Why FATCA Classification Must Begin with the U.S. FATCA Regulations—Even in IGA Countries
The Foreign Account Tax Compliance Act (FATCA) created a global framework for identifying and reporting financial accounts held by U.S. taxpayers through non-U.S. entities. While many jurisdictions have signed Intergovernmental Agreements (IGAs) with the United States to facilitate FATCA compliance, the starting point for classifying any non-U.S. entity under FATCA—even in IGA countries—remains the U.S. FATCA regulations.
At first glance, one might assume that an IGA relieves a country’s institutions from needing to consult the U.S. Treasury Regulations. However, this is not the case. In fact, Annex I of both Model 1 and Model 2 IGAs explicitly bootstraps the U.S. regulatory definitions into the local IGA framework.
In most cases, determining whether an entity is a Financial Institution (FI) or a Non-Financial Entity (NFE) begins with the definition of Financial Institution. That’s because an NFE is defined as any entity that is not an FI. Therefore, you have to eliminate classification as an FI before you can even consider whether and entity is an NFE.
However, the IGAs turn this general rule on its head in a little-known provision. According to Annex I of the IGAs, an NFFE includes (among other criteria) “any Non-U.S. Entity that is not a Financial Institution as defined in relevant U.S. Treasury Regulations.” This language makes it plain that U.S. Treasury Regulation §1.1471-5 must be consulted to determine whether an entity is a Financial Institution (FI) or not.
Importantly, §1.1471-5(e)(5) of the FATCA regulations carves out specific categories of entities from the definition of an FI. These include:
- Excepted nonfinancial group entities
- Excepted nonfinancial start-up companies or companies entering a new line of business
- Excepted nonfinancial entities in liquidation or bankruptcy
- Excepted inter-affiliate FFIs
- Certain U.S. tax-exempt entities (e.g., section 501(c) organizations), and
- Non-profit organizations
These carve-outs are crucial:
Entities that fall under one of these exceptions are not FIs under FATCA, and therefore must be classified as NFFEs, even if they appear to meet some general characteristics of an FI.
Thus, at least in this initial instance, the IGAs defer to the U.S. FATCA regulations for defining what is—and is not—an FI. This means that non-U.S. entities in IGA jurisdictions cannot simply rely on the general IGA definitions of an FI. Instead, they must first consult the U.S. regulations to determine whether they fall within §1.1471-5(e)(5) of the FATCA regulations.
In summary, while IGAs localise the FATCA compliance process, they do not rewrite the core classification rules. For any entity classification exercise under FATCA, the U.S. Treasury Regulations are the authoritative starting point—a fact that is embedded directly into the structure of the IGAs themselves
Annex I of both Model 1 and Model 2 IGAs defines a Non-Financial Foreign Entity (NFFE) as “any Non-U.S. Entity that is not an FFI as defined in relevant U.S. Treasury Regulations”. This means that, even for entities resident in IGA partner countries, the determination of whether an entity is a Financial Institution (FI) or an NFFE must be made by reference to the definitions set forth in the U.S. FATCA Regulations.