In December, the intergovernmental agreement (“IGA”) between Cyprus and the USA was formally signed under the Foreign Account Tax Compliance Act (“FATCA”).
FATCA is a US federal law enacted in order to prevent and detect US tax evasion on income derived by US taxpayers (either citizens or residents) from sources outside the United States.
The term ”United States person” means:
- A U.S. citizen (including dual citizen)
- A U.S. resident alien for tax purposes
- A domestic partnership
- A domestic corporation
- Any estate other than a foreign estate
- Any trust if:
- A court within the United States is able to exercise primary supervision over the administration of the trust, and
- One or more United States persons have the authority to control all substantial decisions of the trust
- Any other person that is not a foreign person.
Under the FATCA agreement, foreign financial institutions are required to report information annually to the American Internal Revenue Service (“IRS”) regarding direct and indirect US account holders.
What types of payments are subject to FATCA?
FATCA provisions apply to “withholdable” payments.
“Withholdable payments” are defined as:
- Any payment of interest (including any portfolio interest and original issue discount), dividends, rents, royalties, salaries, wages, annuities, licensing fees and other income, gains, and profits, if their sources are situated within the USA.
- Any income (gross proceeds) from the sale or disposition of U.S. property in a way that leads to interest or dividends
- Interest paid by foreign branches of U.S. banks
- Please note that any Income effectively connected with a United States business is generally exempt from withholding under FATCA.
Under which circumstances is the withholding 30% tax applied?
The Foreign Financial Institutiosn (FFIs) may be required to apply a 30% withholding on any payments or transactions of US source income, as well as gross proceeds from the sale of securities that generate U.S. source income, made to:
- non-participating FFIs
- individual accountholders failing to provide sufficient information to determine whether or not they are a U.S. person, or
- foreign entity accountholders failing to provide sufficient information about the identity of its substantial U.S. owners.
For any further information on the FATCA agreement and on its implications on your business, please get in touch.