On November 29, 2013, the Cayman Islands signed an intergovernmental agreement (an “IGA”) with the United States. The IGA obligates the Cayman Islands to:
(i) require Cayman Islands financial institutions to apply specified due diligence procedures to identify certain U.S. accounts;
(ii) collect specified information with respect to such U.S. accounts; and
(iii) exchange such information with the United States on an automatic basis pursuant to the provisions of a Tax Information Exchange Agreement, also entered into between the two countries on November 29.
This important development means that investment funds and other financial institutions that are organized in the Cayman Islands will not be required to sign an FFI Agreement with the United States and will not be required to report information about certain U.S. investors to the Internal Revenue Service. Rather, Cayman funds will be treated as being in compliance with FATCA, and thus will not be subject to FATCA withholding, if the investment funds comply with certain obligations as set forth in the IGA, including the reporting of investor information to the Cayman Islands Tax Information Authority. The Cayman Islands is expected to enact its own laws and promulgate its own regulations implementing the terms of the IGA.
The IGA does not alter the date for the commencement of FATCA withholding for Cayman funds, which remains as July 1, 2014. Reporting will begin in 2015 with respect to the 2014 calendar year.
Investment funds should note the following provisions of the IGA:
(i) investment funds will still be required to comply with the applicable registration requirements on the IRS FATCA registration website (including obtaining a “GIIN”, or Global Intermediary Identification Number) by April 25, 2014 (and may want to begin that process now that this IGA has been signed);
(ii) investment funds will still be required to comply with due diligence and reporting requirements that are similar to those they would have had under FATCA;
(iii) investment funds will not be required to withhold upon, or close the accounts of, recalcitrant account holders;
(iv) the enforcement of investment funds’ obligations set forth in the IGA will be governed by Cayman Islands domestic law; and
(v) the governments have agreed to work together to develop a practical and effective alternative approach to achieve the policy objectives of “foreign passthru payment” (i.e., withholding by Cayman funds on amounts attributable to U.S. securities) and gross proceeds withholding that minimizes the burden on financial institutions.
Our prior memoranda regarding FATCA can be accessed here:
IRS Delays FATCA Implementation for Six Months
FATCA Update: Final Regulations and Cayman IGA Negotiations
http://www.sewkis.com/pubs/xprPubDetail.aspx?xpST=PubDetail&pub=456
Our webinar regarding FATCA can be accessed here:
http://www.sewkis.com/events/xprEventsDetail.aspx?xpST=EventDetail&event=137
We will continue to keep you updated on any developments regarding FATCA and the U.S.-Cayman Islands IGA. If you have any questions regarding the application of FATCA to your organization, please contact: Jim Cofer (212-574-1688, cofer@sewkis.com), Ron Cima (212-574-1471, cima@sewkis.com), Jon Brose (212-574-1615, brose@sewkis.com), or Dan Murphy (212-574-1210, murphyd@sewkis.com.)
