Non-US private equity firms expecting to file tax information on their US investors with local officials as part of the US Foreign Account Tax Compliance Act (FATCA) may be in for some disappointment, warn legal sources.
A host of countries have signed intergovernmental agreements (IGA) with US officials that allow them to collect and relay US account holder information on behalf of firms captured by FATCA. Doing so removes the need for private equity firms and others to enter into a direct reporting relationship with a foreign government.
But due to differences in how individual countries plan to enforce their IGAs, some private equity structures may not be able to benefit from the IGA, industry lawyers tell PE Manager.
For instance, UK tax authority HMRC said only entities with tax residency in the UK are eligible for the UK IGA – an entity is a UK tax resident if it is managed and controlled in the UK. But others, such as the Cayman Islands have indicated an entity is “resident” where it is established. Theoretically then, a fund based in the UK but ultimately managed and controlled from a Cayman-based partnership would fall outside the scope of both countries’ IGAs.
Entities that “fall between the cracks of IGAs” like this will then be required to comply with the US’ domestic FATCA rules and establish a direct reporting relationship with the IRS, said John Forbes Anderson, international tax counsel at Debevoise & Plimpton.
“We are waiting with bated breath for implementing rules, or indications of what they will look like, from key jurisdictions such as the Cayman Islands to see if they clarify the issue of residency and who will be covered by their IGA,” added Anderson.
Firms that fail to submit tax information on their US investors face a hefty 30 percent withholding tax on certain payments travelling outside the US. FATCA comes into force July 1, 2014 but GPs who will not benefit from an IGA must finalize their registration by April 25, 2014 in order to avoid FATCA withholding from July.