FATCA Reminder for Investment Funds

Subsequent to the release of this article, the IRS announced the April 25 deadline for fund managers to register their offshore funds and offshore master funds with the and obtain Global Intermediary Identification Numbers has been extended to May 5. 

As we rapidly approach the July 1, 2014 FATCA effective date there are several important considerations and actions investment funds should not wait on:

Registration

• Offshore hedge funds and private equity funds should strongly consider submitting their electronic registration on the IRS FATCA portal (irs.gov/fatca) by April 25, 2014 in order to obtain a Global Intermediary Identification Number (GIIN) and ensure that they appear on the first IRS list of FATCA-compliant foreign financial institutions to be published June 2, 2014.  U.S. withholding agents (i.e., prime brokers, portfolio companies) will be required to verify these GIINs by reference to this IRS list in order to not withhold 30% on certain types of U.S.-sourced income. Although many funds will not technically be required to obtain a GIIN until a later date in order to avoid withholding (for example, investments funds domiciled in jurisdictions with whom the U.S. has signed a Model 1 Intergovernmental Agreement (IGA) (e.g., Cayman Islands)), it would certainly seem prudent and practical to get this done by the April 25 date.
• If an offshore feeder owns more than 50% of a master fund, both entities need to register as an Expanded Affiliated Group (EAG), designating one of them as the “Lead.”
• Offshore private equity funds should consider their fund and deal structures to determine which entities are required to register and receive a GIIN, whether to avoid withholding, comply with the IGA of their domicile, or both. EAGs and their lead(s) need to be identified prior to registration.
• A person needs to be designated as the Responsible Officer in order to submit the registration. 
• Domestic funds are not required to register and obtain a GIIN.

New Investor Onboarding

• Processes and procedures need to be in place no later than June 30, 2014 in order to properly document the FATCA status of investors admitted thereafter. Generally, this will be done by receiving from investors the revised versions of Forms W-9 (1/24/14) for U.S. individuals, W-8BEN (3/3/14) for foreign individuals, W-8BEN-E (3/28/14) for foreign entities, W8-IMY (final version pending) for foreign partnerships, and W8-EXP (final version pending) for foreign governments and exempt entities. In some instances, it may be more practical to accept from new investors old versions of these forms if allowed (an old version of the form may only be accepted for six months from date the new version of the form was released).
• A compliance plan should be put in place which designates responsibility to collect new investor information and to validate it. Validation includes verifying the investor GIIN against the monthly list that the IRS will publish as well as applying due diligence procedures as required by IRS regulations or the IGA under which the foreign fund or investment entity is covered. At the heart of these procedures is a review of all the information the fund obtains regarding the investor (including for non-FATCA purposes) to ascertain that it doesn’t conflict (or, if it does, to remedy) with the status that the investor claims on the form (W-9, W-8, etc.) The ultimate goal of this process (and FATCA in general) is to determine if there is an ultimate U.S. owner that is invested in a foreign fund or investment entity and report on such U.S. owner’s investment.

Pre-Existing Investor Due Diligence

An investor who is in a fund prior to June 30, 2014 is considered a pre-existing investor and as such doesn’t necessarily require immediate attention. Depending upon the type of investor, due diligence will need to be completed over the next few years, although some must be done as early as December 31, 2014. The procedure will generally be the same as described above for new investors (admitted after June 30, 2014), except the consideration of whether to solicit new versions of the forms or supplement valid pre-FATCA forms already on file with FATCA information (e.g., GIIN, etc.) will require more deliberation (than in the case of a new investor for whom the fund has no forms on file). There may be advantages and disadvantages to supplementing old forms vs. soliciting new ones, depending on circumstances, including LP profiles and the confidence you have in the validity of the old forms. Now is the time to consider these options, discuss them with your external advisors as necessary, and implement an action plan assigning responsibility to particular people and communicating with your investors.