On 21 March 2019, the US Internal Revenue Service (IRS) issued final regulations (the Final Regulations) relating to FATCA verification and certification requirements. FATCA Sponsoring entities, trustees of trustee documented trusts (TDTs) and compliance financial institutions should review their FATCA compliance under the Final Regulations to ensure compliance.
The Final Regulations finalize proposed regulations (REG-103477-14) originally published on 6 January 2017, with limited changes. The Final Regulations are effective 25 March 2019.
The Final Regulations confirmed that 31 March 2019 was the deadline for (i) sponsoring entities to ensure that written sponsorship agreements are in place for each sponsored entity and (ii) certifying compliance for sponsored entities in non-IGA jurisdictions, Model 2 IGA jurisdictions and certain Model 1 IGA jurisdictions with older agreements in place not directly incorporating sponsored entities into the IGA were due.
Sponsoring entities should confirm that they have sponsoring agreements in place or otherwise take prompt corrective actions. FATCA responsible officers and trustees of TDTs should ensure that they have sponsoring agreements in place or otherwise also take prompt corrective actions.
The Final Regulations also modified several compliance requirements, which we summarize below.
The Final Regulations
1. Expanded of the Definition of Responsible Officer
A sponsoring entity of a sponsored FFI must appoint a responsible officer to oversee the sponsor’s compliance for each sponsored FFI.
The Final Regulations confirm that a responsible officer may be either an individual who is an officer of the sponsoring entity or an individual who is an officer of an FFI in the sponsoring entity's expanded affiliated group, so long as that individual has sufficient authority to fulfill the duties of a FATCA responsible officer. The affiliated entity must establish and maintain policies and procedures for, and have general oversight over, the sponsoring entity.
In the event that the sponsoring entity is a financial institution or investment entity, the responsible officer may be an individual who is a director, managing member or general partner of the financial institution or investment entity. If a managing member or general partner is itself an entity, the responsible officer shall be an individual who is an officer, director, managing member or general partner of such other entity.
2. Certification by Compliance FIs and Sponsoring Entities
A sponsoring entity can certify the FATCA compliance on behalf of its sponsored entity and if it does so, the sponsored entity is not required to file a separate certification.
Likewise, a compliance FI (who establishes and maintains a consolidated compliance program for its expanded affiliate group) can certify FATCA compliance on behalf of the electing members of its compliance program and if it does so, the electing member is not required to file a separate certification.
3. Sponsorship Agreement
The Final Regulations retain the requirement that sponsoring FFIs must have a written sponsoring agreement in effect with each sponsored FFI. Such agreement must authorize the sponsoring entity to fulfill the FATCA certification requirements on behalf of the sponsored FFI.
The Final Regulations clarify that the written agreement need not be a separate agreement and that the sponsoring entity's FATCA obligations in regards to the sponsored FFI may be referred to generally in another agreement between the sponsor and sponsored parties, such as a trust instrument or a more comprehensive services agreement.
The deadline for sponsoring entities to either revise existing agreements or enter into a written sponsorship agreement with each of its sponsored FFIs is the later of 31 March 2019, or the date when the sponsoring entity begins acting as a sponsor for the sponsored FFI.
4. Extension of Time for Certifications
The Final Regulations extend the deadline for sponsoring entities and trustees of TDTs with respect to the certification period ending on 31 December 2017. The IRS extended this deadline to 31 March 2019.This extension applied to periodic certifications and preexisting account certifications.
5. IRS Termination of a Sponsoring Entity
The IRS is able to terminate a sponsoring entity’s sponsoring status. Once the IRS terminates a sponsoring entity, the entities previously sponsored by the terminated sponsor cannot be sponsored by any entity related to the terminated sponsor, unless the sponsored entity obtains written approval from the IRS. The same rule applies to sponsored direct reporting NFFEs.
6. Sponsored Entities Located in a Model 1 IGA Jurisdiction
The Final Regulations leave open for future discussion with the competent authorities of FATCA Partner jurisdictions the question of how a sponsored Model 1 IGA FFI should comply with FATCA if the applicable Model 1 IGA jurisdiction does not include a sponsored entity as a type of non-reporting institution in Annex II.
The Model 1 IGA jurisdictions that do not include sponsored entities in Annex II to the Model 1 IGA are Denmark, France, Germany, Italy, Mexico, the Netherlands, Norway, and Spain.
What is Next?
The IRS will continue to refine and update FATCA compliance requirements for FFIs. Sponsors of sponsored FFIs and trustees of TDTs should make sure they have not overlooked any of these updated requirements as non compliance may have adverse consequences according to local law and guidance. Financial Institutions that have not taken timely action to address the updated requirements, particularly with respect to Sponsored FFIs and TDTs, should implement corrective steps immediately to become compliant. FATCA responsible officers should monitor future changes and ensure ongoing compliance with all requirements including periodic certifications, if applicable.
This client alert was prepared by Bruna Barbosa (Miami), with insights from Gregory Walsh (Zurich) and Paul de Pasquale (New York).