FATCA Next Steps For Funds and Its Providers 2013

FATCA: Next steps for Funds and their
service providers
Luxembourg June 20th, 2013
Sandrine Leclercq
Counsel, Baker & McKenzie
Marnin Michaels
Partner, Baker & McKenzie
Baker & McKenzie Luxembourg is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common
terminology used in professional service organisations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an
"office" means an office of any such law firm.
2013 Baker & McKenzie Luxembourg
Agenda
What is FATCA in a nutshell ?
Where do we stand and what is at stake with Luxembourg negociating
a model I IGA?
What are the impacts for investment vehicles and their service
providers ?
Possible relief, for whom and how ?
Other measures that will facilitate the implementation of FATCA
Dealing with the complexity of cross border set-ups
Actions to be taken?
Q&A
Baker & McKenzie Luxembourg
2
2013 Baker & McKenzie Zurich
FATCA in a nutshell
3
FATCA in a nutshell
Goal to enable the US tax authorities to obtain information about the income
of US persons even if they are investing through a non-US ("foreign") financial
institution ("FFI")
The Stick 30% withholding tax is imposed upon certain "US source" income
and principal of an FFI that does not participate/ cooperate
Actions to avoid being subject to such withholding tax, unless an exception
applies, the FFI must enter into an agreement with the IRS which will obligate
the FFI (1) to identify "US accounts", (2) to request authorization to report
information to the IRS, (3) to close or refuse to open certain accounts where
the account holder is deemed "recalcitrant", and (4) to impose and pay
withholding tax to the US in certain circumstances
4
Who implements FATCA?

Payors of
withholdable
payments
Anyone in the stream

of payments
Non-US
entities
Regardless of
whether the
entity has U.S.
owners, U.S.
clients, or U.S.
investments
Two categories
of non-US
entities
FFIs
NFFEs
5
How does it work?

Foreign
Financial
Institutions
must determine
their status
under FATCA.
Some may be
deemed
compliant or
benefit from an
exemption.
If not exempt,
then FFI must
enter into an
agreement with
the IRS by 31
December
2013.
If FFI does not,

then it will be
nonparticipating
and subject to
the 30%
withholding by
withholding
agents.
Under the
agreement, FFI
will need to
search
accounts for US
indicia.
If the search
uncovers US
indicia, FFI
must obtain
further
information to
determine if it is
a US account.
FFI must report

specified
information to
the IRS.
If account
holder does not
respond, then
withholding
applies.
6
What is a withholdable payment?

Any payment of U.S. source income that is not connected
with a U.S. trade or business
AND
Any gross proceed from the sale or other disposition of any
property that can produce U.S. source interest or dividends
7
Five Types of FFIs

Category of FFI
Key Classification Factor
Depository Institution
Accepts deposits in the ordinary course of a banking or similar business
Custodial Institution
20% or more of the entitys gross income is attributable to holding financial

assets
Investment Entity
Investment funds and investment managers primarily engaged in the business of

investing, reinvesting, or trading in financial assets
Specified Insurance
Company
Insurance company or holding company of a group that includes an insurance company

if the insurance company (or holding company) issues or is obligated to make payments
on a cash value insurance or annuity contract
Certain Holding Companies

and Treasury Centers
holding companies and treasury centers that are (1) part of an EAG that includes a
depository institution, custodial institution, insurance company, or investment entity
under (b) and (c) above, and (2) a holding company or treasury center formed in
connection with or availed of by an investment fund
8
Where do we stand and

what is at stake with Luxembourg
negociating an IGA?
9
FATCA implementation - where do we

stand?
Successive Proposed Regulations released since 2010
Final Regulations published in January 2013
Meanwile in 2012 IRS published two IGA Models
1st January 2014 is the first effective date for FFI Agreements
10
IGAs - What are they?

Why IGAs?
Different Models
Framework for Compliance and General Requirements
Modifications to Requirements of Final Regulations
Classification FFI, NFFE
Exempt Categories of FFIs
Modifications of Registration, Due Diligence, Reporting and

Withholding Requirements
11
IGAs - What are they? (cont)

Not a treaty, but an agreement
Less formal negotiation and implementation procedures
Treasury position no ratification required by the US
Approval and ratification of FATCA Partner
Implementing law required
12
IGAs where do we stand?

