The Ministry also set forth in the intergovernmental agreement (IGA) on FATCA dated May 23 2013 and the Ordinance Regulating the Implementation of FATCA dated July 23 2014 (Umsetzungsverordnung) (the Ordinance) on November 3 2015.
The most important issue under FATCA is whether a German entity qualifies as a financial institution (FI) or as an active or passive non-financial institution (non-financial foreign entity (NFFE)) under the aforementioned legal framework. The German Ministry of Finance provides its view thereto in nos. 9 to 93 of the Ordinance, which is 71 pages long.
Clarity on scope of ‘financial institutions’
The term ‘financial institutions’ includes the following entities:
‘Custodial institutions’,which generateat least 20% of their income by safekeeping financial assets and related financial services (for example, handling fees, commissions, fees from securities transaction, lending fees or other consulting services). Thus, depositary banks, trust companies and clearing houses, which safekeep the financial assets of their customers, will qualify as custodial institutions.
‘Depository institutions’are entities whichreceive deposits from their customers as part of their general banking business or comparable activities – savings and loan, commercial banks, credit cooperatives, cooperative societies, or regulated trade and industrial cooperatives. A licence granted by the German regulatory authorities will support the qualification as a depository institution, but is not mandatory to qualify for said status. Factoring or leasing companies are thus generally excluded from the impact of FATCA.
‘Investment entities’are defined as financial service companies according to the German Banking Act (KWG) or investment funds according to the German Capital Investment Act (KAGB). Moreover, the German Ministry of Finance’s view is that companies not covered by the KWG or KAGB may also qualify as investment entities under FATCA if they trade in financial instruments, invest or manage financial assets of third parties. This results in a possible application of the FATCA rules to holding companies or group finance companies if these do not qualify as active or passive NFFEs. Unfortunately, the Ordinance does not provide any guidance on the treatment of family offices under FATCA. Re-insurance, casualty and health insurance companies are generally not impacted by FATCA, though life insurance companies do generally qualify as ‘financial institutions’.
Certain financial institutions, however, are excluded from the burdensome reporting requirements under FATCA if they qualify as ‘non-reporting financial institutions’ according to Exhibit II of the IGA or ‘exempt beneficial owners’ under the US Treasury Regulations on FATCA.
Impact of FATCA on a non-financial foreign entity (NFFE)
NFFEs must disclose their FATCA status to financial institutions in order to enable the financial institutions to properly report their customer base under FATCA. If an NFFE does not do so, the financial institution must notify the German Central Tax Office, which will inform the IRS accordingly that the NFFE is non-compliant. The non-compliant status of an NFFE results in a 30% withholding tax penalty to be withheld by a US paying agent if the non-compliant NFFE does not fully disclose its FATCA status and delivers the relevant W-8 (US) tax form to the US paying agent prior to payment.
The self-certification of an NFFE requires the NFFE to distinguish between active and passive status. Active NFFEs do not have to disclose shareholders qualifying as a controlling US person, whereas passive NFFEs do. Exhibit I Section VI.B.4 of the IGA determines the criteria to be fulfilled by an active NFFE. Non-active NFFEs automatically qualify as passive NFFEs. Various criteria set forth in Exhibit I of the IGA (including the 50% test, stock listing test, treatment of holding companies, regulation on companies during set-up, liquidation or restructuring phase, and so on), however most of them are still not precisely defined under the Ordinance and thus are still uncertain to handle in practice.
Although the Ordinance provides guidance on a number of questions regarding the application of US FATCA to German entities, various issues, especially in regard to the qualification as a non-financial institution, remain unanswered. However, the NFFE status under FATCA is of high importance for such entities as they will be accepted as customers by financial institutions only if these entities can fully and clearly disclose their FATCA status to the financial institutions. Hopefully, the active NFFE status will be clarified in more detail by the German financial authorities soon.
This article was prepared by Carsten Ernst, partner at Bödecker Ernst & Partner.
