United States taxpayers using foreign accounts in the United Arab Emirates may see more rigorous enforcement of the Foreign Account Tax Compliance Act, or FATCA, in the UAE, as obligations for UAE financial institutions have been ramped up under a new intergovernmental FATCA Agreement between the U.S. and the UAE, signed on June 17, 2015, which seeks to facilitate compliance and provide greater certainty to the UAE financial services sector.
The Agreement sets forth a myriad of issues that affect financial institutions operating in the UAE, making it crucial that they become knowlegable in all aspects of the FATCA regime, including the extent to which these policies and procedures are necessary to ensure compliance.
Background – What is FATCA?
FATCA is a law enacted by the U.S. in 2010 to target non-compliance by U.S. taxpayers using foreign financial accounts. It imposes significant obligations on foreign financial institutions, or FFIs, to identify and report certain information regarding accounts held by U.S. persons, which includes individuals, trusts, partnerships, and corporations.
In practical terms, FATCA requires FFIs to use enhanced due diligence procedures to identify U.S. persons who have invested in either non-U.S. financial accounts or non-U.S. entities. The intent of the law is to prevent U.S. persons from hiding income and assets in foreign jurisdictions. While an FFI may elect not to comply, if they choose not to do so, the FFI is subject to a 30 percent U.S. withholding tax on income it receives on its U.S. investments.
Key Obligations under the U.S./UAE Agreement
The FATCA Agreement between the U.S. and UAE is referred to as a “Model 1” form of intergovernmental agreement. This form of agreement provides for a reciprocal information exchange between the participating countries and that compliance is performed through the local government.
Under the Agreement, UAE financial institutions do not report information directly to the U.S. Rather, they report to the relevant UAE government authority which in turn makes it available to the U.S. government. This reporting convention enables UAE financial institutions to supply information without breaching the UAE privacy laws regarding customer confidentiality.
Steps UAE financial institutions should take immediately
First, UAE financial institutions must know if they have an obligation to register with the U.S. Internal Revenue Service. (Those with foreign branches or subsidiaries may also be subject to additional FATCA obligations.)
Second, UAE financial institutions should understand their due diligence and reporting obligations. They must then conduct thorough due diligence on existing account holders. This will involve the identification of all account holders in order to ascertain accounts that are considered U.S. reportable accounts. For clarity, Annex I of the FATCA Agreement details the due diligence obligations and specific procedures involved in account identification.
Third, financial intuitions should also update their systems, processes, and account opening documentation to comply with the requirements under the FATCA Agreement for all new accounts, and to clearly identify and manage obligations for all new and existing U.S. reportable accounts.
Finally, financial institutions must ensure that they meet all reporting deadlines as set out by the local regulator.
The FATCA Agreement has been widely viewed as a positive step in facilitating compliance with FATCA by the financial institutions in the UAE, as it will greatly clarify and thus ease their compliance obligations in the long term. FATCA compliance should now be a matter of priority, and UAE financial institutions would be wise to consult their legal counsel to ensure that they meet all obligations.
About the authors:
Ms. Arti Sangar is a partner and has over 15 years of experience practicing in the UAE. She is the author of Emirates Business Law Blog, focused on business and law in the Middle East.
Ms. Marta Colomar-Garcia is a partner in Miami, Florida, and focuses her practice on international commercial disputes, contracts, and regulatory compliance in the U.S. and abroad.
Diaz, Reus & Targ LLP (Diaz Reus) is an international law firm, headquartered in Miami, Florida, U.S.A., and has 14 offices worldwide. Diaz Reus team can help you to understand the fundamentals of FATCA, determine the applicability of FATCA to your business and meet your obligations under the FATCA regime.