Following rapidly on the heels of formally signing an Intergovernmental Agreement (IGA) with the United States (June 17 2015), the United Arab Emirates Ministry of Finance issued on July 6 2015, "Guidance Notes on the Requirements of the Intergovernmental Agreement Between the United Arab Emirates and the United States". The Guidance Notes span 173 pages and are a treasure trove of welcome information in the confusing world of FATCA. The Guidance Notes are very comprehensive, and are replete with examples. "Specific" guidance notes are included for certain industries (for example, for the banking sector and the insurance sector etc.); flowcharts and "walk-throughs" are also there. Unfortunately, the links provided in the Guidance Notes were, for the most part, not working. Hopefully, in due course the webpages cited will be available and contain the relevant information.
You can read more here about the history of the UAE's reaction to FATCA and the IGA it signed just last month. The full text of the signed IGA can be found here. Information about financial accounts held by US persons at UAE financial institutions will be sent by the UAE to the IRS pursuant to the IGA on September 15 2015.
Most people are aware of FATCA, the acronym standing for the "Foreign Account Tax Compliance Act." FATCA imposes reporting and withholding obligations on foreign financial institutions and certain other foreign persons in order for the institution itself to avoid a 30 percent US withholding tax on certain US-source payments made to the institution. These foreign financial institutions are referred to as "FFIs" in the Treasury Regulations implementing FATCA, but are referred to as "Financial Institutions" when referenced in an IGA, including the IGA signed by the UAE.
Broadly, an IGA is an agreement entered into between the US and the relevant country, or FATCA Partner. IGAs have been signed in an effort to facilitate compliance with FATCA by Financial Institutions located in countries whose internal laws (e.g., privacy and data protection laws) impose requirements on Financial Institutions that are inconsistent with those imposed by FATCA. IGAs also serve as a method of encouraging other countries to cooperate with the US and to implement FATCA in their own jurisdictions. IGAs contain two annexes: Annex I sets forth due diligence requirements for financial institutions to determine whether their accounts and payments are reportable information and Annex II describes the classes of entities that are not required to report and the products that will not be treated as financial accounts.
Under UAE law, all entities within the UAE should ensure they are compliant with the US-UAE IGA. Certain entities are specifically regulated within the UAE - for example, entities under the regulation of the Central Bank (CB), or Insurance Authority (IA), or the Securities and Commodities Authority (SCA) or the Dubai International Financial Center (DIFC). Such regulated entities have been provided with specific guidance from their respective regulators to assist them with implementing FATCA and meeting their compliance requirements.
Not all entities within the UAE, however, are specifically regulated by an applicable governmental authority. The Guidance Notes together with the US-UAE IGA are available to such "Unregulated Entities" to understand their FATCA compliance requirements. Broadly, such entities will first need to determine whether they are, under the UAE-US IGA a "Financial Institution" or a "Non-Financial Foreign Entity" (NFFE). Following that determination they must comply with the relevant requirements imposed by the US-UAE IGA.
"Financial Institutions" (unless exempt or are "deemed compliant"), have registration, due diligence and reporting requirements that they must fulfil; whereas Non-Financial Foreign Entities, or NFFEs, have far less burdens imposed on them. If the entity is a so-called "Direct Reporting NFFE", it will have registration and reporting requirements to meet. Direct Reporting NFFEs are NFFEs that have decided to report information directly to the IRS instead of identifying their US owners to counterparties. In the UAE context, it is a Passive NFFE that elects to report about its US owners directly to the IRS as opposed to providing such information to the UAE Financial Institution at which it holds an account. The Direct Reporting NFFE will be required to register with the IRS to obtain a so-called "Global Intermediary Identification Number" ("GIIN").
Financial Institutions that have reporting obligations under FATCA will be required to report "reportable information" using the Ministry of Finance's Reporting Portal, which can be accessed here (link not operative at the time of this post). Once a Financial Institution has identified accounts as so-called "US Reportable Accounts", it must report on those accounts (or report that it does not have any such accounts). The UAE IGA allows UAE Financial Institutions to send the information to the UAE Ministry of Finance instead of to the IRS. The UAE Ministry of Finance will, in turn, supply the information to the IRS.
In the case of Regulated Entities in the UAE, the Guidance Notes state that the information should first be provided to the relevant regulator, at the links, below (most links are not working at the time of this post):
Central Bank Services Portal: (private network)
According to the Guidance Notes, these links should (eventually?) contain additional details on reporting, including the account holder details and account information that is required; how to report on joint accounts; how to report on payments to non-participating financial institutions; how to report on recalcitrant accounts; the data format and so on.
While the Guidance Notes cover volumes of information, one of the most frequently asked questions is whether a particular entity operating in the UAE is a "Financial Institution" for purposes of the IGA. IGAs (like FATCA) generally subject Financial Institutions to significantly higher compliance burdens than NFFEs. A NFFE generally includes a foreign entity that is not engaged in banking or investment management business activities. The basic task for the NFFE under the US-UAE IGA, especially a so-called "Passive" NFFE, is to look for and determine if it has any U.S. "Controlling Persons" (any natural person owning or having direct or indirect control of more than 25% of the entity). The FATCA mandate is met by the NFFE by completing Form W8BEN-E, or equivalent form certifying its FATCA-status to US withholding agents or foreign financial institutions with whom it maintains accounts.
