•is engaged or holds itself out as

•is engaged or holds itself out as being engaged
primarily in the business of investing, reinvesting,
or trading in securities, partnership interests, commodities,
or any interest in securities, including a
futures or forward contract or option, such as mutual
funds, funds of funds, exchange-traded funds,
hedge funds, private equity and venture capital
funds, other managed funds, commodity pools,
foundations, and other investment vehicles;
•insurance companies that make payments with respect
to certain contracts that are treated as financial
accounts.
REPORTING BY FOREIGN
RETIREMENT PLANS
Given the broad definition of FFI, foreign retirement
plans that are funded and hold investment assets
are at risk of being characterized as FFIs. In addition,
if captive insurance entities have been established to
hold financial assets, such assets may also implicate
the FFI definition. The drafters of the FATCA regulations
clearly contemplated that foreign retirement
plans would initially be classified as FFIs, but provided
the following six exemptions:
1. ‘‘Broad participation’’ retirement plans: plans
that are established to provide retirement income (or
death/disability benefits) to plan participants. In order
to qualify for the broad participation exemption a foreign
retirement plan must meet a series of requirements,
including the following:
a. the plan has more than one beneficiary and
one beneficiary does not have more than
5% of the plan assets;
b. the plan is subject to government regulation
in the jurisdiction in which the plan is
established;
c. the plan provides annual reporting information
about its participants to the local
tax authorities in the jurisdiction in which
the plan is established; and
d. the plan meets one of the following:
i. the fund receives at least 50% of its
total contributions from the sponsoring
employers;
ii. the distributions or withdrawals from
the plan are allowed only upon retirement,
death, or disability, or penalties
apply to distributions or withdrawals
not made upon retirement, death, or
disability;
iii. the plan is generally exempt from
taxation on its investment income
under the laws of the relevant jurisdiction
in which the plan is established;
iv. contributions by employees are limited
to earned income or may not
exceed $50,000 annually.
2. ‘‘Narrow participation’’ retirement plans. Like
the broad participation exemption above, the narrow
participation exemption applies to foreign retirement
plans that are designed to provide only retirement,
disability, or death benefits to its beneficiaries. In order
to qualify for this exemption a foreign retirement
plan must meet the following requirements:
a. the plan has fewer than 50 participants;
b. the plan is sponsored by one or more employers
that are not investment entities or
passive non-financial foreign entities;
c. employee and employer contributions to
the plan are limited to earned income and
the employee’s compensation;
d. nonresident participants of the jurisdiction
in which the plan is established are not
entitled to more than 20% of the plan’s
assets;
e. the plan is subject to regulation in the jurisdiction
in which it has been established;
and
f. the plan is required to report information
about its participants to the relevant jurisdiction’s
tax authorities.
3. Retirement programs covered by a tax treaty.
This exemption applies to a fund that is generally exempt
from taxation on U.S.-source income under a tax
treaty with the United States. The specific retirement
plan must meet all the conditions prescribed under the
tax treaty for the tax relief.
4. Retirement plans similar to a U.S. qualified plan.
There is an exemption for a foreign retirement plan
that meets the conditions of §401(a) and qualifies for
tax-favored status.
5. Investment vehicles exclusively for retirement
funds. This exemption applies to a fund that is established
only to earn income for other exempt retirement
funds.
6. Tax-favored retirement and savings accounts.
This exemption applies to an account that is registered
or regulated under the laws of the local country and is
a tax-favored plan in that country.
In many cases, the above exemptions are helpful
and the foreign retirement plan can clearly qualify for
one of the above exemptions and simply indicate such
Tax Management International Journal
2 2014 Tax Management Inc., a subsidiary of The Bureau of National Affairs, Inc.
ISSN 0090-4600
status on the new Form W-8BENE. However, in practice,
it has been seen that plans may not strictly meet
the above exemptions due to missing one or more of
the stated requirements. For example, a foreign jurisdiction
may not require any sort of annual reporting
by the plan. In general, any foreign retirement plan
should be reviewed in light of the FATCA requirements
to determine whether exemptions are available.
An initial list of questions is included in Exhibit A.
Note that whether a U.S. person participates in the
plan is not a relevant factor.
In addition to the exemptions provided by the
FATCA regulations, there may be additional exemptions
useful for retirement plans in an intergovernmental
agreement (IGA), which is an agreement between
the United States and a foreign country relating
to the implementation of FATCA. For example, the
IGA with the United Kingdom provides an exemption
for certain U.K. tax-approved retirement plans and
U.K. tax-approved equity compensation plans so that
the plan balances and equity awards are not treated as
financial accounts for purposes of the FATCA rules,
including the participant reporting discussed in the
next section.
Exhibit B sets out the current list of IGAs by Model
type. Most of the IGAs are classified as a Model 1
type, which provides that FFIs report the relevant information
to the tax authorities in their own jurisdiction,
which then exchange the information with the
IRS. Model 2-type agreements provide for direct reporting
to the IRS by FFIs.
The challenge remains that, if no exemption is ultimately
available, the registration process for FATCA
is generally not appropriate for retirement plans because
it was designed for financial institutions and the
requirements specifically focus on review of customer
accounts.
FATCA withholding became effective on July 1,
2014, with certain transitional exemptions. In addition,
given the substantial burdens raised by the
FATCA review and registration process, the IRS announced
in Notice 2014-33 that it will treat calendar
years 2014 and 2015 as a transition period for purposes
of enforcing and administering implementation
of FATCA