The Foreign Account Tax Compliance Act (FATCA) is a complex reporting and withholding regime enacted with a goal of achieving greater tax transparency by enforcing disclosure by certain non-US entities of US persons’ offshore accounts, investments, and income. FATCA generally imposes a 30 percent withholding tax as a penalty on certain US source payments (e.g., dividends and interest) received by certain non-US entities after 30 June 2014 if disclosure and other requirements are not satisfied by such non-US payees.
The FATCA regime classifies non-US entities under two broad categories: “Foreign Financial Institutions” (FFIs) and “Non-Foreign Financial Entities” (NFFEs). The definition of an FFI is very broad and captures most funds. As such, a fund and certain non-US entities in its affiliated group (e.g., the fund’s general partner and the fund’s manager) may be classified as FFIs. Each FFI in a fund’s affiliated group generally will be required to register with the IRS by 25 April 2014. Certain key action steps are required for funds to be compliant with FATCA.