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How FATCA impacts alternative investment funds - EY - Asset Management - EY - Global

How FATCA will impact alternative investment funds

Summary: The Foreign Account Tax Compliance Act (FATCA) will have a far-reaching effect on US and foreign alternative investment funds, levying significant tax penalties on organizations failing to comply.

FATCA, as part of the Hiring Incentives to Restore Employment Act, is designed to prevent US taxpayers from avoiding US tax on their income by investing through foreign financial institutions and offshore funds. Both US and foreign managed funds, including mutual funds, funds of funds and hedge funds, venture capital and private equity funds, will be impacted by the new rules.

Under FATCA, US-based funds will be treated as US financial institutions (USFIs) and will be required to withhold payments to non-US entity investors who refuse to provide the required information and/or documentation.

Additionally, foreign financial institutions (FFIs), such as an offshore investment fund, must disclose information on “specified US persons” to the Internal Revenue Service (IRS). Non-financial foreign entities (NFFEs) must also disclose information on their substantial US owners. Refusal to comply will result in to a 30% withholding tax on “withholdable payments,” such as on interest or dividends.

While the new rules apply to certain payments made on or after 1 January 2013, a timely assessment of the fund entities, investors and processes is essential to prepare now.

We offer an overview of the newly issued guidance and what it means moving forward as well as the top four steps alternative fund managers and their service providers must take to successfully plan for FATCA implementation.

New guidance on priority concerns

On 8 April 2011, the Treasury Department and the IRS issued the second in what is expected to be a series of guidance under the FATCA.

The guidance focuses on priority concerns identified by the comments received during the review process and offers additional insight on the role of the chief compliance officer of the FFI to the reporting requirements for US account.

Select information from the guidance includes:

  • Funds that are withholding foreign partnerships are required to enter into FFI Agreements, unless they are deemed compliant.
  • Certain local institutions and fully intermediated funds will be treated as deemed compliant and will not have to enter into FFI Agreements.
  • The government is considering whether there should be a centralized application procedure for investment funders under common management.
  • Application of the “passthru payment” rules (applies to all payments) is clarified and participating FFIs are required to determine and publish “passthru payment percentages” corresponding to the US assets they own using a quarterly average calculation.
  • The chief compliance officer (or the equivalent) of the FFI must certify to the FFI’s timely completion of required review processes for pre-existing individual accounts.

Our recommended approaches

Meeting these challenges requires significant planning. We believe the following steps are critical to the initial FATCA assessment process:

  1. Assess the legal entity structure and classification of fund entities as FFIs, NFFEs and USFIs.
  2. Review the investor data to classify investors into the appropriate FATCA categories.
  3. Examine your organization’s current on-boarding processes and determine whether the know-your-customer processes are adequate.
  4. Check into the payment systems that will be impacted by FATCA withholding and reporting.

As with any initiative of this scope, it is particularly important to increase awareness about FATCA throughout an organization and across service lines. To manage the sheer volume of data, technology-related solutions should also be considered.


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