In the FATCA world, some trusts are Foreign Financial Institutions (FFIs) and some are Non-Financial Foreign Entities (NFFEs). For those trusts that are FFIs, there may be options under the FATCA regulations classifying and registering your trust for a Global Intermediary Identification Number (GIIN).
Financial Institutions in the U.S. and in non-IGA jurisdictions apply the FATCA regulations. Although Model 1 and Model 2 IGAs offer a classification of Trustee Documented Trust, this classification is not available in the FATCA regulations. In the U.S. or a non-IGA jurisdiction, the choice may come down to Participating FFI or Sponsored Closely Held Investment Vehicle (SCHIV).
A Participating FFI is an FFI that has agreed to comply with the requirements of an FFI agreement. For example, an entity in a non-IGA jurisdiction or in the U.S. may choose to register in the IRS FATCA portal to enter into an FFI Agreement with the IRS and obtain a GIIN.
Sponsored Closely Held Investment Vehicle
A Sponsored Closely Held Investment Vehicle (SCHIV) must satisfy the following criteria:
The trust 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 trust does not hold itself out as an investment vehicle for unrelated parties;
The trust 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.
[Note that before selecting an entity to be the Sponsoring Entity, you must it meets the criteria for being a Sponsoring Entity under FATCA.]
Foreign Grantor Trust
Although it may be situated in a U.S. state such as South Dakota and have a U.S. trustee, for U.S. tax purposes (including FATCA), a foreign grantor trust is considered a non-U.S. trust. Assume that a classification assessment of a foreign grantor trust results in the conclusion that it is a Financial Institution pursuant to FATCA.
Classifying a foreign grantor trust as a Participating FFI would require that the foreign grantor trust register in the IRS FATCA portal and receive a GIIN. Through this registration, the foreign grantor trust will enter into an agreement with the IRS to comply with FATCA by undertaking certain due diligence, withholding and reporting requirements for U.S. account holders.
If the foreign grantor trust is classified as a SCHIV, the Sponsoring Entity (e.g., the trust administrator or other entity) would enter into an agreement with the IRS whereby it agrees to take on due diligence, withholding, reporting, and other requirements that the foreign grantor trust would have been required to perform if it obtained its own GIIN.
With both classifications, due diligence, withholding, reporting and other activities may be outsourced but the Responsible Officer is ultimately in charge of ensuring that a compliance program is put into place and followed. [See my August 17, 2017 blog: FATCA & CRS: Perfect Reporting Process But Still Non-Compliant http://bit.ly/2vMNitU].
The benefit of taking the SCHIV path is administrative efficiency. The foreign grantor trust does not take on compliance tasks that would be onerous on an individual trust basis. The SCHIV can use the Sponsoring Entity’s GIIN and rely on the Sponsoring Entity to take on the role of Responsible Officer.
An additional benefit is confidentiality. The foreign grantor trust will not be listed on the IRS GIIN lookup list on the IRS website. Instead the Sponsoring Entity’s name will be listed.
If the foreign grantor trust prefers greater flexibility in service providers, it may choose the Participating FFI classification. The foreign grantor trust will register in the IRS FATCA portal and obtain its own GIIN. It will name a Responsible Officer and outsource all compliance tasks. If it chooses to walk away from a service provider including the Sponsoring Entity, the foreign grantor trust will not need to change its GIIN. It will have its own GIIN that stays with it regardless of service provider.
Regardless of which classification the foreign grantor trust uses, it must ensure that relationships are properly documented in contracts. There must be an agreement between the Sponsoring Entity and the sponsored foreign grantor trust establishing the roles and responsibilities associated with due diligence, withholding, reporting, and other requirements that the foreign grantor trust would have been required to perform if it entered into an FFI Agreement with the IRS.
Similarly, if the foreign grantor trust is classified as a Participating FFI and chooses to outsource compliance tasks, it must carefully draft contracts between it and its service providers to ensure that its FATCA compliance does not fall through the cracks.
If you would like assistance with FATCA legal entity classification or drafting appropriate language for your FATCA compliance outsourcing contracts, please contact me at firstname.lastname@example.org.