Under the Foreign Account Tax Compliance Act (FATCA), the definition of foreign financial institution (FFI) includes any non-U.S. entity that qualifies as an investment entity. It is yesterday’s news that FATCA insisted that trusts are entities and that trusts have obligations to identify account holders. The headline for today is that despite only proposed guidance being available, the trusts’ Responsible Officers (ROs) will be required to certify in less than five months.

The FATCA regulations and most FATCA intergovernmental agreements (IGAs) permit less burdensome compliance paths including the possibility to be sponsored by other entities, which fulfil the FATCA obligations on behalf of the sponsored entity. Under these arrangements, an RO is still required, which means that the upcoming 1 July 2018 RO certification deadline is rapidly approaching. 

In this blog, which is the third in a five-part series, we will explore the various types of RO certifications for deemed-compliant FFIs. In particular, we focus on sponsored FFIs (i.e. sponsored investment entities, sponsored controlled foreign corporations and sponsored closely held investment vehicles). We also highlight the requirements for trustee-documented trusts (TDTs) and registered deemed-compliant FFIs (other than reporting Model 1 FFIs) and thus remind you that the clock is also ticking outside the banking community.

A sponsoring entity (sponsor) must register itself as a sponsor with the U.S. Internal Revenue Service (IRS) and undertake all of the sponsored FFI’s FATCA obligations on its behalf.

Additionally, the sponsor of a sponsored FFI accessing the classification via Annex II of an applicable Model 2 IGA or the FATCA regulations (e.g. because the FFI is in a non-IGA country or such status is not available in the applicable IGA) is also required to appoint a FATCA RO.

The appointed RO must oversee the compliance program (which includes effective internal controls for each sponsored entity) and certify periodically to the IRS that both the sponsoring and sponsored entities are compliant with their respective obligations via a single certification. 

What does the RO certification for sponsored FFIs entail?

The proposed FATCA regulations published in the Federal Register on 6 January 2017 envisage that the sponsoring RO must make three types of certification with respect to the first certification period. 

The first is a one-off certification requiring the RO to confirm for each sponsored FFI that: (1) the review of all pre-existing accounts has been performed as required by the applicable set of rules, and (2) there were no practices or procedures in place to assist account holders with FATCA avoidance.

Second, the RO must make a certification regarding the sponsoring entity and sponsored FFI requirements including the following:

• The sponsoring entity meets all of the requirements of a sponsoring entity;
• The sponsoring entity has a written sponsorship agreement in effect with each sponsored FFI authorising the sponsoring entity to fulfil the relevant FATCA requirements; and
• Each sponsored FFI meets the requirements of its respective status.

Finally, the RO must make one of the following certifications:

• A certification of effective internal controls; or
• A qualified certification where the RO has identified an event of default or an uncorrected material failure.

Although the sponsoring entity conducts all compliance activities on behalf of the sponsored entities, the sponsored entity remains ultimately liable for any failure to comply with the FATCA obligations.

What about TDTs and registered deemed-compliant FFIs?

In principle, the TDT status is very similar to the sponsoring concept; however, the certification requirements are different. While the trustees of TDTs accessing the category via Annex II of a Model 2 IGA are also required to appoint an RO, the proposed regulations only require the following certifications:

• The RO has established a compliance programme and has performed a periodic review; and
• The trustee has reported to the IRS all US accounts of each TDT for which it acts.

For registered deemed-compliant FFIs (other than reporting Model 1 FFIs) the RO must periodically certify to the IRS solely that all of the requirements of the deemed compliant status claimed by the FFI have been satisfied.

Although (sponsored) direct reporting non-financial foreign entities have certification requirements, these are not further discussed in this blog due to their limited prevalence. 

Key considerations

Now is the appropriate time for sponsoring entities and trustees to check that they are on track and prepared for the upcoming certifications. Sponsoring entities and trustees of affected TDTs should ensure that for each relevant sponsored entity and trust there is an established compliance program, policies and procedures are in place and sufficient controls exist to track and monitor the FATCA status of each sponsored entity and trust. 

Although the proposed regulations confirm that an event of default relating to a specific sponsored FFI (or trust) should not necessarily compromise the statuses of the sponsoring entity (or trustee) or the other sponsored FFIs (or trusts) for which it acts, it is important for the sponsoring entity (or trustee) to have a robust compliance program in place in advance of the 1 July 2018 RO certification deadline. Thus, although the regulations are only proposed, there is limited time to close any gaps and we recommend sponsors and other trustees to reflect on the work done to date to ensure that all items on the RO’s action list are properly ticked off.

Similarly, registered deemed-compliant FFIs (other than reporting Model 1 FFIs) or the third parties taking care of their FATCA compliance, such as the fund managers of most Swiss funds, should take appropriate measures to have sufficient comfort to make the necessary certifications by 1 July 2018.

Markus Weber - Partner, Financial Services Tax Leader Switzerland

Markus heads the Financial Services Tax practice. He has more than ten years of experience in advising financial institutions in the banking, insurance and asset management sector, covering the full range of relevant taxes. Prior to joining Deloitte, he was the managing director of a fund management company, followed by a role as executive director in the group tax department of a leading Swiss bank, where he was responsible for compliance with cross-border U.S. tax regulations.

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Brandi Caruso - Director, Financial Services Tax 

Brandi heads the Tax Transparency offering within the Financial Services Tax practice across Switzerland, responsible for services related to QI, FATCA, CRS, and 871(m). She is a technical advisor and a subject matter expert to a number of Swiss-based trust companies and banks and leads the Deloitte Trust Forum. She has more than 15 years of experience with Deloitte in the U.S., UK, and in Switzerland.

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Glen Lovelock - Senior Manager, Financial Services Tax

Glen is a Senior Manager in the Financial Services Tax practice. Prior to recently joining Deloitte, he was Head of Tax Operations at a multi national global private bank based in Switzerland. He has over 15 years relevant experience and has had direct exposure to the QI regime since inception in 2001. In addition to acting as QI, FATCA and CRS subject matter expert for various non-U.S. financial institutions, Glen also spent nine years working as a dedicated European tax resource on behalf of a U.S. financial institution.

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Atila Demiraj - Consultant, Financial Services Tax 

Atila is working in the Financial Services Tax team in Zürich, where she advises a variety of leading financial institutions and trusts on the implementation of FATCA and CRS. Prior to joining Deloitte, Atila obtained a Master of Arts in Business Administration from the University of Zurich.

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