Signed
Initialed
Denmark
Italy
Germany
Ireland
Japan
Mexico
Norway
Spain
Switzerland
United Kingdom
Finalizing
Canada
Finland
France
Guernsey
Isle of Man
Jersey
Netherlands
Luxembourg
13
Model I approach
FFI in the IGA country does not have to withhold on payments made to
recalcitrant account holders, or to close accounts held by such recalcitrant
holders
Some Relief from Responsible Officer
Some relief from obligations to withhold on foreign passthru payments
FFI will still have to register with the IRS but not to enter into a FFI agreement
Luxembourg will exchange information directly with the IRS regarding financial
accounts held by US investors
Will put Luxembourg in line with the declaration of 10 April 2013 by which
Luxembourg announced that it will introduce in 2015 the automatic exchange
of information in the frame of the EU Savings Directive
Specific Annex II dealing with FFI categorization
14
FATCA Compliance Timeline 2013

October
15 October: GIIN
will be assigned no
later than this date
25 October: Last
date for PFFI
registration to
ensure inclusion on
first PFFI list
January
17 January:
Final
Regulations
published
July
December
15 July:
FATCA Portal
open for FFI
registration no
later than this
date
15 July:
Sponsoring
Entities can
begin to
register
31 December:
Grandfathered
Obligation cut-off
date
15

1 January
Earliest effective date for FFI
Agreement
New account opening
procedures operational
Accounts opened before this
date are Preexisting
FATCA withholding begins on
U.S. source FDAP payments
that are not grandfathered
Form 1042/1042-S filing in effect
July
1 July:
Grandfathered cutoff date for dividend
equivalent
payments
June
30 June: (or 6 months after FFI
Agreement Effective Date) PFFI must
document Prima Facie FFI payees
30 June: (or 6 months after FFI
Agreement Effective Date), PFFI must
withhold on Withholdable Payments
(other than Gross Proceeds) to
undocumented Prima Facie FFIs
30 June: Deadline for Restricted Funds
to renegotiate distribution agreements
(or 6 months after registration with IRS)
16

1 January
December
PFFI withholding begins on

recalcitrant high-value
accounts
PFFIs are required to confirm
the GIIN of a payee or
Account Holder claiming
Reporting Model 1 FFI status
PFFIs begin withholding on
Pre-existing Obligations to
undocumented Passive
NFFEs
31 December (or 6 months after

FFI Agreement Effective Date):
Due diligence complete
31 December (or 6 months after
FFI Agreement Effective Date):
After this date PFFI treats
undocumented accounts are
either treated as NPFFIs (entities)
or recalcitrant (individuals)
31 December: Cut-off date for
Limited Branches and Limited
FFIs
March
15 March: Reporting withheld

amounts from U.S. source FDAP
payments to non-U.S. recipients
15 March: PFFI begins reporting
Substantial U.S. Owners of
Passive NFFEs
31 March: First account reporting
deadline for accounts maintained
in 2013 and 2014
31 March: PFFI begins reporting
recalcitrant accounts maintained
in 2013 and 2014
17

January
1 January: PFFI withholding
begins on all recalcitrant
accounts and undocumented
entity accounts that are
Preexisting Accounts
March
15 March: Reporting begins for
non-U.S. source payments to
NPFFIs (for calendar year 2015)
18

January
1 January: Withholding on
Gross Proceeds begins
1 January: Withholding on
Foreign Passthru Payments
begins
March
31 March: Reporting Gross
Proceeds
31 March: Reporting non-U.S.
source payments to NPFIs
made in calendar year 2016
19
Impact of IGAs on the time line?
Same time line applies, where relevant

What if the IGA is not up and running as at dead-line?
Treasury Officials have stated recently that withholding will not be required as long as
IGA is signed, (hence) even-though transposition not fully completed
20
What are the impacts for

investment vehicles and their
service providers ?
21
21
All actors of the industry are concerned

It affects funds and further vehicles implementing all sorts of
strategies, i.e. fund of funds, exchange-traded funds, hedge funds,
private equity and venture capital funds, securitization vehicles and
other managed funds, commodity pools
subject to specific statuses and grandfathering conditions
Their service providers and counterparties

Investment vehicles can be either FFIs or NFFEs
22
Investment vehicles as FFIs?

