FATCA: Mandatory Contract between Sponsored & Sponsoring Entities
To comply with FATCA regulations, each Sponsored Entity must enter into a written agreement with its Sponsoring Entity. The Sponsoring Entity’s Responsible Officer is required to certify to the IRS that this agreement is in place.
Sponsored & Sponsoring Entities Defined
A Sponsored Foreign Financial Institution (FFI) is an FFI that is an investment entity or a controlled foreign corporation which has a Sponsoring Entity performing FATCA due diligence, withholding, and reporting obligations on its behalf.
A Direct Reporting Nonfinancial Foreign Entity (NFFE) is a nonfinancial foreign entity that has elected to report its substantial U.S. owners to the IRS. A Sponsored Direct Reporting NFFE means a Direct Reporting NFFE that has another entity (not a nonparticipating FFI) agree to act as its Sponsoring Entity.
A Sponsoring Entity is an entity that will perform the FATCA due diligence, withholding, and reporting obligations of one or more Sponsored FFIs or the FATCA due diligence and reporting obligations of one or more Sponsored Direct Reporting NFFEs.
FFI Agreement v Sponsor Agreement
Sponsoring Entities register in the IRS FATCA portal to receive a Global Intermediary Identification Number (GIIN). Sponsoring Entities that are in non-Intergovernmental Agreement (IGA) or Model 2 IGA jurisdictions also enter into an FFI Agreement when they register in the FATCA portal. This includes a United States Financial Institution (USFI) that chooses to become a Sponsoring Entity.
The FFI Agreement establishes the Sponsoring Entity’s due diligence, withholding, information reporting, tax return filing, and other obligations. This agreement is between the Sponsoring Entity’s Responsible Officer (RO) and the IRS. As part of this agreement, the Responsible Officer commits to the Sponsoring Entity entering into an agreement with each of its Sponsored Entities.
The agreement between the Sponsoring and Sponsored Entities is a legal contract by which the Sponsoring Entity agrees to take on certain of the Sponsored Entities FATCA obligations. As with any legal contract, the agreement should outline the responsibilities of each party. It is not a one-sided contract that places all obligations on the Sponsoring Entity.
Responsible Officer IRS Certification
A Sponsoring Entity RO subject to the FATCA regulations must submit a periodic certification to the IRS every three years. The certification includes the following language:
PERIODIC CERTIFICATION – SPONSORING ENTITIES OF SPONSORED FFIs - CERTIFICATION OF EFFECTIVE INTERNAL CONTROLS
I, the responsible officer of the sponsoring entity, certify that:
2. The sponsoring entity has a written sponsorship agreement in effect with each sponsored FFI.
4. I (or my designee) have established a compliance program for the sponsoring entity with respect to each sponsored FFI that is in effect as of the date of this certification.
The concept of entering into a Sponsoring Entity Agreement should not be surprising. Providing services between distinct organizations should always be documented in a legal contract. Even organizations that are related should have intercompany service agreements in place for the various services provided across legal entity structures.