What is FATCA?


FATCA is a US provision enacted in March 2010 and aimed at foreign financial institutions.  

It is part of a larger piece of legislation – Hiring Incentives to Restore Employment Act – designed to ensure that US citizens are fully disclosing their worldwide income to the US Internal Revenue Service.  

There is a worldwide movement towards fighting tax avoidance; FATCA is a part of this, but the Organisation for Economic Co-operation and Development (OECD) has also spurred this movement by bringing international disclosure requirements into its Model Double Tax Agreement, which is widely adopted not only by OECD members, but also by BRIC (Brazil, Russia, India, China) and other jurisdictions.  The UK has pledged to be a front runner in the adoption of these measures.

OECD is now using FATCA as a model to develop a common reporting standard which will require fiscal authorities to automatically share tax information.

Who is affected?

FATCA has been introduced to place the responsibility for reporting foreign income upon the payer of the income, rather than on the taxpayer.  

As from 1 July 2014, non-US entities that do not comply with these requirements could be subject to a 30% withholding tax on certain payments from the US.  

Interest, dividends, rents, royalties and other ‘fixed and determinable income’ from the US will be subject to the withholding tax.

This applies to individual client accounts with an aggregated value above US$50,000 and entities with an aggregated annual value above US$250,000. There are additional requirements for accounts above US$1m.

‘Non-financial’ payments made in the normal course of business (such as wages and employee benefits, lease payments and payments for the use of property and payments for goods) are exempt from withholding taxes.

The rules apply to any foreign financial entity which accepts deposits in the normal course of business; holds assets for others as nominee or custody services; is primarily engaged in investing, reinvesting or trading in securities or commodities; or is an insurance company that makes payments in respect of a financial account.  

This will include banks, investment funds, insurance companies, mutual funds, brokers, custodians, intermediaries and private equity firms.

Immediate action

Immediate action is necessary and must include the following:

  • Identify and classify the entities comprising the practice and clients, such as trusts connected with it;
  • Register any financial institution (FI) for a Global Intermediaries Identification Number (GIIN). Registration with the US Inland Revenue Service (IRS) is carried out online by completing form 8957. This form can be accessed via the the IRS website (see the 'Related links' section on this page).
  •  A GIIN will be issued and must be supplied to other institutions as evidence of compliance. This will be the reference number for reporting.
  • Engagement letters must be adapted to accommodate the legislation (see below).

Effect on UK entities

As a result of the UK-US inter-governmental agreement, FATCA is now part of UK law, by virtue of section 222 Finance Act 2013 and its supporting regulations.  

The major impact of FATCA will be on banks, but accountancy firms are also affected. 

All UK entities are subject to the UK rules, and they will probably be asked for their or their clients’ FATCA status, together with the usual money-laundering and client identification processes when dealing with financial institutions.

When acquiring new clients or passing on former clients, FATCA status will become part of the transfer information required.

An FI must inform the IRS when any sums are paid to or for a US person, regardless of where the payment is made.  

The IRS must be confident that the FI has adequate systems in place in order to identify and record US persons.  

A failure to do this will lead to a default, with the result that penalties and penal rates of withholding taxes (30%) may be imposed. These will be a cost to the FI rather than to the client and the FI may well be unable to recover this cost.

The UK entered into an intergovernmental agreement (IGA) with the US in order to ease some of the burden of compliance on UK entities.  

The Finance Act 2013 also brought in legislation to enable UK FIs to share information with the IRS without falling foul of UK data protection legislation.

Entity classification

Entities are either FIs or non-financial foreign entities (NFFE).

The definition of FI includes:

  • depositary institutions – accept deposits in the ordinary course of banking or similar;
  • custodial institutions – hold financial assets on behalf of others as a substantial part of its business (more than 20% of gross income). This includes trust companies and nominees;
  • investment entity – either trading in financial assets or ‘otherwise investing administering or managing money or funds on behalf of other persons’ (more than 49% of gross income) or acting as an investment adviser. Entities whose assets are managed by FIs may be investment entities, as may family trusts and trust companies;
  • specified insurance companies – issue cash-value insurance or annuity contracts;
  • holding companies and treasury centres – where the primary activity is holding the stock of at least one FI.

FIs are of two types: reporting and non-reporting.


If any practice advises entities or clients (especially trusts) that are FIs, it will be necessary to register them for a GIIN.