The final regulations align the definition of an investment entity with the
definition under the IGAs. The final regulations set out three tests for
determining whether an entity is an FFI investment entity:
Primary Business Test
the entity primarily conducts a business of one or more of the following (i)
trading in financial assets and other assets, (ii) portfolio management,
and (iii) otherwise investing, administering, or managing funds, money or
financial assets on behalf of other persons
Gross Income Test
the entitys gross income is primarily attributable to investing in financial
assets and the entity is managed by another FFI
Investment Fund
entity holds itself out as an investment fund or investment vehicle with an
investment strategy of investing in financial assets
23
Service Providers to the fund as FFI ?

Investment Manager ?
Investment Adviser ?
Transfer Agent ?
Fund administrator ?
Custodian/ Depositary ?
Distributors ?
Placement Agent ?
Platforms ?
PB ?
Brokers ?
24
Typical holding structures in investment

vehicles
Individuals
US / non US / Recalcitrant
Corporate
FFI / NPFFI / NFFE/?
Distributors/ placement
agents
FFI / NPFFI / Agents
Plateforms
FFI / NPFFI / Agents
Nominees (custodian banks

etc.)
FFI / NPFFI
Private banks
FFI / NPFFI
Insurance companies
FFI / NPFFI
Fund of funds
FFI / NPFFI / NFFE?

25

Passthru payments?
A PFFI must withhold on foreign passthru payments which
it makes to a recalcitrant account holder or
nonparticipating FFI. However, the IRS and Treasury have
not yet defined foreign passthru payment.
In the context of an IGA?
26
Possible Relief, for Whom and

How ?
27
27
1. Specific Status of FFIs:

Deemed-Compliant FFIs
Certain Investment Advisers and investment vehicles may qualify as
Deemed Compliant FFIs
Depending on the cases they may qualify as Registered Deemed
Compliant, Certified Deemed Compliant OR Owner Documented
Main benefit of these qualifications lies in the exemption from any
reporting duty
Certified Deemed Compliant FFIs and Owner Documented FFIs are
also exempt from registration with the IRS
28
Deemed Compliant FFIs (cont)

Investment Advisers can be Registered Deemed Compliant FFIs:
In accordance with applicable U.S. Treasury Regulations, an entity the
sole activity of which is to render investment advice to and act on behalf
of a customer based on a power of attorney (an investment authority)
issued by the holder of a Financial Account or based on investment
powers in a directorship capacity for the purposes of investing, managing
or administering funds deposited in the name of the person or entity
granting the power (or issuing the similar instrument) with a Financial
Institution other than a Nonparticipating Financial Institution.
29

Vehicles qualifying as Certified Deemed Compliant FFIs
Certified DeemedCompliant Entity
Conditions Abstract
Sponsored closely
held investment
vehicle
Entity must be an FFI solely as an investment entity and has a contractual arrangement with a
PFFI, reporting Model 1 FFI or US financial institution to sponsored the FFI; FFI has 20 or
fewer individual debt and equity holders (excluding certain holders), FFI does not hold itself out
as an investment fund for unrelated parties; new category created in final regulations
Limited life debt

investment entities
Limited purpose entities formed to invest and hold debt and issue interests to unrelated
investors; vehicle must have been in existence as of 31 December 2011 and transitional relief
terminates 1 January 2017; new category created in final regulations
30

Vehicles qualifying as Registered Deemed Compliant FFIs
Registered DeemedCompliant Entity
Conditions Abstract
Qualified CIV
Investment fund where all direct equity holders (and direct holders of debt in excess of USD
50k) are FATCA-compliant or FATCA-exempt financial institutions; under final regulations,
retirement plans and non-profit organizations may qualify
Restricted Fund
Investment fund where all interests issued by the fund are redeemed or transferred by the fund
rather than sold in the secondary market, interests not issued directly by the fund are
distributed through certain FATCA-compliant FFIs; prohibits sales of interests to prohibited
holders (e.g., specified US persons, non-participating FFIs, or passive NFFEs with substantial
US owners)
31

Vehicles qualifying as Registered Deemed Compliant FFIs
Registered DeemedCompliant Entity
Sponsored
Investment Entities
(and CFCs)
Conditions Abstract
The entity is an investment entity or CFC and another entity agrees to sponsor the entity; new
category under the final regulations
32

Owner Documented FFIs?
Typical Owner Documented FFIs are Trusts

FFI withholding agent needs to agree to treat the FFI as ownerdocumented
The withholding agent undertakes the additional due diligence and
reporting required
The owner-documented FFI provides information on its owners to the
withholding agent who, passes on the information of any substantial
US owners to the IRS
33

