Updated on January 27, 2016:
|The US Treasury definition of a Non-Participating Foreign Financial Institution:
“The term non-participating FFI means an FFI other than a participating FFI, a deemed-compliant FFI, or an exempt beneficial owner.”
Note: there are important variations in IGA jurisdictions that in effect prevent classifying an FFI as “Non-Participating” until the “significant the non-compliance” process has been followed. This process will take more than 18 months to complete.
For example, here is a quote from the UK Inter-Governmental Agreement. Article 4, Section 1:
“Notwithstanding the foregoing, a Reporting United Kingdom Financial Institution with respect to which the conditions of this paragraph are not satisfied shall not be subject to withholding under section 1471 of the U.S. Internal Revenue Code unless such Reporting United Kingdom Financial Institution is identified by the IRS as a Non-participating Financial Institution pursuant to subparagraph 2(b) of Article 5″
This would imply that under this particular Inter-Governmental Agreement, in this particular Jurisdiction, in order to apply withholding, the US Internal Revenue Service has to actually identify the Reporting UK FI as Non-participating.
Further, article 5(2) of the IGA reads:
Significant Non-compliance. a) A Competent Authority shall notify the Competent Authority of the other Party when the first-mentioned Competent Authority has determined that there is significant non-compliance with the obligations under this Agreement with respect to a Reporting Financial Institution in the other Jurisdiction. The Competent Authority of such other Party shall apply its domestic law (including applicable penalties) to address the significant non-compliance described in the notice. b) If, in the case of a Reporting United Kingdom Financial Institution, such enforcement actions do not resolve the non-compliance within a period of 18 months after notification of significant non-compliance is first provided, the United States shall treat the Reporting United Kingdom Financial Institution as a Non-participating Financial Institution. The IRS shall make available a list of all Reporting United Kingdom Financial Institutions and other Partner Jurisdiction Financial Institutions that are treated as Non-participating Financial Institutions pursuant to this paragraph.
This means that in the UK, that a Foreign Financial Institution can not be “Non-participating” until that Foreign Financial Institution has been formally identified by HMRC (the local Competent Authority) as in “Significant Non-compliance”, local law has been applied, 18 months have elapsed without a satisfactory resolution and following completion of this process that the US Internal Revenue Service ‘make available a list’ that identifies the Foreign Financial Institution in question as Non-participating.
4.3.2 Procedures for Significant Non-Compliance: 22.214.171.124 In General: Under Article 5(2) of the IGA, the receiving Competent Authority would notify the providing Competent Authority when the receiving Competent Authority has determined there is significant non-compliance with the obligations under the IGA with respect to a Reporting Financial Institution. After such notification of significant non-compliance from the receiving Competent Authority, the providing Competent Authority would apply its domestic laws (including applicable penalties) to address the significant non-compliance described in the notice. The Competent Authorities may consult on the steps needed to address such non-compliance. If the U.S. Competent Authority were to notify the United Kingdom Competent Authority of a determination of significant non-compliance, the date on which notification was provided to, and received by, the United Kingdom Competent Authority (per Paragraph 3.3.4) would constitute the beginning of the eighteen (18) month period set forth in Article 5(2)(b) of the IGA. 126.96.36.199 Notice to Reporting United Kingdom Financial Institution: The United Kingdom Competent Authority should notify the relevant Reporting United Kingdom Financial Institution of the significant non-compliance determination, including the date the U.S. Competent Authority provided notice of such non-compliance to the United Kingdom Competent Authority (per Paragraph 3.3.4). The notice should also indicate that if the significant non-compliance is not cured within eighteen (18) months after the date the U.S Competent Authority provided notice to the United Kingdom Competent Authority, the relevant Reporting United Kingdom Financial Institution may be treated as a Nonparticipating Financial Institution, its name may be removed from the IRS FFI list, and it may, therefore, be subject to 30-percent withholding under section 1471(a) of the U.S. Internal Revenue Code.
On September 2015, HMRC released Guidance Notes:
Section AEIM 103360 states:
If the Account Holder entity falls within the definition of a financial institution then where it is a financial institution, wherever resident for DAC/CRS or CDOT reporting or a UK or partner jurisdiction financial institution for FATCA reporting, no further review, identification or reporting will normally be required. The exception to this under the FATCA regime is where there is significant non-compliance by the financial institution which has not been rectified. In such circumstances the entity will be classified as a non-participating financial institution. Where the financial institution is a non-participating financial institution for FATCA, then reports on certain payments made to such entities will be required.
So there you have it, an FI can only be “Non-Participating,” in the UK, after “Significant Non-Compliance”. The “Significant Non-Compliance” process takes at least 18 months. FATCA became effective on July 1, 2014. Hence, it is not possible to have an NPFFI in the UK during 2015.
One caveat, it is possible for a UK FI to self-certify to “Non-participating” status. However, this would be tantamount to a declaration not to comply with local law. Such a declaration, if deliberate, ought to trigger a judicious process for offboarding. Very few banks have a risk appetite that would include openly maintaining and onboarding accounts for those who declare an intention not to participate.
UK HMRC FATCA Guidance (Paragraph 02.05): Non-Participating Financial Institutions (NPFIs):
A Non-Participating Financial Institution (NPFI) is a Financial Institution that is not FATCA compliant. This non-compliance arises either where:
- the Financial Institution is located in a jurisdiction that does not have an Intergovernmental Agreement with the US, and the Financial Institution has not entered into a FATCA Agreement with the IRS, or,
- the Financial Institution is classified by the IRS as being an NPFI following the conclusion of the procedures for significant non-compliance being undertaken. In this case, a UK Financial Institution will only be classed as an NPFI where there is significant non-compliance with the UK legislationand, after a period of enquiry, that non-compliance has not been addressed to HMRC’s satisfaction. In such circumstances, the UK Financial Institution’s details may be published electronically by the IRS and the Financial Institution will cease to be covered by the Agreement.
For further details about how to comply with the UK, legislation see Section 10.
Also see Rule Map