Registration is carried out online via the IRS website on Form 8957. The GIIN will be issued and can be supplied to other institutions as evidence that the entity is compliant.  

This reference number will be used for reports.  

Guidance is available from the IRS website but may have to be adapted to suit UK guidance.

Practice management

As with anti-money laundering legislation, a reporting person will be given responsible for reporting and must:

  • identify and record US persons;
  • identify and record payments to those persons; and
  • report the payments to the authorities.

Engagement letters

Ensure that the engagement letters set out the scope of the work.

Not all clients or entities will be within the scope of FATCA, but those affected must be identified.  

Set out that the client is responsible for advising you of any changes to their FATCA status or changes to their US connections.

If acting for a trust or FI, set out clearly any FATCA work to be undertaken or whether there will be none at all.    

Non-UK resident subsidiaries and branches are outside the scope of the UK agreement, but UK permanent establishments of non-UK entities are within it.  

The engagement letter must also deal with data protection as it may be necessary to share FATCA status and GIIN with other FIs and make appropriate reports to HMRC.

Suggested wording to be included in the engagement letter is as follows:

'Unless covered by a separate engagement letter or another schedule to this letter we will not be responsible for compliance with the International compliance (United States of America) Regulations 2013, produced as a result of FATCA.

However, if requested to do so we can provide advice on registration requirements under these regulations.  

We can also provide advice on setting up the appropriate systems to identify and report on your clients or beneficiaries affected by FATCA.'

Client engagement

In addition to the know-your-client information, it will be necessary to determine whether the client has any US connections and to record the information carefully.  

The same applies in respect of clients with any other foreign connections.  

There is a requirement to ensure that there is a valid ID for each client and this will have to be monitored.  

Changes of circumstance may have consequences for FATCA status or for information to be reported.  

It is also necessary to establish and record tax residence status; this should be checked annually.

Client identification

Whether a person is a US taxpayer is determined by US indicia, which include:

  • US citizenship or green card (lawful permanent residence status);
  • US birthplace;
  • US residence address or a US correspondence address (including a US PO box);
  • standing instructions to transfer funds to an account maintained in the US, or directions regularly received from a US address;
  • a ‘care-of’ or ‘hold-mail’ address that is the only address for that client; and
  • a power of attorney or signatory authority granted to a person in the US.

These are not conclusive, but indicate the possibility that the person concerned may be a US person and should warrant closer enquiry.  If the person is found to be American, further documentation should be retained:

  • US citizenship or green card: obtain form W-9 from IRS
  • US birthplace: obtain form W-9 or W-8BEN from IRS and non-US passport or similar documentation establishing foreign citizenship and written explanation regarding US citizenship
  • US address (residence, correspondence or PO box): obtain W-9 or W-8BEN and non-US passport or similar documentation establishing foreign citizenship
  • Instructions to transfer funds to US accounts or directions regularly received from a US address: request W-9 or W-8BEN and documentary evidence establishing non-US status
  • Only address on file is ‘in care of’ or ‘hold mail’ or US PO box: request W-9, W-8BEN or documentary evidence establishing non-US status
  • power of attorney or signatory authority granted to person with US address: request W-9, W-8BEN or documentary evidence establishing non-US status.

Again, these are not conclusive evidence that an account is owned by a US person but mean that it must be given closer scrutiny.

Having established whether you have US clients, the acceptance and monitoring systems must be updated on a regular basis.  

You should also realise that if you have a computer searchable database, its integrity could be examined in compliance checks.

If there is no computer database, paper records such as copy passports must be maintained but, unlike the money-laundering records, these should constantly be maintained up to date.

All UK entities are subject to the UK rules and will be asked for their FATCA status, together with the usual money-laundering and client identification processes, when dealing with FIs.

You must appoint a reporting person who will carry the responsibility for reporting, identifying and recording US persons and payments to or for them.  

This is not as easy as it may seem. Suppose your clients form a trust for their grandson. His father’s employer sends him to the US to work for a few years.  

He will have permission to work in the US (green card) and his family and any trust distributions will come within the FATCA provisions.  

Information about account holders must be reported annually, ie the name, address US tax identification number or date of birth, account number, name and identification number of the foreign financial institution (FFI), as well as the account balance or value.  

Reports are to be made to HMRC. 

Documents relating to due diligence for each client must be retained for six years after the end of the year in which the status was established.

