1. True or False: I’m a non-US fund and I don’t invest in US securities therefore I don’t have to deal with FATCA compliance.
False. If you have certain US investors whether directly or indirectly you still need to consider FATCA compliance. It’s possible that Intergovernmental Agreements (or IGAs) could force the fund into registration with the US Internal Revenue Service (IRS) under local law. Additionally, non-US investors may be fearful that the fund is not compliant and demand that management comply.
2. I only manage US domestic funds so why do I need to worry about FATCA?
Although it’s true that you won’t need to register with the IRS and enter into an agreement to provide information about US investors, US domestic funds still act as “withholding agents,” and therefore must still gather information about their offshore investors. Failure to properly document these offshore investors will result in withholding taxes on certain US income
3. I run a small fund shop and don’t have a lot of resources; is there some sort of exception for small managers?
Unfortunately, no, and this is yet another burden on small or emerging managers. Typically smaller managers may not have robust internal tax or compliance capabilities and may not even use a third party administrator who can help them. This leads the manager to have to spend internal time trying to cope with complex compliance using a non-efficient process. From an investor due diligence standpoint this could stand out as a red flag.
4. I’ve heard a lot about IGAs replacing the FATCA rules. What does this actually mean from a compliance standpoint?
The fund will still need to register with the IRS but won’t need to enter into an agreement with the IRS or directly provide information to the IRS on their US investors, assuming the IGA is of the model 1 variety. Instead, your fund will be subject to the local laws of the foreign jurisdiction. The challenge to this is that even though nine IGA’s have been signed, only the United Kingdom has enacted local laws. This means that you will need to plan to make sure you have assistance to quickly analyze a foreign jurisdiction’s local laws.
5. FATCA was passed into law March 2010. It has since been delayed a few times. Do I really need to act now?
Yes. At a minimum, existing (and more importantly potential investors) know about FATCA and will likely ask you about how you intend to comply. It is important for all funds to have a clear and informative FATCA action plan. This plan will include communication (both to investors and potential withholding agents), who will perform entity analysis and registration, who will act as a responsible officer, when will systems for new investors onboarding take place and how, when will systems for pre-existing investors take place and how, who will be responsible for any required IRS reporting. Given the scope of the FATCA action plan it takes months if not more to fully implement so waiting is not a good option.