to financial
institutions with which they hold accounts, FATCA and UK FATCA should hopefully have a limited impact on
day-to-day operations.
If you have any queries regarding FATCA, please get in touch with your regular contact at Conyers Dill &
Pearman who can advise further, or if required, refer you to appropriate US or English advisors.
