FATCA could hit acquisition vehicles

Certain GPs may have to supply US authorities tax information on holding companies.

The Foreign Account Tax Compliance Act (FATCA) will likely end up covering holding companies used by private equity firms to acquire target companies, according to legal sources interpreting the complicated US bill. If so, it would mean each individual holding company will need to report as its own foreign financial institutions (FFI) under the law.

FATCA requires FFIs to provide US authorities tax information on any US investors or face tax penalties on US-connected income.

Originally, holding companies were deemed be outside of FATCA’s purview. “But then the UK’s regulations came out at the end of last year and they have surprisingly added back the concept of a holding company as an FFI,” said one industry tax expert.

The regulation said if you have a holding company that serves a private equity fund, which almost all holding companies do, then it is considered an FFI and is subject to FATCA, added the tax expert.

This interpretation of the law may mean GPs will have to enter into a complicated matrix of reporting relationships with tax authorities. Many countries have signed FATCA agreements that require local FFIs to share information on US account holders with its domestic tax authority (who shares that information with the US on their behalf). Accordingly, GPs would need to share certain tax information on their US investors with the domestic tax authorities of countries in which they’ve structured an intermediate holding company.

FATCA comes into force July 1, 2014 .