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FEATURES FATCA


to act as the trustee of Trust A. Trust A’s assets consists [sic] solely of financial assets… Pursuant to the terms of the trust instrument, Trustee A manages and administers the assets of the trust. Trustee A does not hire any entity as a third-party service provider to perform [financial instrument trading; individual or collective portfolio management; or investing, administering or managing funds, money or financial assets]. Trust A is not an investment entity… because it is managed solely by Trustee A, an individual.’


• ‘Example 6. Trust managed by a trust company. The facts are the same as in Example 5, except that X hires Trust Company, an FFI, to act as trustee on behalf of Trust A. As trustee, Trust Company manages and administers the assets of Trust A in accordance with the terms of the trust instrument for the benefit of Y and Z. Because Trust A is managed by an FFI, Trust A is an investment entity [by virtue of being managed by an entity that provides at least one of these services: trading in certain financial instruments; individual or collective portfolio management; or otherwise investing, administering or managing funds, money or financial assets on behalf of other persons] and an FFI.’


The examples make it clear that if a trustee or grantor does not engage a third-party FFI to manage any aspect of the trust, the trust should not be an FFI under the investment entity definition.1 Additionally, if a grantor or trustee engages a trust company as trustee, the examples make it clear that the trust will be treated as an FFI. The final regulations also imply that if an individual trustee manages the daily aspects of the trust, but the trustee or grantor engages an FFI to manage the trust portfolio, the IRS would treat the trust as an FFI in the investment entity category. Under this analysis, any trust with a professionally managed portfolio (i.e. almost any sizeable trust) will be treated as an investment entity and, as such, an FFI subject to reporting and withholding in its own right. Despite treatment as FFIs, many trusts should be eligible to claim owner-documented FFI status.2 As noted above, this would allow eligible trusts to protect the privacy of non-US beneficiaries through the substitute letter mechanism and to avoid withholding without entering an FFI agreement. A trust classed as an FFI that opts to forgo owner- documented FFI status must enter a formal FFI agreement obliging it to perform the due diligence required to identify and report information about its beneficiaries, including ‘substantial US owners’. For investment entities, including trusts that so qualify, a substantial US owner means a US beneficiary with any interest at all.3


Therefore, generally, a


trust treated as an FFI will have to report specified information to the IRS on all of its US beneficiaries. However, the regulations provide a de minimis exception that states that a US person is not treated as a substantial US owner if the fair market value of the distributions to that person during the calendar year are USD5,000 or less and, in the case of a person entitled to mandatory distributions, the value of that person’s interest in the trust is USD50,000 or less. A trust treated as an NFFE is subject to relaxed reporting requirements, and must simply provide the withholding agent with specified information on any substantial US owners or certify that it does not have any substantial US owners. For purposes of a trust


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classified as an NFFE, a substantial US owner is any specified US person that holds, directly or indirectly, more than 10 per cent of the beneficial interests of the trust. An individual holds a beneficial interest if they have the right to receive, directly or indirectly, a mandatory distribution or they may receive, directly or indirectly, a discretionary distribution from the trust. Importantly, a person’s proportionate interest in a non-US trust is aggregated with related persons who also hold beneficial interests in the trust. Generally, a person is treated as holding more than 10 per cent of the beneficial interest of a trust if: • the beneficiary receives only discretionary distributions from the trust and the fair market value of the distributions from the trust to that person in the prior calendar year exceeds 10 per cent of the value of either all the distributions made by the trust during that year or all the assets held by the trust at the end of that year


• the person is entitled to receive mandatory distributions from the trust and the value of the person’s present interest in the trust exceeds 10 per cent of the value of all the assets held by the trust; or


• the person is entitled to receive mandatory distributions and may receive discretionary distributions from the trust and the value of the person’s interest in the trust, determined as the sum of the fair market value of all of the discretionary distributions made from the trust during the prior calendar year to the person and the value of the person’s present interest in the trust at the end of that year, exceeds either 10 per cent of the value of all distributions made by the trust during the prior calendar year or 10 per cent of the value of all the assets held by the trust at the end of that year.


The regulations provide the following example: • ‘Example 3. Determining the 10 per cent threshold in the case of a beneficial interest in a foreign trust. U, a US citizen, holds an interest in FT1, a foreign trust, under which U may receive discretionary distributions from FT1. U also holds an interest in FT2, a foreign trust, and FT2, in turn, holds an interest in FT1 under which FT2 may receive discretionary distributions from FT1. U receives USD25,000 from FT1 in Year 1. FT2 receives USD120,000 in Year 1 and distributes the entire amount to its beneficiaries in Year 1. The distribution from FT1 is FT2’s only source of income and FT2’s distributions in Year 1 total USD120,000. U receives USD40,000 from FT2 in Year 1. FT1’s distributions in Year 1 total USD750,000. U’s discretionary interest in FT1 is valued at USD65,000 at the end of Year 1 and therefore does not meet the 10 per cent threshold… U’s discretionary interest in FT2, however, is valued at USD40,000 at the end of Year 1 and therefore meets the 10 per cent threshold.’


The regulations provide a de minimis exception allowing a beneficiary to avoid substantial US-owner treatment if the fair market value of the distributions from the trust to such person during the prior calendar year were USD5,000 or less and, for a person entitled to mandatory distributions, the value of their interest in the trust is USD50,000 or less.


Intergovernmental agreements As an alternative to the withholding and reporting regime required under FATCA, several countries have entered into intergovernmental agreements (IGAs) with the US. Under the Model 1 IGA,


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1 A trust holding only real estate, art or other non-financial tangible assets should not qualify as an ‘investment entity’. Therefore, assuming (as implied by the preamble to the final regulations) that a trust would only qualify as an FFI under the ‘investment entity’ category, such a trust should be treated as an NFFE pending further guidance.


2 Owner-documented FFI status is available only to those entities that are FFIs solely under the investment entity category.


3 FFIs must report all US accounts, which include both accounts held by US persons and accounts held by US-owned foreign entities. A US-owned foreign entity includes any non-US entity that has one or more substantial US owners. For trusts that fall within the investment entity category, a substantial US owner includes any specified US person that holds, directly or indirectly, more than 0 per cent of the beneficial interest of the trust. A person has a beneficial interest in a non-US trust if that person has the right to receive, directly or indirectly, a mandatory distribution from the trust or if that person may receive discretionary distributions from the trust.


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