Captive Insight Vol I

FATCA: US TAX TRANSPARENCY & CAYMAN CAPTIVES The Cayman Islands Government (CIG) continues to make strides laying the groundwork for tax transparency for international business. Included in this groundwork, and likely having the most direct impact with US owned Cayman Islands captives, is the Foreign Account Tax Compliance Act (FATCA). image © Konstantin L - Fotolia.com FATCA is actually US domestic legislation implementing a new tax information reporting regime. Noncompliance with FATCA could result in a 30% tax on US source withholdable payments made to foreign entities including Cayman Islands captive insurance companies. Withholdable payments include US sourced interest, dividends, gross proceeds, and certain other income including insurance or reinsurance payments. Welladvised and managed captives will be able to navigate and comply with the FATCA legislation and prevent the FATCA tax. On August 13, 2013 the CIG announced it had concluded negotiations with the United States on a Model 1 intergovernmental agreement (IGA), and a new tax information exchange agreement (TIEA) which would supplant the current TIEA signed on November, 2001. These negotiations were a direct result of the Cayman Islands initiative to comply with FATCA. Under the US domestic FATCA legislation, each foreign entity would be required to comply directly with the Internal Revenue Service (IRS). However, FATCA allows an alternative method of compliance for foreign entities in countries which have an IGA with the US. Under the Cayman Islands Model 1 IGA, certain Cayman Islands financial entities will report the required tax information directly to the Cayman Islands Tax Information Authority which will then automatically exchange this information with the United States IRS. 40 by Ian Bridges Vice President, Global Captive Management Ltd. It is expected that the IGA will soon be signed and officially released. The IGA will include an Annex II schedule. The purpose of the Annex II is to list out various entities which will have an alternative treatment under the IGA than under the actual US domestic legislation. Cayman Islands captive stakeholders are anxious to see whether Cayman Islands regulated captives are specifically included in the negotiated Annex II. Regardless of any potential Annex II inclusion much can be done now by captives to plan for FATCA as the final FATCA regulations were released in January 2013 and provide much of the foundation for FATCA compliance.

Captive Insight Vol I | Page 40