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On September 14, the United States and the United Kingdom entered into an intergovernmental agreement that, if ratified by the U.K. parliament,1 would provide financial institutions that are resident in the United Kingdom, and branches of financial institutions that are located in the United Kingdom, with an alternative withholding regime to that imposed under the “Foreign Account Tax Compliance Act” (“FATCA”) provisions contained in sections 1471 through 1474 of the Internal Revenue Code. The U.S.-U.K. intergovernmental agreement is substantially similar to the “reciprocal” model agreement released by the U.S. Treasury Department on July 26, under which each country exchanges information with the other. We discussed the reciprocal model intergovernmental agreement in an earlier Clients & Friends Memo, available here.2 However, the U.S.-U.K. intergovernmental agreement contains four significant differences from the model reciprocal agreement:
(i) have no fixed place of business outside the United Kingdom,
(ii) do not solicit account holders outside the United Kingdom,
(iii) are required by law to perform tax withholding or information reporting with respect to accounts held by U.K. residents,
(iv) have only account holders that are resident in the United Kingdom or another member state of the European Union (subject to a de minimis exception of up to 2% of the entity’s aggregate outstanding account value),
(v) establish procedures to report any account holders that are U.S. persons, nonparticipating foreign financial institutions, or non-publicly traded passive nonfinancial foreign entities with controlling U.S. owners, and to close their accounts by 2014, and
(vi) require their affiliates to be subject to the same restrictions.
The U.S.-U.K. intergovernmental agreement does not include the exemption contained in the proposed regulations for “restricted” investment funds that limit their equity and debt owners to persons that present a low risk of tax avoidance.
3 In addition, the U.S.-U.K. intergovernmental agreement clarifies that a U.K. financial institution will not be subject to withholding under FATCA unless the IRS identifies it in a published list of noncompliant U.K. financial institutions. The model intergovernmental agreement required the IRS to identify noncompliant signatory country financial institutions, but did not explicitly exempt financial institutions that were not included in the list from withholding under FATCA.
4 The other organizations are the World Bank, the International Bank for Reconstruction and Development, the International Finance Corporation, the International Finance Corporation Order 1955, the International Development Association, the Asian Development Bank, the African Development Bank, the European Community, the European Coal and Steel Community, the European Atomic Energy Community, the European Investment Bank, the European Bank for Reconstruction and Development, the OECD Support Fund, and the Inter-American Development Bank.
5 To qualify, the entity must be (i) registered as a charity with the Charity Commission of England and Wales, (ii) registered with HMRC for charitable tax purposes, (iii) registered as a charity with the Office of the Scottish Charity Regulator, or (iv) registered as a community amateur sports club with HMRC.