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Cayman fund managers prepare for FATCA

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After signing Model 1 inter-governmental agreements (IGA) with both the US and the UK in November 2013, in July 2014 the Cayman Islands government passed the necessary regulations to provide legal obligations with respect to US and UK FATCA as a matter of Cayman Islands law. Also in July 2014, the Cayman Islands Tax Information Reporting Authority (‘TIA’) issued the first official version of the Cayman Islands FATCA guidance notes. 

The next expected development comes early next year with the opening of an information exchange portal – which foreign financial institutions (FFIs) will use to file their FATCA reports to the TIA – as well as the publication of the reporting template to be used by Cayman FFIs. 

“There are a number of obligations that reporting financial institutions will need to comply with. The first, with respect to US FATCA, is to register with the IRS to receive their GIIN number, which most of our clients have now obtained,” comments Neal Lomax (pictured), partner at Mourant Ozannes, Cayman Islands. “The second is that they need to notify the TIA of their status by 31 March 2015.” 

The key FATCA deadlines for Cayman FFIs to be aware of are:

• 31 December 2014: FFIs must have registered with the IRS and received their GIIN; 

• 31 March 2015: FFIs to notify the Cayman TIA of their status; 

• 31 May 2015: FFIs to submit their first FATCA report to the Cayman TIA.

“As legal counsel we are assisting clients to ensure that the Offering Memorandum and also the constitutional and subscription documents of the Cayman fund contain appropriate disclosures and FATCA-related provisions. The offering and subscription documentation of a Cayman hedge fund needs to make it clear to any new investors that the fund entity is subject to FATCA and that it will need to obtain due diligence information from investors to comply with FATCA. It must also clearly state what the fund will do with non-compliant investors if they don’t provide the necessary information,” explains Lomax. 

In a Cayman fund’s constitutional documentation, Mourant Ozannes builds in the necessary powers to deal with non-compliant investors; one example of this would be to compulsorily redeem the investor. 

Failure to identify such an investor will, under US FATCA, lead to the potential imposition of a 30 per cent withholding tax by the IRS “so the fund must have the ability to deal with them very quickly and effectively”, states Lomax.

“From a fiduciary standpoint it’s very important that our fund clients are aware of the need for a proper FATCA compliance program to be in place,” adds Lomax.

One point of confusion in the US and Cayman has been over whether Cayman funds need to appoint a FATCA Responsible Officer (‘FRO’). From a strict Cayman legal perspective there is no requirement to appoint an FRO. However, one is required to be listed when applying for the GIIN number on the IRS portal. 

“The Cayman government issued a release in March confirming that the concept of the responsible officer as expressed in the US Treasury regulations would not be imported into the Cayman legal framework. In terms of who oversees compliance under FATCA there will be no one size fits all approach. 

“In many cases, our fund clients will engage a third party service provider to advise on the implementation of FATCA compliance,” concludes Lomax.

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