Becoming law in March 2010, the Foreign Account Tax Compliance Act (FATCA) was introduced by the current administration as a way to target non-compliance by U.S. taxpayers with foreign accounts. FATCA focuses on reporting, and specifically:
by U.S. taxpayers about certain foreign financial accounts and offshore assets, and
by foreign financial institutions about financial accounts held by U.S. taxpayers or foreign entities in which U.S. taxpayers hold a substantial ownership interest.
The objective of FATCA is the reporting of foreign financial assets; withholding is the cost of not reporting.
The good news for offshore captives is that those who elect to be U.S. taxpayers under Section 953(d) will now be treated as U.S. companies for FATCA purposes.
Section 953(d) electing companies should not need to provide different withholding forms to withholding agents based on their Section 953(d) election and FATCA requirements. Form W-9 should be the only form required.
In certain circumstances, FATCA may still impact Section 953(d) electing companies. When making a withholdable payment to a foreign person, Section 953(d) electing companies will be required to obtain appropriate FATCA documentation from the payee or withhold 30% on the payment. An example would be reinsurance premiums paid to a non-U.S. reinsurance company.
It is important that the offshore captive’s investment brokers understand the withholding and reporting of U.S. federal income tax on dividend payments from the U.S. Any oversight may lead to various interest and penalties.
Certain types of U.S. source income, such as interest and dividends, paid to foreign insurance companies are subject to U.S. federal income tax. This tax is required to be withheld at the source of payment. The usual rate of this withholding tax is 30% from the gross amount paid to the foreign insurance company, unless it establishes that it has made a Section 953(d) election, in which case no withholding is required. The withholding agent (i.e. broker, bank, etc.) is responsible for withholding on the payments made to the foreign insurance company.
The withholding agent is personally liable for any tax that is required to be withheld. This withholding tax is independent of the tax liability of the foreign insurance company. If the withholding agent fails to withhold and the foreign insurance company fails to satisfy its U.S. tax liability, then both the withholding agent and the foreign insurance company are liable for the tax, as well as any interest and penalties. If the foreign insurance company satisfies the U.S. tax liability, the withholding agent is not liable for the tax but remains liable for the interest and penalties for failure to withhold.
For 953(d) electing companies, the withholding agent is provided a W-9, and therefore no withholding is due.
For non-953(d) electing companies, the withholding agent will be provided the Form W-8BEN and should withhold 30% on any U.S. source dividends paid to the foreign insurance company. U.S. source interest should generally be subject to 0% withholding. It is to be noted that this withholding tax is separate and distinct from FATCA withholding.
As an insurance manager, Atlas Insurance Management works with investment managers to ensure that the correct form is filed. Atlas works with a number of qualified tax advisors and can make referrals for additional advice on this subject.