What Are Sponsored FFIs and Owner-Documented FFIs?
A sponsored entity is an FFI that outsources its FATCA compliance obligations to a third-party “sponsoring entity.” The sponsor, typically a fund manager, trustee, or corporate parent, must itself be a registered FFI and agrees to perform all necessary FATCA due diligence, withholding, and reporting on behalf of the sponsored entity.
Another arrangement similar to sponsorship is a “Trustee-Documented Trust” (TDT). We will cover TDTs in our next blog.
There are two main types of sponsored entities under FATCA:
- Sponsored Investment Entity (SIE):
The sponsor must register with the IRS and obtain a special “sponsor’s” Global Intermediary Identification Number (GIIN) for itself. In addition, unless the sponsored entity is resident in a country with a Model 1 FATCA Inter-Governmental Agreement (IGA) with the United States, the sponsor must list each SIE in the sponsor’s own GIIN registration account. One advantage of this type of sponsorship is that there are few restrictions on the type of entity that can qualify as an SIE. - Sponsored Closely Held Investment Vehicle (SCHIV): Just as with SIEs, the sponsor of a SCHIV must register with the IRS and obtain a special “sponsor’s GIIN for itself. However, unlike SIEs, SCHIVs do not need to registered. This is true even if the SCHIV is not resident in a country with a Model 1 IGA. I However, it is more difficult to qualify as a SCHIV than as an SIE. For example, a SCHIV must be an FFI solely because it is an “Investment Entity” type of FFI. In addition, subject to limited exceptions, a SCHIV cannot have more than 20 individual owners (technically “equity” and “debt” holders) and cannot have any entity equity- or debt-interest holders at all. Thus, you can see where the name “Closely Held” “Investment Vehicle” comes from.
There is also a third, less common type of sponsored entity: A Sponsored Controlled Foreign Corporation (CFC). This category is specific to certain CFCs held by U.S. financial institutions.
What Is an Owner-Documented FFI (ODFFI)?
An Owner-Documented FFI is a small, closely held investment vehicle that chooses not to register directly with the IRS or to file its own FATCA reports. Instead, it provides all required FATCA documentation to a designated withholding agent (usually a bank or custodian), which then assumes the responsibility for FATCA compliance and reporting. ODFFIs do not receive a GIIN but are subject to strict eligibility criteria, including not being widely held or acting as an intermediary.
Whether an entity should choose (i) to be sponsored and, if so, whether to be an SIE or a SCHIV, or (ii) to be an ODFFI depends on a number of factors, including the entity’s structure, size, and operational needs. Sponsored categories offer scalability and centralised compliance, making them ideal for fund groups and corporate families. ODFFI status, by contrast, is designed for smaller, low-risk investment vehicles seeking a simpler, agent-mediated compliance path.
FFIs need to decide whether they will conduct their own FATCA due diligence and reporting and, if not, to whom and in what form they will delegate those functions. The answers to those questions will determine whether the FFIs should become sponsored and, if so, what type of sponsorship category they may be eligible for, on the one hand, or whether they should become ODFFIs instead.
However, deciding whether to be sponsored or to be an ODFFI is not to be confused with entity classification as such. Entity classification is not a choice. Rather, an entity’s FATCA classification is determined solely by FATCA’s definitions of the different types of FFI or NFFE and which of those definitions an entity meets. That is the type of classification that aeoiclassification.com performs for you.