Vehicles issuing bearer shares?
Exchanged Traded Funds?
Real Estate Funds?
34
2. Grandfathering provisions
Withholdable payment does not include:
any payment made under a grandfathered obligation
Foreign passthru payment does not include any payment made
under a grandfathered obligation
any gross proceeds from the disposition of a

grandfathered obligation
Foreign passthru payment does not include any gross proceeds
from the disposition of a grandfathered obligation
35
Definition of Grandfathered Obligation

Any obligation outstanding on January 1, 2014
Any obligation that gives rise to a withholdable payment solely because the
obligation is treated as giving rise to a dividend equivalent,
provided that the obligation is executed on or before 6 months after the date when
such obligations are first treated as giving rise to dividend equivalents
Any agreement requiring a secured party to make a payment with respect to,
or to repay, collateral posted to secure a grandfathered obligation
if (a pool of) collateral secures both grandfathered and non-grandfathered obligations:
pro rata by value allocation
Any obligation executed on or before 6 months after the date when IRS final
regulations defining foreign passthru payment are filed with the US Federal
Register
Any material modification of an outstanding obligation will result in the
obligation being treated as newly issued or executed as of the effective date of
such modification
36
3. Part of a group How do I leverage?
Expanded Affiliated Group

Sponsoring Entity
37
Expanded Affiliated Group (EAG)

Affiliated group means one or more chains of corporations connected through
stock ownership by a common parent corporation
More than 50% of the total voting power of the stock of such corporation and
Has a value equal to more than 50% of the total value of the stock of such
corporation
A partnership or any other entity (other than a corporation) shall be treated as a
member of EAG if such entity is controlled by other members of the EAG (via
ownership, directly or indirectly, of more than 50% by value of the beneficial
interests in the partnership)
Is a matter of fact, not an optional status
38
Sponsoring Entity
Sponsoring Entity
An entity that registers with the IRS and agrees to perform the due diligence,
withholding, and reporting obligations for the Sponsored FFI, pursuant to the
specified requirements for such Sponsored FFI.
GENERAL REQUIREMENTS:
Authorized to manage the SFFI and enter into contracts on behalf of SFFI (i.e., fund
manager, trustee, corporate director, or managing partner);
Registered with IRS as sponsoring entity;
Registers the SFFI with the IRS (not req.d with closely held investment vehicles);
Agrees to perform, on behalf of SFFI, all due diligence, reporting, etc., that the SFFI
would have been required to perform if it were a PFFI (in the case of closely held
investment vehicles retains documentation collected with respect to such entity for 6
years);
Identifies the SFFI in all reporting completed on the SFFIs behalf to the extent required
39
Sponsored FFI (cont)

Sponsored entities can be:
investment entities
wholly owned CFCs
closely-held investment vehicles
40
Consolidated compliance program

The Final Regulations describe the compliance program that each
PFFI must have in place for the PFFI to satisfy the requirements of the
FFI Agreement.
For EAGs, an FFI may be selected as the compliance FI, which
would perform the periodic review of the compliance program for the
whole group.
A Sponsoring Entity is required to act as the compliance FI for its
sponsored FFI group.
41
Other measures to facilitate the

implementation
42
42
Other measures to facilitate the

implementation
Rules for proper allocation of roles among the payment

chain and the responsabilities
Rules to resolve errors in reporting and / or payment
43
Dealing with cross border set-ups

44
44
Cross Border Issues?

Account holders in different countries with or without IGAs
EAG with entities in different countries
Sponsoring entity in a different location than the
Sponsored entity(ies)
45
Next Steps?
46
46
Next Steps
Vis vis the IRS, depending on my status?
Vis vis my local tax authorities?
Strategic decisions
Look for Sponsoring/ offer the services?
Other FATCA tasks delegation set-ups?
Look for specific vehicle status?
Review eligibility of distribution network

Review distribution agreements (notification, termination and certification clauses etc.)
Review PPM (KYC, FATCA status, prohibited persons etc.)
Review composition of the portfolio (grandfathered obligations, compliant target funds etc.)
Educate and inform clients

About service offer
Their KYC duties
Announce willingness to enter into necessary compliance steps
Review of account terms and conditions and other servicing contracts

Account terms and conditions/ subscription agreement, management company agreements, delegation
agreements, allocation of responsibilities
47
Q&A
48
48
Pursuant to requirements relating to practice before the Internal

Revenue Service, any tax advice in this communication (including any
attachments) is not intended to be used, and cannot be used, for the
purpose of (i) avoiding penalties imposed under the United States
Internal Revenue Code, or (ii) promoting, marketing, or recommending to
another person any tax-related matter.

