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What Is FATCA, and How Do Captives Handle It?

Accounts Filing Forms-SF
January 18, 2017

By P. Bruce Wright, M. Kristan Rizzolo, Saren Goldner, and Christopher W. Schoen
Sutherland Asbill & Brennan LLP

"FATCA" refers to the Foreign Account Tax Compliance Act, which was enacted as part of a larger piece of legislation by Congress in 2010 to improve reporting with respect to non-US assets and income of US persons. The FATCA provisions as implemented by comprehensive final and temporary Treasury Regulations and a variety of intergovernmental agreements ("IGAs") between the United States and other countries became partially effective in 2014, while some provisions have yet to become effective.

FATCA is an information reporting regime imposed by the United States on all non-US entities. The provisions operate to encourage compliance with US information reporting requirements by imposing a withholding tax on those that fail to comply. The provisions are extremely complex and were primarily targeted at financial institutions. This article provides only a high-level overview of the provisions as they relate to captive insurance companies. 

In very basic terms, the rules provide that a captive insurance company must collect information from those persons to whom it makes certain US source payments (i.e., withholdable payments) (in this situation, the captive acts as a "withholding agent"). Additionally, captives must provide information to (i) those persons who make withholdable payments to it or (ii) a financial institution when opening an account. This information is generally provided by the completion of either a Form W-9 or a Form W-8BEN-E.

US Captives

US captives, when requested to provide such forms, merely need to provide a Form W-9 indicating that they are US persons. In this context, "US captives" includes any non-US captive that has made an election under Internal Revenue Code (IRC) section 953(d) to be characterized as such for US federal income tax purposes. Accordingly, a US captive's primary concern relates to its role as a withholding agent, which is discussed below. 

Non-US Captives

With respect to non-US captives, the FATCA rules provide for two different regimes depending on the status of the non-US recipient of a US source payment. There is one regime that would apply to captives characterized as foreign financial institutions ("FFIs") and another that would apply to all other non-US captives, or nonfinancial foreign entities ("NFFEs"). Most non-US captives will be characterized as NFFEs. A non-US captive will be characterized as an FFI only if the captive issues "cash value policies" (e.g., life insurance or annuity policies). Unless subject to a Model 1 IGA,1 any captive that issues such policies and is characterized as an FFI on account of its status as a "specified insurance company" will have to enter into an agreement with the Internal Revenue Service (IRS) whereby the FFI agrees to conduct due diligence efforts and report certain information to the IRS on an annual basis with respect to the US owners of its cash value policies. Such FFI captives will also have to register on the IRS portal and obtain a global intermediary identification number (GIIN).

The non-US captives characterized as NFFEs typically will be characterized as "passive NFFEs" or "excepted NFFEs." An NFFE is "excepted" if it is part of a publicly traded2 affiliated group, with the affiliation requirement being 50 percent ownership by vote and value. Other than in their role as withholding agents, excepted NFFEs need merely to report this status on a Form W-8BEN-E when requested to do so in connection with receiving certain US source payments or with opening an account at a financial institution.

For passive NFFEs, the requirements are a bit broader. They must determine if they have substantial US owners (generally, "specified" US persons3 that own, directly or indirectly, more than 10 percent of the vote or value4 of the NFFE) and must either report information with respect to such persons on the Form W-8BEN-E or elect to become "direct reporting" NFFEs and report the information directly to the IRS on a Form 8966. Direct reporting NFFEs indicate on the Form W-8BEN-E that they are excepted NFFEs, and as part of the direct reporting process, must register with the IRS to obtain a GIIN.

FATCA Obligations as Withholding Agents

With respect to their obligations as withholding agents, all captives (US and non-US) must consider whether they are making payments that are characterized as withholdable payments. The initial starting place to determine whether a payment is a withholdable payment is to determine if it is a US source payment. Generally, payments made by US entities are US source payments and those made by non-US entities are treated as non-US source payments under the US source rules because most payments such as dividends and interest are sourced to the residence of the payor.  Although generally the US source rules determine source by reference to the residence of the payor, some source rules may determine source on different bases. For example, payments for compensation for services performed in the United States are treated as US source payments; royalty payments are sourced according to the place of use so that a royalty paid for the use of a patent, a copyright, or other intangible property in the United States would be treated as US source income; and insurance premiums paid for coverage of US risks will be characterized as US source.  

In general, US source payments of fixed or determinable annual or periodic income ("FDAP") as described in Treasury Regulation section 1.1441–2(b)(1) with certain modifications are characterized as withholdable payments. There are certain exceptions; for example, payments for nonfinancial services and for the use of property are excluded nonfinancial payments. Although not effective yet, there also are rules that treat payments of gross proceeds as withholdable payments.

In addition to collecting W-8BEN-Es from entities to which they make withholdable payments, withholding agents must also report annually on Form 8966 any substantial US owners that are reported on the Forms W-8BEN-E that they receive.  

P. Bruce Wright, M. Kristan Rizzolo, and Saren Goldner are partners and Christopher W. Schoen is counsel in the tax department of the law firm Sutherland Asbill & Brennan LLP. Mr. Wright and Ms. Goldner are located in New York, and Ms. Rizzolo and Mr. Schoen are located in Washington.


  1. Under a Model 1 IGA, the US and the other country that is a party to the IGA agree that the US FATCA reporting rules will not apply to FFIs in the other country.  Instead, the other country agrees to adopt local reporting rules for FFIs and to provide the information collected to the IRS.
  2. There are specific requirements that must be met to be characterized as publicly traded.
  3. Certain US persons, such as publicly traded corporations or their more than 50 percent affiliates, are not "specified" US persons.
  4. For purposes of determining whether the 10 percent threshold has been met, all "related" direct or indirect owners must be aggregated.

Copyright © 2017, International Risk Management Institute, Inc.

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