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COLUMN – More on the rules of FATCA

SOSUEME-1We conclude our examination of the provisions of the agreement between the government of the United States and the Government of Barbados to improve international tax compliance and to implement FATCA (the Foreign Account Tax Compliance Act).

Pursuant to the provisions of Annex II to the above-mentioned treaty, there are a number of financial institutions which are or may be exempt or deemed to have complied with the provisions of the act by virtue of certain criteria. Where the usual customers of a financial institution are predominantly local they will be deemed as being compliant for FATCA purposes where:

(1) they are licensed under Barbados laws;

(2) they do not have a fixed place of business outside of Barbados which is open to the public;

(3) they must not solicit business outside of Barbados and specifically must not target or solicit United States customers. Advertisements and websites do not constitute solicitation of such customers;

(4) they must be subject to local reporting requirements with respect to withholding tax;

(5) at least 98 per cent of their accounts must be held by Barbadian resident individuals or entities;

(6) they must have due diligence policies and procedures in place on or before July 1, 2014, for the identification of accounts held by US resident individuals or entities. Pre-existing accounts must be reviewed; and

(7) they must not have policies which discriminate against opening or maintaining accounts for persons who are specified United States persons resident in Barbados.

Local banks, credit unions and non-profit cooperative societies can be exempt under the provisions of Clause B of Annex II of the agreement. The preconditions for exemption in this case are:

(1) licensing and registration under the laws of Barbados;

(2) primary business must be holding of deposits and making loans to retail customers and particularly in relation to a credit union, no individual must be entitled to more than a five per cent interest;
(3) non-solicitation of foreign customers and any website must not permit the opening of a financial account;

(4) assets must be less than $175 million as evidenced on the balance sheet  and any group of which the institution forms a part should not have more than $500 million on their combined balance sheets; and

(5) all related companies in the grouping must have been incorporated in Barbados with the exception of retirement funds.

There is also a reporting exemption for financial institutions which are not engaged in investment business, have no more than $50 million in assets and no individual account holds more than $50,000. Credit card companies are also exempt where deposits are only accepted when the customer pays his bill and where policies have been implemented to prevent deposits of more than $50,000 at any one time, excluding merchandise returns and disputed charges.

The exemption requirements for investment entities are somewhat convoluted and in any event pertain to entities such as trusts and foreign partnerships with sponsoring entities. In such cases the individual client is not involved and it is highly advisable for persons in this area to consult with a trained financial adviser or attorney at law. The space constraints
of this article do not allow for examination but the treaty is available online and the relevant information is contained in Clause IV of Annex II.

Retirement and pension accounts (outside of the funds dealt with in last week’s article) are exempt where:

(1) the account is deemed a personal account for the provision of retirement, pension, death or disability benefits;

(2) the account is subject to no or a favourable rate of tax;

(3) annual reporting to Barbados Revenue Authority is required;

(4) withdrawals may only be made in limited circumstances and any other withdrawals, where permitted, are subject to penalties;

(5) annual contributions must be less than $50,000 annually or no more than $1 million over the course of a lifetime. Other non-retirement savings accounts can be exempted in the same circumstances, save and except that withdrawals must be limited to the purpose for which the account is held, for example, education, medical costs, etcetera.

Term life insurance, where the policy coverage terminates before the age of 90 years and there is no cash value which can be withdrawn other than as a death benefit to the beneficiary are exempt as are accounts held on behalf of a deceased person’s estate where a copy of the will or death certificate forms part of the file held in relation to the account.

Last, but by no means least, escrow accounts held pursuant to a court order or judgment, by a financial institution for withheld taxes, to facilitate payment of a mortgage and related payments, or in relation to the transfer of property are exempt or deemed compliant. In the case of property related escrow accounts the following conditions must be satisfied:

(1) the account must be funded solely with money relating to the transaction;

(2) the purpose of the account is solely to secure the payment of the purchase price or damages to leased property;

(3) the funds may only be distributed on the sale lease, etcetera of the property;

(4) the account is not a margin account offered by brokers to allow investors to borrow money to purchase securities; and

(5) the account is not associated with a credit card account.

Hopefully when your financial institution waves another form at you, you will know what to do with it.

(Alicia A. Archer is an attorney-at-law.)

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