51
Marnin Michaels, Partner
Marnin J. Michaels
Marnin Michaels has been practicing for more than a decade in the areas of tax and international private banking. He also
handles insurance matters, particularly as it relates to tax investigations and wealth management. Mr. Michaels has written
extensively for many publications, including The Journal of International Taxation, Tax Planning International, Tax Planning
Financial Review, Private Client Business, International Tax Review, World Money Laundering Review, and The New York
State Bar Association Trusts & Estates Journal.
Partner, Zrich
E-Mail:
Marnin.Michaels@bakermckenzie.com
Tel: +41 44 384 14 14
Mr. Michaels focuses his practice on international estate planning and taxation of trusts for families with connections in the
US. He counsels clients on US withholding tax and qualified intermediary rule, as well as money laundering avoidance
legislation.
Sandrine Leclercq, Counsel

Sandrine enjoys a 16 year experience in tax, legal and regulatory asset management practice. She advises clients on
the most suitable fund or corporate structures with cross-border aspects. She also advises financial institutions on
strategic regulatory compliance issues such as MiFID, UCITS, AIFM D, IMD and FATCA.
Sandrine Leclercq
Counsel, Luxembourg
E-Mail:
sandrine.leclercq@bakermckenzie.com
Tel: + 352 26 18 44 261
Sandrine participates at various local and international technical committees and is a regular speaker on many fund
conferences across Europe. She was published in various Luxembourg and international newspapers.
Prior to joining Baker&McKenzie office, Sandrine acted successively as Head of Fund Structuring for six years and
further, as Group General Counsel for three years for CACEIS. She was involved in typical banking and asset
management regulatory matters, both on the product and servicing side. She also lectured at the Institut de Formation
Bancaire Luxembourgeois on fund related tax topics.
50

FATCA Next Steps For Funds and Its Providers 2013

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FATCA: Next steps for Funds and their

Baker & McKenzie Luxembourg

2013 Baker & McKenzie Zurich

Who implements FATCA?

Anyone in the stream

How does it work?

Baker & McKenzie Luxembourg

If FFI does not,

FFI must report

What is a withholdable payment?

Baker & McKenzie Luxembourg

Five Types of FFIs

Key Classification Factor

Accepts deposits in the ordinary course of a banking or similar business

20% or more of the entitys gross income is attributable to holding financial

Investment funds and investment managers primarily engaged in the business of

Insurance company or holding company of a group that includes an insurance company

Certain Holding Companies

Baker & McKenzie Luxembourg

Where do we stand and

2013 Baker & McKenzie Zurich

FATCA implementation - where do we

Baker & McKenzie Luxembourg

IGAs - What are they?

Modifications of Registration, Due Diligence, Reporting and

Baker & McKenzie Luxembourg

IGAs - What are they? (cont)

Baker & McKenzie Luxembourg

IGAs where do we stand?

Baker & McKenzie Luxembourg

FATCA Compliance Timeline 2013

Baker & McKenzie Luxembourg

FATCA Compliance Timeline 2014

FATCA Compliance Timeline 2015

PFFI withholding begins on

31 December (or 6 months after

Baker & McKenzie Luxembourg

15 March: Reporting withheld

FATCA Compliance Timeline 2016

Baker & McKenzie Luxembourg

FATCA Compliance Timeline 2017

Impact of IGAs on the time line?

Same time line applies, where relevant

Baker & McKenzie Luxembourg

What are the impacts for

2013 Baker & McKenzie Zurich

All actors of the industry are concerned

Their service providers and counterparties

Baker & McKenzie Luxembourg

Investment vehicles as FFIs?

Baker & McKenzie Luxembourg

2013 Baker & McKenzie Zurich

Service Providers to the fund as FFI ?

Baker & McKenzie Luxembourg

Typical holding structures in investment

FFI / NPFFI / NFFE/?

FFI / NPFFI / Agents

FFI / NPFFI / Agents

Nominees (custodian banks

FFI / NPFFI / NFFE?

Baker & McKenzie Luxembourg

Baker & McKenzie Luxembourg

Possible Relief, for Whom and