The issue of what constitutes a Financial Institution under the UAE-US IGA is explored below.
The UAE IGA will apply to: a) Financial Institutions, as defined, that are organized under the laws of the UAE; and b) branches, located in the UAE, of non-UAE Financial Institutions. It will not apply to branches of UAE Financial Institutions that are located outside of the UAE. For these purposes, "organized under the laws of the UAE" means for a company, that the company is incorporated in the UAE; for a partnership, the partnership must be established in the UAE.
An entity will be a UAE "Financial Institution" if it is one of the following types:
means any entity that accepts deposits in the ordinary course of a banking or similar business. Depository institutions are usually banks or similar institutions. An entity is not considered to be engaged in a banking or similar business if it solely provides asset based finance services or accepts deposits solely from persons as collateral or security pursuant to a sale or lease of property, a loan secured by property, or pursuant to similar financing arrangements between that entity and the person making the deposit. The following would not be expected to fall within the definition of Depository Institution: o Insurance brokers o Attorneys at law o Factoring or invoice discounting businesses o Entities that complete money transfers by instructing agents to transmit funds
means any entity that holds, as a "substantial portion" of its business, financial assets for the account of others. Custodial institutions can include custodial banks, trust companies or brokers, in certain circumstances. An entity will hold financial assets for the account of others as a "substantial portion" of its business if its gross income attributable to the holding of financial assets and related financial services equals or exceeds 20 percent of its total gross income over, in general terms, a specified 3-year period (or over the period that the entity has been in existence, if that is less than 3 years). The relevant three year period is the entity's accounting period.
The term "income attributable to holding financial assets and related financial services" means custody, account maintenance, and transfer fees; commissions and fees earned from executing and pricing securities transactions; income earned from extending credit to customers with respect to financial assets held in custody by the entity (or acquired through such extension of credit); income earned on the bid-ask spread of financial assets; fees for providing financial advice with respect to financial assets held in (or potentially to be held in) custody by the entity; and fees for clearance and settlement services. An" execution only" broker that simply executes trading instructions, or receives and transmits such instructions to another executing broker, will not hold assets for the account of others and should not be a custodial institution (although it is possible that it could be an investment entity). Entities that only provide advice, do not hold, and will not hold financial assets; and therefore have no financial accounts should not be treated as custodial institutions. As noted above, the term "income attributable to holding financial assets" from financial assets is limited to providing financial advice with respect to financial assets held in (or to be held in) custody by the entity.
means any entity that: i. primarily conducts a business (or is managed by an entity that conducts a business) of one or more of the following activities or operations, for or on behalf of a customer:
trading in money market instruments (such as checks, bills, certificates of deposit and derivatives), foreign exchange, interest rate and index instruments, transferable securities or commodity futures trading;
ii. the gross income of which is primarily attributable to investing, reinvesting, or trading in financial assets, if the entity is managed by another entity that is a Depository Institution, a Custodial Institution, a Specified Insurance Company or an investment entity described earlier. Investment entities can include investment funds and other fund structures, in certain circumstances. Generally, entities that are professionally managed will be treated as Investment Entities because its managing entity is an Investment Entity.
means any insurance company (or the holding company of such insurance company) that issues (or writes) or is obliged to make payments in respect of a Cash Value Insurance Contract or an Annuity Contract.
"Insurance company" means (under the Treasury regulations) an entity or arrangement:
that is regulated as an insurance business under the laws, regulations, or practices of any jurisdiction in which the company does business;
the gross income of which (for example, gross premiums and gross investment income) arising from insurance, reinsurance, and annuity contracts for the immediately preceding calendar year exceeds 50 percent of total gross income for such year; or
the aggregate value of the assets of which associated with insurance, reinsurance, and annuity contracts at any time during the immediately preceding calendar year exceeds 50 percent of total assets at any time during such year.
In accordance with Article 4 paragraph 7 of the UAE IGA, the UAE permits Financial Institutions to use a definition in the FATCA Regulations in lieu of a corresponding definition in the UAE IGA, provided that such application would not frustrate the purposes of the UAE IGA.Back to Articles Back to Virginia La Torre Jeker J.D.
The information provided in this article is for general information purposes only. The information is not intended to be comprehensive or to include advice on which you may rely. You should always consult a suitably qualified professional on any specific matter.
Virginia La Torre Jeker J.D.
Virginia La Torre Jeker J.D., is based in Dubai. Virginia has been a member of the New York Bar since 1984 and is also admitted to practice before the United States Tax Court. She has over 30 years of experience specializing in the international aspects of US tax, including FATCA. She has been quoted in the New York Times and Newsweek, and is regularly quoted in many local news articles and publications."
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