HMRC offers guidance, available via the 'Related links' section on this page.

UK agreements

The UK has entered into IGAs with the Crown dependencies and most of the overseas territories.  

There are two types of UK IGAs: reciprocal and non-reciprocal.  

Reciprocal IGAs oblige financial institutions both in the UK and in the partner jurisdiction to identify relevant persons and report on their accounts.  

There is no obligation to withhold tax on payments made to the account holders.

The UK has reciprocal agreements with Jersey, Guernsey, the Isle of Man and Gibraltar; in addition, there are many tax information exchange agreements in force and in progress.

Non-reciprocal IGAs have been signed with the Cayman Islands, Bermuda, Montserrat, British Virgin Islands and the Turks & Caicos Islands; the number is increasing all the time.  

These do not place any obligation on UK FIs to identify residents of the overseas territories, but financial institutions in these jurisdictions will be required to identify UK residents and report information on their accounts.


In order to minimise compliance costs for financial institutions, UK IGAs follow FATCA closely.  

Where there are reciprocal IGAs, identification of the partner jurisdiction is required in order to establish taxability;  this contrasts with the US requirement, which taxes US citizens, wherever resident.

As is the case with FATCA, FFIs will need to search for indicia of UK or partner jurisdiction status which could indicate that an account holder is tax resident in the other jurisdiction.  

If this is the case, the account will be treated as a reportable account unless the account holder provides specified documentation refuting the identified indicia.

Common reporting standard

Following an initiative by France, Germany, Italy, Spain and the UK, 36 countries issued a joint statement on 18 November 2013, confirming their intention to develop a common reporting standard (CRS).  

This is based on the FATCA regime and will follow FATCA as closely as practicable in order to reflect consistency and reduce compliance costs.  

The OECD is developing this with the intention of having a CRS implemented in local rules.  

It is expected that the first exchanges will take place in 2016, covering the year 2015.


Trusts can take many forms, some of which will come within the FATCA legislation.  

There is no requirement for the trust to have US settlors, beneficiaries, trustees or investments for it to come within the legislation. All trusts are entities; the starting point is to establish the FATCA status and consequent reporting requirement for the trust.  

There are two main categories:

  • where a principal of the firm or a trust company owned by the firm is a trustee; and
  • where no principal of a subsidiary is a trustee.

In the first situation, the firm or principal will have to take responsibility for FATCA reporting.

In the second, the FATCA status, monitoring and reporting will be the responsibility of the trustees, although the firm’s instructions in the matter must be agreed and documented.  

Where employer benefit trusts simply hold unallocated shares, it should not be treated as an investment entity.

Registration requirements

As with other entities, the starting point is to determine the FATCA categorisation and where the trust is a FI, register and obtain a GIIN.

The fact that a trust has a US-connected settlor, trustee or beneficiary does not alter the FATCA categorisation.

Non-UK resident trusts will not be within the requirements, although the residence status may change.  

There is also an exemption for charitable trusts. These are:

  • entities registered as charities with the Charity Commission of England and Wales;
  • entities registered with HMRC for charitable tax purposes; and
  • entities registered as charities with the Office of the Scottish Charity Regulator. 

 The status of Northern Ireland charities is currently unknown.

Corporate trustees

A corporate trustee will register and report on the trusts; individual trusts do not need to register or report. It could be worthwhile to appoint a corporate trustee in order to eliminate the need for the trustees to register.

Owner documented trusts

Instead of registering, the trustees may be able to opt for owner-documented status.  

They can do this if they have enough regular information to prove that all owners (beneficiaries who receive one or more distributions) are and remain non-US persons.

They will also have to recertify their status every three years via form W8-BEN-E and, if at any time the trustees become aware that an owner has become a US person, they will have to register with the IRS and report to HMRC in the normal way.

They will also have to appoint a withholding agent; banks and investment businesses, which already act as qualifying intermediaries for US tax purposes, may be able to offer this service.  

Trustees must notify withholding agents of any change in status within 30 days.

Pilot trusts

Clients often create pilot trusts, usually with a nominal amount of £10, to establish a trust to which funds can be added at a later date.  

These are standard discretionary trusts with family members as trustees and a pool of potential beneficiaries drawn from family members.  They are UK resident and subject to UK  reporting; a determination of status under FATCA must be made by the trustees.  

They are not charitable trusts, so the charitable trust exemption does not apply. They are not managing assets on behalf of customers; the £10 is not making money.  

