Are you complying with FATCA?

FATCA classification

In short terms, four types of FFI’s are distinguished in the following manner. An entity that:

• Type 1: Accepts deposits in the ordinary course of a banking or similar business; or
• Type 2: Holds as a substantial portion of its business (20% income test), financial assets for the account of others; or
• Type 3: A) Primarily conducts as a business, on behalf of a customer, one of the following: (1) trading in securities, 2) portfolio management, (3) investing, managing funds, money or financial assets on behalf of other persons, or B) Has a gross income that is primarily attributable to investing, reinvesting, or trading in a wide range of securities or other investments, or C) Functions or holds itself out as an investment vehicle; or
• Type 4: Is an insurance company that is obligated to make payments with respect to specific financial accounts.

There are certain obligations that FFIs must comply with. Shortly summarized, a participating FFI must:

• Identify US and non-participating FFIs account holders or counterparties;
• Report US account holders as defined in the FATCA legislation to the IRS; and
• Withhold tax on payments of certain US source income to recalcitrant account holders and non-participating FFIs.

Review your FATCA classification

It is important to check the Entity’s classification and compliance. In practice we have seen:

• Entities that are servicing US clients despite they have registered as FFIs that should not accept these types of clients.
• Custodians that have been classified under a type that is only applicable for local banks.
• Entities whose principal business is managing funds, money or financial assets on behalf of other persons, and have not classified themselves as FFIs.

Depending on the classification of the entity, compliance obligations and certifications that should be submitted to the IRS, may change.

Enforcement by the IRS is not just an eventual risk but a reality. The IRS has already terminated agreements with Argentinean FFIs that have not complied with FATCA obligations.

We can assist you with all FATCA issues. Our people have implemented AEOI procedures for banks, custodians, and funds located in the principal financial centers of Latin America.

For more information do not hesitate to contact us.