FATCA Driven (Even More . . . ) – New IRS Forms W-8BEN versus W-8BEN-E versus W-9 (etc. etc.) for USCs and LPRs Overseas – It’s All About Information and More Information (Part III)
Information and more information is the mantra of revised IRS Forms as a result of FATCA. See, FATCA Driven – New IRS Forms W-8BEN versus W-8BEN-E versus W-9 (etc. etc.) for USCs and LPRs Overseas – It’s All About Information and More Information
U.S. citizens residing outside the U.S. along with lawful permanent residents (“LPRs”) are not the only persons who need to understand the IRS forms referenced above. Indeed, all entities and institutions, whether they are small privately held companies or large and traditional financial institutions are required to complete and have signed a range of IRS forms.
The forms can be either the actual IRS form, or a satisfactory substitute form. Many individuals are of the erroneous view that if they are not financial institutions, they do not need to concern themselves with these classifications.
Unfortunately, that is not the case. Also, these classification rules apply to the surprise of many, if there are (or are not) U.S. persons involved.
In addition to a basic understanding of U.S. laws, it is also crucial that the parties see if their country has entered into an IGA. For instance, if we examine the tiny little country of Liechtenstein which has a relatively large financial sector, it is necessary to first classify the type of entity.
All of this is necessary in order to properly determine which IRS form is to be required to be completed (e.g., IRS Form W-8BEN-E o W-8BEN o W-9 or W-8IMY or W-8EXP, etc.). In addition, each of these classifications will help determine how to complete such forms.
For instance, if it is a Liechtenstein Stiftung, it will probably (but not necessary) be a trust and not a corporation. See the IRS Memorandum from 2009 that provides that a Liechtenstein Stiftung will be classified as a trust, if its primary purpose is to protect or conserve the property transferred to the Stiftung for the Stiftung’s beneficiaries and is usually not established primarily for actively carrying on business activities.
Next, in this example, with a Liechtenstein Stiftung, the country of Liechtenstein has entered into an Intergovernmental Agreement (“IGA”).
Hence, the terms of the IGA are most important. Under the IGA, as is the case generally for FATCA, the entity has to be either an Foreign Financial Institution (“FFI” or “FI”) or a Non-Financial Foreign Entity (“NFFE”).
1) Definition of Financial Institution (“FI”)
A financial institution is any entity that:
- Accepts deposits in the ordinary course of a banking or similar business (“Depository Institution”);
- Holds, as a substantial portion of its business financial assets for the benefit of one or more other persons (“Custodial Institution”);
- Is an investment entity; or
- Is an specified insurance company or holding company that is a member of an expanded group;
 See Article 1(i), IGA.
 See Article 1(h), IGA.
 See Article 1(k), IGA.
Generally a private Liechtenstein Stiftung would not satisfy any of these requirements (although it could conceivably be the case that one could be an “investment entity”). Hence, it would generally be an NFFE and not an FI.
NFFEs can be passive or active. The kind of compliance obligations varies depending on the type of NFFE (passive or active).
- Passive NFFEs
A passive NFFE is an NFFE which is not an active NFFE or a withholding foreign partnership or withholding foreign trust.
There are several criteria under which a NFFE can be classified as an active NFFE. The following explain the most relevant criteria.
- Active NFFEs
Among the criteria that the IGA establishes, under which a NFFE can be considered as an Active NFFE, are the following:
1) If less than 50% of the NFFE’s gross income is passive income and less than 50% of the assets held by the NFFE are assets that produce or are held for the production of passive income during the preceding calendar year. A
2) Substantially all of the activities of the NFFE consist of holding (in whole or in part) the outstanding stock of, or providing financing and businesses other than the business of a Financial Institution.
Sometimes trusts or Stiftungs will also participate in or hold interests in companies, some of which may engage in active trades or businesses or simply hold passive investments. On the contrary, the companies/subsidiaries only hold other assets from which they derived passive income (e.g., dividends, interests, rents, royalties, etc.).
This will determine if a Stiftung will be classified as a Passive NFFE or not under FATCA regulations and the IGA.
 It also can make a difference if the trust (or Stiftung in this example) is a so-called “withholding” foreign trust; which generally requires an agreement with the IRS.
 Treas. Reg. § 1.1472-1.
Not surprisingly, the above analysis is complex, because the rules are complex. Accordingly, it has been the author’s experience, that many institutions around the world which request one or more of the above IRS Forms have great difficulty in even implementing these rules. Most of their employees seem to have little understanding of what is a very complex area of law, even when their resident country has issued extensive regulations or guidance about how the terms of the IGA are to be implemented.