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UK FATCA: Reporting requirements for Bermuda trusts

Financial institutions in Bermuda, such as banks and trust companies, will soon be obliged to provide information to foreign tax authorities relating to the financial affairs of United States (US) and United Kingdom (UK) resident clients.

The Foreign Account Tax Compliance Act 2009 (US FATCA) is a US law designed to prevent tax evasion by US taxpayers.

On 19 December 2013, Bermuda entered into an intergovernmental agreement with the US that requires financial institutions in Bermuda to identify and annually report key information about US persons directly to the US tax authorities.

In addition to US FATCA, the UK has also entered into similar agreements with various jurisdictions.

On 26 November 2013, the UK signed intergovernmental agreements with a number of its overseas territories, including Bermuda, paving the way for automatic exchange of tax information with these jurisdictions.

These agreements, commonly known as “UK FATCA”, are modelled on US FATCA and require financial institutions located in the UK's overseas territories to identify UK tax resident account holders and report specific account information directly to the UK tax authorities.

US FATCA and UK FATCA may have unexpected consequences for Bermuda trusts, including trusts with tenuous US/UK connections.

Specifically, with respect to UK FATCA, the new reporting requirements apply to offshore financial accounts in existence on or after 30 June 2014 that are held by a specified UK person, being a person or entity who is resident in the UK for tax purposes. An entity may be a legal person or a legal arrangement, including a trust.

Under UK FATCA, financial institutions in Bermuda will be required to provide information in relation to UK reportable accounts, which are accounts held by one or more specified UK persons or by an entity with one or more controlling persons that is a specified UK person.

In the case of a trust, a “controlling person” includes not only the settlor and the beneficiaries, but also the trustees, the protector, and any other individual exercising ultimate effective control over the trust.

Bermuda trusts may therefore be subject to reporting requirements if one or more of the trustees, settlor, beneficiaries or protectors are resident in the UK for tax purposes.

As a result of UK FATCA, financial institutions in Bermuda will need to have due diligence procedures in place to identify relevant accounts and will have up to 30 September 2016 to report information to the UK tax authorities for the calendar year 2014 in relation to UK reportable accounts.

Pursuant to UK FATCA, a Bermuda financial institution is any financial institution organised under the laws of Bermuda (excluding any branch or head office located outside of Bermuda), or any branch or head office of a financial institution not organised under the laws of Bermuda, but located in Bermuda.

“Financial institution” is defined very widely as an entity that accepts deposits in the ordinary course of banking or similar business, holds financial assets for the account of others as a substantial portion of its business, engages primarily in the business of investing, trading in securities and managing funds, or conducts certain business as an insurance company. This will include not only banks and investment companies, but will also extend to trust companies.

The information to be reported under UK FATCA will be phased in and by 2016 will include: the name, address and date of birth of the specified UK person that is the holder or controlling person of the UK reportable account; the account number; the balance or value of the account; the total gross amount of interest paid or credited to the account; the total gross amount of dividends and other income generated with respect to the assets held in the account; and the total gross proceeds from the sale or redemption of property paid or credited to the account.

UK FATCA will make significant advances in transparency when it is fully implemented. It should be noted that the new reporting requirements under US FATCA are somewhat similar to the requirements described above relating to UK FATCA.

As such, trustees need to be aware of the reporting requirements and deadlines under both regulations going forward. In some cases, failure to comply could result in a 30 per cent withholding tax being imposed.

The regulations are a challenge to apply and understand. We would therefore urge trustees to seek professional advice at the earliest opportunity and discuss possible ideas for restructuring.

Lawyer Stacy-Ann Maharaj is an Associate with the Corporate and Commercial Practice Group. At the time of writing this column, Ms. Maharaj was working with the Private Client and Trusts Practice Group at Appleby. A copy of Ms. Maharaj's column can be obtained on the Appleby website at www.applebyglobal.com.

This column should not be used as a substitute for professional legal advice. Before proceeding with any matters discussed here, persons are advised to consult with a lawyer.

Stacy-Ann Maharaj

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Published March 13, 2014 at 9:00 am (Updated March 12, 2014 at 10:18 pm)

UK FATCA: Reporting requirements for Bermuda trusts

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