Foreign Account Tax Compliance Act (FATCA)
What is FATCA?
The Foreign Account Tax Compliance Act (FATCA) is intended to enforce US taxation around the world. The legislation is designed to ensure that all foreign accounts and investments held by US taxpayers are disclosed. The incentive for affected entities to comply with the new reporting requirements is a 30% rate of withholding tax on all withholdable payments received by an Foreign Financial Institution (FFI) unless the FFI enters into a legally binding agreement with the IRS to disclose specific details about their US investors.
Reporting is the custodian bank's duty
As explained in more detail below, Swiss SEC RIAs are required to register with the IRS as a deemed compliant FFI since they do not "maintain" the actual Swiss bank account, which is held at the qualified custodian bank. As a registered FFI, it is the custodian bank's responsibility to report any information required.
Reporting is mandated on "US Persons." This broad category includes US citizens, US residents, green card holders as well as trusts controlled by US persons etc. FATCA rules proposed by the IRS include extensive criteria that banks will have to use to screen all of their clients to determine which ones appear to be US persons.
FFIs are required to report directly to the IRS, the name, address and account number of all clients deemed to be a US persons. They must also report the highest daily account value in US dollars over the course of the year and inflows and outflows to the account.
Duties under the Implementation Agreement
Financial institutions located in Switzerland, whether organized under the laws of Switzerland or another jurisdiction (Swiss Financial Institutions or SFIs), are defined as custodial institutions, depository institutions, investment entities or specified insurance companies. The term "investment entity" includes, among others, any entity that conducts as a business the (i) managing of individual and collective portfolios and/or (ii) investing, administering, or managing of funds or money on behalf of other persons.
Article 3 paragraph 1 of the Implementation Agreement provides that "Switzerland shall direct all Reporting SFIs" to register with and report directly to the US Internal Revenue Service (IRS) the information regarding US Accounts as required by FATCA. US Accounts (either pre-existing or new) are defined as those financial accounts ”maintained“ by a Reporting SFI.
However, under the Implementation Agreement, certain Non-Reporting SFIs, such as registered deemed-compliant SFIs, are in principle required to register with the IRS.
Swiss investment advisers and assets managers qualify as investment entities, and thus as SFIs, even though they do not ”maintain“ any account in the name of their clients (such accounts being maintained with a depositary banking institution).
Investment Advisers and Assets Managers as Non-Reporting SFIs
Annex II of the Implementation Agreement entitled "Non-Reporting Swiss Financial Institutions and Exempt Products" sets forth the list of those SFIs which do not have to report to the IRS the information regarding US accounts under FATCA.
The "Swiss Investment Adviser" is defined in Section II.A.2 of Annex II of the Implementation Agreement as ”[…] an entity the sole activity of which is to render investment advice to and act on behalf of a customer […] based on a power of attorney or a similar instrument […] for the purposes of investing, managing or administering funds deposited in the name of the person or entity granting the power […]."
Such definition of a "Swiss Investment Adviser" covers both the investment advice and assets management activities.
Section II of Annex II of the Implementation Agreement provides that "Swiss Investment Advisers" are deemed to be "Non-Reporting SFIs" that are treated as registered deemed-compliant FFIs for purposes of section 1471 of the US Internal Revenue Code."
As a consequence, Swiss investment advisers and asset managers are to be considered Non-Reporting SFIs. This is in line with the fact that they do not "maintain" accounts in the name of their clients. As Non-Reporting SFIs, they are treated as registered deemed-compliant FFIs within the meaning of the Implementation Agreement, respectively FATCA, and are in principle required to register with the IRS.
Source: Swiss Bankers Association