Application of FATCA on Non-Financial Foreign Entities [NFFEs]

As we discussed in our previous article, to implement the Foreign Account Tax Compliance Act (‘FATCA’) effectively, the United States (‘US’) has signed Intergovernmental Agreements (‘IGA’) with the United Arab Emirates (‘US-UAE IGA’) in 2015 and 112 other jurisdictions. Under the UAE Law, all entities within the UAE are required to comply with the US-UAE IGA, and the entities can be classified into (i) Financial Institutions (‘FIs’); and (ii) Non-Financial Foreign Entities (‘NFFEs’).

?We have already discussed in detail which FIs are subject to FATCA, and which are exempt or deemed compliant. In this article, we have covered the impact of FATCA on NFFEs, which can further be categorized into (i) Active NFFEs and (ii) passive NFFEs. Active NFFEs are not generally reportable but passive NFFEs controlled or managed by the US person are reportable.

?The NFFEs generally include entities that are not in the banking sector, investment sector and insurance sectors as these have been covered under the definition of FI. The core concept of NFFEs is to identify entities that are neither US entities nor FIs as defined in the US-UAE IGA.

?Active NFFEs are the NFFEs that are not earning passive income and their assets are not used to earn passive income. Passive income includes the income from rent, interest, dividends and any other income, which is earned without involving any extra effort. We can conclude that the NFFEs that we earn income by doing extra efforts are called active NFFEs.

?More precisely as given in the US-UAE IGA, if any of the following criteria is fulfilled NFFE will be considered active NFFE.

1. Less than 50% of its gross income for the preceding year is passive income and less than 50% of assets are being held to produce passive income
2. Public listed company or related party of a public listed company
3. Entity is organized in the US and all the owners are residents of the US
4. The NFFE is a government (other than the US government), an entity that is an integral part of the government like any emirate, government bodies providing government functions, international organization, or any entity wholly owned by any of the above.
5. The NFFE has substantial activities of holding outstanding stock and providing financing and services to subsidiaries that are engaged in trade/business other than the business of FI except that an entity shall not qualify for NFFE status.
6. The NFFE is a new non-operating business but invests capital into assets with the intent to operate a business (this criterion will not apply after the first 2 years of the initial organization of the NFFE).
7. The NFFE was not a FI in the past 5 years and reorganizing with the intent to continue operation, not as a FI.
8. The NFFE primarily engages in financing and hedging transactions only with, or for, Related Entities that are not FIs.
9. The NFFE is an “excepted NFFE” as described in relevant U.S. Treasury Regulations.
10. Any NFFE that meets all the following requirements:

• It is established and operated in its jurisdiction of residence exclusively for specified non-profit purposes (such as religious or charitable organizations, chambers of commerce, or civic leagues).
• The NFFE is exempt from income tax in its jurisdiction of residence
• It has no shareholders or members who have a proprietary or beneficial interest in its income or assets.
• The laws of the jurisdiction where NFFE is resident, don’t permit any income or assets to be used or applied for the benefit of a person or non-charitable entity with some exceptions.
• The laws of the jurisdiction where NFFE is resident require that upon liquidation or dissolution all its assets are distributed to the government or its political subdivision, governmental entity, or other non-profit organization.

Suppose any of the above conditions are being fulfilled. In that case, it will be considered “active NFFE”, and active NFFE is not required to register on the Internal Revenue Service (‘IRS’) website. Still, they must submit the self-certification form to avoid withholding on the US source payments.

A “Passive NFFE” means any NFFE that is not (i) an active NFFE or (ii) a withholding foreign partnership or withholding foreign trust according to relevant US Treasury Regulations. A passive NFFE can further be classified as (i) direct reporting passive NFFE and (ii) non-direct reporting passive NFFE.

?All passive NFFEs must identify and exchange information about their substantial US owners and/or controlling persons who are the specified US persons. Direct reporting passive NFFE provides information directly to the IRS. They are required to register on the IRS site and provide information directly to the IRS, while non-direct reporting passive NFFE reports information to the local FIs.

?Its recommended to assess the status of your entity, and fulfil the compliance requirement accordingly to avoid further complications.

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?[email protected].