The push by the IRS to persuade countries around the world to get onboard with the Foreign Account Tax Compliance Act (“FATCA”) has been quite successful. As part of the Hiring Incentives to Restore Employment Act of 2010, FATCA requires bank and financial institutions to disclose U.S. assets being held outside the U.S. on behalf of U.S. taxpayers. Currently, over 70 countries and 77,000 banks and financial institutions have now registered under FATCA. Banks and financial institutions that fail to comply may be frozen out of U.S. markets since a 30% withholding tax penalty will be imposed on payments of U.S. source income to these foreign institutions.

Foreign holding companies formed as an integral part of global structuring strategies may be declared a foreign financial institution, based on private equity investments, and therefore would be required to register and comply with disclosure requirements. Each foreign financial institution will be required to comply with FATCA even if it has no U.S. investors or invests in U.S. markets. FATCA Regulations obligates the foreign financial institution to identify its investors or account holders, and if any are “specified U.S. persons” defined as U.S. citizen, U.S. resident, domestic corporation, or trust. As a U.S. taxpayer with investments in foreign financial institutions, including possibly foreign holding companies, you will no doubt have received a request for completion of a declaration, whether from a foreign financial institution or from the holding company local registered agent.

The information required to be disclosed includes, account numbers, balances, and identification of the U.S. taxpayer. The U.S. taxpayer with a foreign bank account with a value of over $10,000 must also disclose the particulars of the account and any assets held each year.

U.S. taxpayers can still comply with FATCA regulations by participating in the Offshore Voluntary Disclosure Program and be willing to reopen up to 8 previous tax years, paying taxes, interest and penalties. Foreign banks, including Credit Suisse and UBS are still recovering from steep fines and penalties for failure to disclose assets held by U.S. taxpayers. Foreign banks and foreign registered agents will be expected to disclose to remain in compliance with FATCA or face increased scrutiny, fines and penalties, potentially closing off the market to U.S. customers. Moving forward foreign banks and foreign financial institutions will have more stringent due diligence requirements to open accounts, form companies and purchase assets.

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