What is FATCA? A Quick Guide to the Foreign Account Tax Compliance Act
Wondering What is FATCA? The Foreign Account Tax Compliance Act is a U.S. law that went into effect in 2014 to combat tax evasion by U.S. taxpayers holding foreign (meaning “non-U.S.”) accounts. It requires foreign financial institutions (FFIs) to report U.S. account holders to the IRS. FATCA also requires certain so-called “non-financial foreign entities” (NFFEs) to disclose their U.S. “Controlling Persons” or “Substantial U.S. Owners” to FFIs where the NFFEs hold accounts so that the FFIs can report those persons to the IRS.
FATCA’s Purpose
FATCA aims to prevent tax evasion by increasing transparency. It mandates that FFIs such as foreign banks disclose U.S. account holders’ details (and the U.S. Controlling Persons or Substantial U.S. Owners of certain NFFE account holders) or face penalties, ensuring compliance with U.S. tax laws.
Who is Affected?
- FFIs: Banks, investment firms, funds, some insurance companies, and many private-client structures such as trusts must report U.S. account holders (or U.S. Controlling Persons and Substantial U.S. Owners of certain NFFE account holders) or risk a 30% withholding tax on U.S.-sourced payments.
- Non-Financial Foreign Entities (NFFEs): Certain foreign entities, including many private-client structures, must disclose U.S. Controlling Persons and Substantial U.S. Owners to the FFIs where the NFFEs hold accounts so that those FFIs can report those people to the IRS.
Final Thoughts
Every non-U.S. entity in the world is either an FFI, with potential FATCA reporting obligations, or an NFFE. Many NFFEs, specifically so-called “Passive NFFEs”, must facilitate FATCA reporting by the FFIs where they hold accounts so that those FFIs can report the Passive NFFEs’ U.S. Controlling Persons or Substantial U.S. Owners to the IRS. Therefore, it’s absolutely critical that non-U.S. entities correctly determine whether they are FFIs or NFFEs and, if they are NFFEs, whether they are Passive NFFEs with disclosure obligations or so-called Active NFFEs, which don’t have any disclosure obligations.
Classifying entities correctly is crucial to FATCA compliance. That’s where AEOIclassification.com comes in: AEOIclassification.com’s online FATCA classification system is an easy-to-use, affordable, and accurate FATCA entity classification system created by a globally recognised FATCA expert.