The family trustees are not FIs and therefore the trust FATCA status is an NFFE and does not need to register or report to the IRS.

Nil-rate band discretionary trust

It was common for a married couple to make reciprocal wills such that the first to die left the amount of the inheritance tax (IHT) nil-rate band on discretionary trusts, in order to take the amount from the estate at nil charge to IHT. This is less common since the creation of the transferable nil rate band.  

The trusts were created with lay trustees and a pool of beneficiaries including the surviving spouse and other members of the family.  

There are three possibilities for the type of assets used to fulfil the available nil-rate band:

  • debt/charge scheme;
  • cash; and
  • land and other property.

A debt/charge scheme is not managed as the trust property (the debt/charge) is only the right to receive or recover the debt.

Typically, interest is not charged and the trustees have the right to waive payment of interest.

The trustees are lay family members and therefore not FIs and no other management of assets takes place.

Where the cash equivalent of the nil-rate band is held by trustees, they must ensure that the cash is properly invested and therefore it is unlikely that the money will be left as cash in a bank account.  

If it were left on a bank account it is not managed, as UK bank accounts are exempt and are not reportable under FATCA.  

A similar exemption applies to National Savings and Investment products and Premium Bonds. If the cash is substantial, the investments may be managed and the trust may be a FI (see 'Family trust invested with a discretionary manager', below).

Land and other property usually includes an interest in the family home that has been transferred into the name of the trustees; often the trustees under the terms of the trust deed allow the surviving joint owner to occupy the property rent free.  

These trusts are not managed; the trustees are lay trustees and therefore not FIs and no other management of assets takes place.  

No income arises and therefore the FATCA status is that they are NFFEs. These trusts do not need to register or report to the IRS.

A note of this outcome should be placed with the trust deed.  A note must also be made to review the trust FATCA status when circumstances change, ie when the surviving spouse dies.

Legacy trusts held on age contingency

The executors of a deceased person’s estate are nearing the end of the administration.  A legacy of £1,000 has been left to a minor upon attaining the age of 18.  

The money is left on a bank account in the name of the personal representatives as trustee for the beneficiary.  

The trust is UK resident and therefore subject to UK reporting; a determination of FATCA status must be made.  

The trust is not charitable, so the charitable exemption does not apply. This is a purpose trust, so it is not undertaking activities on behalf of a customer; UK bank accounts are not reportable under FATCA.  

The trustees are lay trustees and not FIs. Income may arise to the trust but it is not attributable to investing and the trust status is a NFFE.  

The trust does not need to register or report to the IRS. It will be reported upon by the bank as a FI.

Executors are not an entity, but they may become one if the will appoints them as trustees and the point at which this happens can be difficult to ascertain.  

It is important to ensure that action is taken promptly, for example appointing a corporate trustee where necessary.

Trusts of land

Trusts of land arise where ownership of land is by more than one person whether the co-owners are beneficial joint tenants or tenants in common.

Trusts holding UK land are UK resident and subject to UK IGA reporting and determination of status under FATCA.  

These trusts are arrangements between co-owners and they are not undertaking activities on behalf of a customer.

These trusts are not managed; the asset is usually non-income producing.

The trustees are co-owners and not FIs, and no other management takes place.  No income arises and the trust status is NFFEs.    

If a trust has only family trustees it is a NFFE, but if it has a corporate trustee, it will be a FI, a trustee documented trust and will need to be reported on by the trustees.

Family trust invested with a discretionary manager

A UK-based family holds significant assets within various trust structures.  

The assets are invested on behalf of the trustees with a discretionary fund manager at a well-known financial institution.

These trusts are UK tax resident and therefore subject to UK IGA reporting.  

A determination of FATCA status must be made by the trustees. The trusts are not charitable and therefore not exempt.

The trusts are family trusts and therefore they are not undertaking activities on behalf of customers.  They are managed by a discretionary fund manager who is for the purpose of the FATCA regulations an FI; the trusts are therefore FIs. 

The trustees can register and report the trusts themselves to the IRS, or they can appoint a withholding agent and opt for compliant status.

Alternatively, the existing trustees may consider appointing a corporate trustee, which is an FI, as an additional trustee, thus avoiding the need to register and transferring the responsibility to that trustee. 

The Law Society offers advice for trustees, available via the 'Related links' section on this page.