FATCA from the Account Holder's View
Call the Attorney at +36 1 8892800
While banks and other financial institutions are already preparing for the introduction of FATCA, the system is less commonly known by banking clients. The objective of this article is to summarise the most important changes and decision points the introduction of the FATCA system will mean to clients holding their bank accounts with non-US banks.
Upon the initiative of the Congress of the United States, as of 1 January 2014 a new banking information system will be introduced worldwide. The new system, the codename of which derives from the name of the law introducing the system (Foreign Account Tax Compliance Act – FATCA), will dramatically change the world’s financial culture.
While banks and other financial institutions are already preparing for the introduction of FATCA, the system is less commonly known by banking clients. The objective of this article is to summarise the most important changes and decision points the introduction of the FATCA system will mean to clients holding their bank accounts with non-US banks.
The aim of the system
FATCA was enacted with a view to combat tax avoidance by US citizens and entities through holding financial assets on off-shore accounts. To achieve tax compliance, FATCA adopts a twofold approach. On one hand it aims at enabling the internal revenue service of the United States (IRS) to obtain all such information on US taxpayers holding account outside the United States that can lead to the taxation of such persons. On the other hand, where the IRS is unable to obtain sufficient information about the identity of the account holders, the system allows an automatic collection of 30% withholding tax on the US source income of the non-identified beneficiaries. To formulate it in a simple way, banks either need to provide information to the IRS on certain account holders or accept the deduction of a withholding tax.
Account holders and income types affected by the system
Generally all those companies which receive financial income from a US source are affected by the FATCA system. This implies that a company does not need to be a US taxpayer (or its shares held by a US taxpayer) in order to be affected by the FATCA regulation.
The scope of financial incomes that fall within the FATCA system is rather wide. It includes US-source dividends, interest, other “fixed or determinable annual or periodical” (FTAP) income (e.g. royalties) as well as gross proceeds from the sale of US stocks and debt instruments.
The operation of the system
Pursuant to the FATCA rules, non-US banks are given the option to participate in the regime or not. All participating non-US banks need to report information to the IRS about financial accounts held by US taxpayers (or by foreign entities in which US taxpayers hold a substantial ownership) at the bank. In addition to the identification of the clients, non-US banks are also required to withhold 30% withholding tax from the on-payment of US-sourced qualifying income, provided that the recipient of the payment holds its account at a non-participating bank.
If a non-US bank elects not to participate in the regime it will trigger various negative consequences for its client. Most particularly, a 30% withholding tax will be levied on all such, US-sourced qualifying payments that are made to the accounts held by such non-participating institution, regardless of whether the account holder is a US taxpayer or not. In addition, as noted above, participating banks will also need to deduct the same withholding tax from certain payments made to these non-participating institutions. As a consequence, clients holding their accounts in these institutions will need to face taxation if their income arises from US sources.
Under its original version non-US banks had an option to decide individually whether they wish to participate in the system or not. As a new development, however, countries may include intra-governmental agreements with the US Treasury on the participation of their banks in the system. While it is not yet crystallised, it is expected that those countries which enter into such an agreement will amend their internal domestic legislations in a way that statutorily requires local banks to participate in the FATCA regime. Further, these agreements will ease the participating banks’ implementation process, they will relax certain deadlines, and allow a simplified due diligence procedure for the banks involved. It is expected that in the CEE region the Czech Republic, Hungary, Romania, Slovakia and Slovenia will conclude intra-governmental agreement with the US Treasury, while others are still hesitating.
What account holders need to do
As noted earlier, the introduction of the FATCA system will, from 1 January 2014, affect all such bank account holders, which realise financial income from the United States. As a first step, therefore, account holders will need to check whether they receive such US-sourced, financial income.
If the answer is positive then account holders need to get informed whether their account holder bank is a participating bank in the FATCA system. While it is likely that the banks located in countries that enter into an intra-governmental agreement with the US Treasury will be considered as participating banks, scrutiny will, in any case, be required. If it turns out that the company’s account holder bank is a non-participating institution then a withholding tax will be levied on the US-sourced financial income of the company holding its account at the bank.
Even if it is ensured that the account holder bank is a participating bank, a withholding may still apply on the on-payment of the US-sourced financial income to a non-participating institution. As a consequence, it needs to be analysed whether the financial income received from US sources is considered to be on-paid to a third party and, if so, whether the account of the third party is held by a participating bank or not.
Last, but not least, it should be kept in mind that the operation and rules of the system are still far from being finalized. Therefore it is advised to continuously keep an eye on the new developments around FATCA.
ABOUT THE AUTHOR: István Csővári, Pál Jalsovszky
István is a qualified attorney and a registered tax expert, who has been working with Jalsovszky Law Firm as a senior tax lawyer since 2006. István understands very well the business priorities and legal needs of clients. He is an expert in Hungarian tax law and he is well accustomed to the international working environment. István has a strong client focus and is used to dealing with high demands and time pressure of international clients having previously worked for both PricewaterhouseCoopers and White & Case.
