FATCA: Final Deadline to Obtain a GIIN for Sponsored Investment Funds

Key Points 

• Transitional relief for non-U.S. investment funds that have been previously permitted to provide only a sponsor’s GIIN to avoid incurring FATCA withholding ends on December 31, 2016.
• U.S. withholding tax forms on file with paying agents may have to be updated to avoid incurring 30 percent FATCA withholding as of January 1, 2017.

Under transitional relief, certain non-U.S. investment funds, including certain Cayman Islands funds, which qualify as foreign financial institutions (FFIs), did not have to obtain a Global Intermediary Identification Number (GIIN); instead, they were permitted to certify their status under the U.S. Foreign Account Tax Compliance Act (FATCA) to withholding agents by providing the GIIN of a FATCA sponsor. As of January 1, 2017, sponsored FFIs should expect FATCA withholding agents (including prime brokers, custodians and International Swaps and Derivatives Association (ISDA) counterparties) to require withholding tax forms that include a separate GIIN for both the FATCA sponsor and the sponsored FFI. Current Internal Revenue Service (IRS) instructions suggest that December 22, 2016 is the cutoff date for GIIN registration to ensure timely inclusion on the IRS list of approved FFIs by January 1, 2017. Since the number of registrations that will be received by the IRS, and also the processing times at year-end, are unclear, FATCA sponsors that have not yet obtained GIINs for their sponsored FFIs should apply for any such GIINs as soon as possible.  

Enacted in 2010, FATCA represents a wide-ranging effort to increase compliance by U.S. taxpayers with U.S. federal tax obligations. In particular, the FATCA regime seeks to compel non-U.S. entities to disclose the existence and identity of certain U.S. taxpayers who directly or indirectly own an interest in such entities. In furtherance of its objective, FATCA imposes a variety of diligence, withholding and reporting requirements on FFIs, which includes many master funds, offshore feeders and other investment vehicles commonly utilized by investment funds. FATCA is enforced through a 30 percent withholding tax on payments of certain types of U.S. source investment income made to FFIs and certain other non-U.S. entities, and is expected to apply to payments of certain gross proceeds as of January 1, 2019. Payments potentially subject to FATCA withholding may include income that is otherwise exempt from U.S. federal withholding tax, such as U.S. source portfolio interest, and dividends, interest or royalties with respect to which U.S. treaty benefits are claimed.

FATCA requires FFIs, among other duties, to register with the IRS and obtain a GIIN.  FFIs are generally required to certify their FATCA-compliant status to withholding agents on a U.S. withholding tax form (typically, IRS Forms W-8BEN-E and W-8IMY) to avoid incurring FATCA withholding tax. To facilitate consolidation and/or outsourcing of investor diligence and information reporting under FATCA, certain non-U.S. investment funds’ compliance obligations may be conducted via a FATCA sponsor, which can be any duly authorized third party (e.g., a fund manager, general partner or administrator). The sponsor must agree to perform the FATCA diligence, withholding and reporting obligations on behalf of the sponsored fund, although the sponsored fund remains ultimately liable for its FATCA compliance obligations. The sponsor must also obtain a separate GIIN to reflect its status as a sponsor. Under transitional rules set to expire, as described above, certain sponsored investment funds were not required to register separately with the IRS and obtain a GIIN. 

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