FATCA Registration of Sponsored Closely-Held Investment Vehicles
In October 2022, the Internal Revenue Service (IRS) issued a notice regarding the removal of Sponsored Entities from the IRS Foreign Financial Institution (FFI) List. According to the notice, the IRS identified registered Sponsoring Entities without any Sponsored Entities registered in the FATCA Registration System. The IRS concluded a Sponsoring Entity without a listed Sponsored Entity is not performing the obligations of a Sponsoring Entity.
The IRS will be posting a message on the Sponsored Entity’s message board within their FATCA portal registration account asking the Sponsoring Entity to cancel their account. If no action is taken within 60 days of notification, the entity will be removed from the published FFI List and may be subject to 30% withholding.
Unfortunately, the IRS’ game plan runs counter to the FATCA registration rules it established: a Sponsored Closely-Held Investment Vehicle (SCHIV) is not required to have its own GIIN but it is required to include its Sponsoring Entity’s GIIN on an IRS Form W-8BEN-E.
What Is A Sponsored Closely Held Investment Vehicle (SCHIV)?
A SCHIV must satisfy the following criteria:
The entity is an FFI solely because it is an investment entity and is not a Qualified Intermediary (QI), Withholding Partnership (WP), or Withholding Trust (WT);
The entity does not hold itself out as an investment vehicle for unrelated parties;
The entity has 20 or fewer individuals that own directly or indirectly its debt and equity interests, disregarding debt interests owned by Participating FIs, Registered Deemed Compliant FIs, and Certified Deemed Compliant FIs; and
If an entity owns 100% of the equity interest in the SCHIV that entity is a SCHIV.
If the closely held investment vehicle is classified as a SCHIV, then its Sponsoring Entity will obtain a GIIN and enter into an FFI Agreement with the IRS whereby it agrees to take on due diligence, withholding, reporting, and other requirements that the closely-held investment vehicle would have been required to perform if it obtained its own GIIN. (Before selecting an entity to be the Sponsoring Entity, you must ensure it meets the criteria for being a Sponsoring Entity under FATCA.)
There must be an agreement between the Sponsoring Entity and the SCHIV establishing the roles and responsibilities associated with due diligence, withholding, reporting, and other requirements that the closely held investment vehicle would have been required to perform if it entered into an FFI Agreement with the IRS.
IRS Treatment of SCHIVs
Form W-8BEN-E: Unlike other Sponsored Entities such as a Sponsored FFI or Sponsored Direct Reporting NFFE, the SCHIV is not required to provide a GIIN on Line 9a. Instead, the SCHIV enters its Sponsoring Entity’s GIIN on Line 9a.
COPA Certification: If the Sponsoring Entity is required to complete a Certification of Preexisting Accounts (COPA) on behalf of the SCHIV, the IRS FATCA Online Registration User Guide explains the Sponsoring Entity must add the SCHIV’s legal name and jurisdiction to the COPA table of Sponsored Entities. This is because the SCHIV will not automatically appear on the pre-populated table given it was not required to be registered.
This point is also addressed in the IRS FATCA General FAQs: “The sponsoring entity must select all of the sponsored entities to be included in the [COPA] certification, and include any sponsored entities that are not required to be registered (for example, sponsored, closely held investment vehicles) for which the RO is certifying.”
Verify your Sponsoring Entity’s current registration status. The IRS has been very active this year in terminating FATCA accounts of FFIs who have failed to properly submit COPA and Periodic Certifications.
Do not ignore the IRS message regarding the fact you do not have any Sponsored Entities listed on your Sponsoring Entity’s FATCA portal account message board.
Respond to the email address provided by the IRS in its message to your Sponsoring Entity. Explain to the IRS you are actively acting as a Sponsoring Entity for a SCHIV.