FATCA has been part of New Zealand law since 1 July 2014 by virtue of an intergovernmental agreement (‘IGA’) made between the US Government and the New Zealand Government and related legislation.
FATCA is highly complex and will have a significant global impact on the way business is done by, with and through banks and other repositories of cash and securities.
FATCA is different to previous mechanisms used by the US Government to prevent tax evasion in that it places the onus of reporting to the IRS details of foreign accounts on the financial institutions used to hold financial assets rather than the individual account holders.
This in itself is not controversial. However, the definition of ‘financial institution’ in the legislation is extremely wide. For example, a trust is not an ‘entity’ in the legal sense of the word (it is a relationship) but FATCA regards trusts as entities and imposes on some trusts the obligation to register on the IRS website as a ‘financial institution’. Remarkably, this is so even where there are no US citizens or tax residents or US investments connected with the trust in question.
As a consequence every New Zealand trust must determine whether or not it is a ‘financial institution’ for FATCA purposes. Contrary to popular belief, this is so irrespective of whether there are US persons or US investments connected with the trust.
If a trust is a ‘financial institution’ it must register as such on the IRS website and obtain a Global Intermediary Identification Number (also known as a ‘GIIN’).
There are some limited exemptions from this registration requirement. For example, where a trustee which itself is a ‘financial institution’ undertakes all the reporting obligations of the trust of which it is trustee, or some other third party (known as a ‘sponsoring entity’) assumes such reporting obligations and there are no US persons connected with the trust. However, this will likely apply where the trust is administered by a professional trust company (such as one of the statutory trust companies). The vast majority of New Zealand trusts which are ‘financial institutions’ will be administered by trustees who are individuals or companies set up specifically to act as trustee and will need to register.
Section 185G of the Tax Administration Act 1994 requires compliance with the relevant registration requirements contemplated by the IGA. Failure to comply would constitute an offence and could lead to financial penalties for the trust and its trustees.
A family trust which holds only a family home will not be a ‘financial institution’ and therefore will not be required to register. However, a family trust which holds a securities portfolio with an account at a bank, share broker, wealth manager or investment advisor is likely to be a ‘financial institution’. In such cases the trust is required to register on the IRS website (unless it falls within one of the limited exemptions).
On the other hand, if a trust receives income from real estate holdings that exceeds any ‘passive’ income (interest and dividends etc.) from financial assets then there is a process by which the trust can avoid being a ‘financial institution’ and if it follows that process it will not be required to register with the IRS.
Another consequence of a trust being a ‘financial institution’ is that the trustees will have to carry out due diligence on the beneficiaries and other functionaries (e.g. settlors, trustees,creditors etc.) to ascertain if any of them are US persons. If so, and subject to certain threshholds, then details of distributions and other information will need to be reported to the IRD which will in turn pass that information to the IRS. US persons for FATCA purposes include a US citizen or tax resident individual, a US company, partnership or a US trust. A US citizen includes a person born in the US, having a US citizen parent, or who is US naturalised. A US tax resident includes a green cardholder and someone who satisfies a substantial presence test.
The qualifying criteria are therefore very wide and require careful consideration by trustees, accountants, lawyers and others associated with trusts. For example, a New Zealand born and resident discretionary beneficiary of a family trust who has a parent who is also living in New Zealand but has retained US citizenship would be within the scope of the definition. If that beneficiary receives a distribution from the trust then details may need to be reported – even though neither the beneficiary nor the parent may have any other connection to the US.
If a trust is not a ‘financial institution’ for FATCA purposes it may still have some (albeit more limited) obligations. For example, a trust could be a ‘passive non-financial foreign entity’ and therefore not be required to register with the IRS but rather inform any financial institutions with whom it has accounts of any ‘controlling persons’ who are US citizens or tax residents. This would include a settlor, trustees, protector, beneficiaries or class of beneficiaries and any other natural person exercising ultimate effective control over the trust.
Kensington Swan has extensive experience advising in relation to FATCA and would be pleased to discuss its application to any trusts of which you may be a trustee, beneficiary, settlor or otherwise associated. We have registered numerous trusts on the IRS website and are proficient in the process, as well as reporting information to IRD.
If you would like to discuss the FATCA and its implications for Trusts, please contact Tim MacAvoy or Henry Brandts-Giesen.