Copyright Jalsovszky Law Firm
More information about Jalsovszky Law Firm
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
While banks and other financial institutions are already preparing for the introduction of FATCA, the system is less commonly known by banking clients. The objective of this article is to summarise the most important changes and decision points the introduction of the FATCA system will mean to clients holding their bank accounts with non-US banks.
The aim of the system
FATCA was enacted with a view to combat tax avoidance by US citizens and entities through holding financial assets on off-shore accounts. To achieve tax compliance, FATCA adopts a twofold approach. On one hand it aims at enabling the internal revenue service of the United States (IRS) to obtain all such information on US taxpayers holding account outside the United States that can lead to the taxation of such persons. On the other hand, where the IRS is unable to obtain sufficient information about the identity of the account holders, the system allows an automatic collection of 30% withholding tax on the US source income of the non-identified beneficiaries. To formulate it in a simple way, banks either need to provide information to the IRS on certain account holders or accept the deduction of a withholding tax.
Account holders and income types affected by the system
Generally all those companies which receive financial income from a US source are affected by the FATCA system. This implies that a company does not need to be a US taxpayer (or its shares held by a US taxpayer) in order to be affected by the FATCA regulation.
The scope of financial incomes that fall within the FATCA system is rather wide. It includes US-source dividends, interest, other “fixed or determinable annual or periodical” (FTAP) income (e.g. royalties) as well as gross proceeds from the sale of US stocks and debt instruments.
The operation of the system
Pursuant to the FATCA rules, non-US banks are given the option to participate in the regime or not. All participating non-US banks need to report information to the IRS about financial accounts held by US taxpayers (or by foreign entities in which US taxpayers hold a substantial ownership) at the bank. In addition to the identification of the clients, non-US banks are also required to withhold 30% withholding tax from the on-payment of US-sourced qualifying income, provided that the recipient of the payment holds its account at a non-participating bank.
If a non-US bank elects not to participate in the regime it will trigger various negative consequences for its client. Most particularly, a 30% withholding tax will be levied on all such, US-sourced qualifying payments that are made to the accounts held by such non-participating institution, regardless of whether the account holder is a US taxpayer or not. In addition, as noted above, participating banks will also need to deduct the same withholding tax from certain payments made to these non-participating institutions. As a consequence, clients holding their accounts in these institutions will need to face taxation if their income arises from US sources.
Under its original version non-US banks had an option to decide individually whether they wish to participate in the system or not. As a new development, however, countries may include intra-governmental agreements with the US Treasury on the participation of their banks in the system. While it is not yet crystallised, it is expected that those countries which enter into such an agreement will amend their internal domestic legislations in a way that statutorily requires local banks to participate in the FATCA regime. Further, these agreements will ease the participating banks’ implementation process, they will relax certain deadlines, and allow a simplified due diligence procedure for the banks involved. It is expected that in the CEE region the Czech Republic, Hungary, Romania, Slovakia and Slovenia will conclude intra-governmental agreement with the US Treasury, while others are still hesitating.
What account holders need to do
As noted earlier, the introduction of the FATCA system will, from 1 January 2014, affect all such bank account holders, which realise financial income from the United States. As a first step, therefore, account holders will need to check whether they receive such US-sourced, financial income.
If the answer is positive then account holders need to get informed whether their account holder bank is a participating bank in the FATCA system. While it is likely that the banks located in countries that enter into an intra-governmental agreement with the US Treasury will be considered as participating banks, scrutiny will, in any case, be required. If it turns out that the company’s account holder bank is a non-participating institution then a withholding tax will be levied on the US-sourced financial income of the company holding its account at the bank.
Even if it is ensured that the account holder bank is a participating bank, a withholding may still apply on the on-payment of the US-sourced financial income to a non-participating institution. As a consequence, it needs to be analysed whether the financial income received from US sources is considered to be on-paid to a third party and, if so, whether the account of the third party is held by a participating bank or not.
Last, but not least, it should be kept in mind that the operation and rules of the system are still far from being finalized. Therefore it is advised to continuously keep an eye on the new developments around FATCA.
ABOUT THE AUTHOR: István Csővári, Pál Jalsovszky
István is a qualified attorney and a registered tax expert, who has been working with Jalsovszky Law Firm as a senior tax lawyer since 2006. István understands very well the business priorities and legal needs of clients. He is an expert in Hungarian tax law and he is well accustomed to the international working environment. István has a strong client focus and is used to dealing with high demands and time pressure of international clients having previously worked for both PricewaterhouseCoopers and White & Case.
Copyright Jalsovszky Law Firm
More information about Jalsovszky Law Firm
View all articles published by Jalsovszky Law Firm
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
