Application of Fatca on financial institutions in the UAE

Usually, depository institutions like banks, custodial institutions like mutual funds, investment entities like hedge funds or private equity funds, and certain types of insurance companies that have cash value products or annuities are required to comply with the Fatca



Once considered as deemed-compliant or exempt, there would not be too much hassle of work which will reduce cost and will have less burden on the team. — File photo
Once considered as deemed-compliant or exempt, there would not be too much hassle of work which will reduce cost and will have less burden on the team. — File photo

By Mahar Afzal/Compliance Corner

Published: Sun 27 Mar 2022, 3:20 PM

In our previous article, we discussed that the Foreign Account Tax Compliance Act (Fatca) was introduced by the United States (US) in 2010 to curb tax evasion. Unless exempt and deemed compliant, Foreign Financial Institutions (FFIs) are required to report information about financial accounts held either by the specified US person or Non-Financial Foreign Entities (NFFEs) in which specified US persons have a substantial ownership interest.

Usually, depository institutions like banks, custodial institutions like mutual funds, investment entities like hedge funds or private equity funds, and certain types of insurance companies that have cash value products or annuities are required to comply with the Fatca.

To implement Fatca effectively, the US has signed Intergovernmental Agreements (IGA) with the UAE (US-UAE IGA) in 2015 and 112 other jurisdictions. Under the UAE law, all entities within the UAE should comply with the US-UAE IGA, and the entities can be classified into (i) Financial Institutions (FIs); and (ii) NFFEs. FIs can further be categorised into (i) Reporting FIs, and (ii) Non-reporting FIs.

The Reporting FIs, regulated by the respective regulatory authority like DIFC, ADGM, Central Bank of UAE etc, are called the regulated FIs. Such FIs are supported by the respective regulatory authority to comply with Fatca. Others reporting FIs that are not being managed by any specific regulatory authority are called unregulated FIs and supported by the Ministry of Finance (MoF) in Fatca compliance.

Annexure-II of the US-UAE IGA deals with exempt and deemed compliant FIs, and it has been categorised into four classes:

Exempt beneficial owners: Other than funds

The government entity, international organisation and central bank are the exempt beneficial owners from Fatca other than related to a payment derived from an obligation held in connection with a commercial financial activity of a type engaged in by a specified insurance company, custodial institution, or depository institution.

The government entities include the government of the UAE, any political subdivision of the government like emirates which are an integral part of the government and any government-controlled entity, and all these are exempt from Fatca compliance.

For the controlled entity, the entity must be wholly owned and controlled by one or more UAE governmental entities directly or through one or more controlled entities. Such entity’s earnings are credited to its account or in the account of any government entity, and at the time of dissolution, all its assets will vest to any government entity.

Exempt beneficial owners: Funds

The entities like broad and narrow participation retirement funds, pension funds of beneficial owners, and investment funds wholly owned by the exempt beneficial owners, fall under this category and are exempt from Fatca compliance.

Narrow participation retirement funds are different from the broad participation retirement funds, and the key factors are that such narrow participation retirement funds have fewer than 50 participants, and nonresident partners are not entitled to more than 20% of the fund’s assets.

Deemed Compliant: Small or Limited Scope FIs

This deemed compliant category comprises financial institutions with a local client base, local banks, financial institutions with only low-value accounts, and qualified credit card issuers. Such FIs have a local presence, or the value of the accounts is very low. Each FIs under this section has specific conditions to comply to be classified under deemed compliant.

Deemed Compliant: Investment Entities

This category includes the trust established under the laws of the UAE to the extent that the trustee of the trust is a reporting US FI, Sponsored investment entity and controlled foreign corporation, sponsored, closely held investment vehicle, investment advisors and investment managers, and collective investment vehicle. Each category under this section has a lot of conditions to fulfil before they classify as deemed compliant.

Non-reporting FIs are generally not required to report information to the UAE; however, they must provide properly completed US tax forms or self-certifications to withholding agents to avoid withholding on US sources payments to them.

Once considered as deemed-compliant or exempt, there would not be too much hassle of work which will reduce cost and will have less burden on the team.

Certain saving accounts, life insurance contracts having certain terms, accounts held by an estate, escrow accounts and partners jurisdiction accounts are excluded from the definition of financial accounts and therefore not to be reported by the respective reportable FIs.

Mahar Afzal is a managing partner at Kress Cooper Management Consultants. The above is not an official but a personal opinion of the writer. For any queries/clarifications, please write to him at compliance@kresscooper.com.


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