American tax legislation obliges banks worldwide to support the fight against tax evasion
Background
With FATCA (Foreign Account Tax Compliance Act), the US federal legislator intends to curb the tax fraud of American citizens through capital flight. Accordingly, financial institutions in other US countries are obliged to search their customer base for persons liable to pay tax in the USA and to report certain data on the accounts of these account holders to the US tax authorities. In Germany, FATCA came into effect through a bilateral agreement with the USA, known as IGA I (Intergovernmental Agreement I). The then German government signed the agreement in May 2013. The law implementing the agreement came into force on 11 December 2013. Since 1 July 2014, banks in Germany have had to comply with the requirements of IGA I.
In the context of FATCA, the QIA (Qualified Intermediary Agreement) concluded bilaterally between the US tax authorities (IRS) and the financial institutions must also be taken into account. These sometimes impose more extensive, stringent auditing and due diligence obligations on a financial institution in the course of customer legitimisation and determining the tax residency of a customer.
Audit requirements for existing customers
In order to fulfil the legal requirements of the IRS, German financial institutions must check their entire customer base for indications of a tax liability in the USA.
- Review of existing accounts of private individuals
Under FATCA, German financial institutions must identify customers who are liable to pay tax in the USA and report data on their accounts to the German Federal Central Tax Office. Annex 1 of IGA I sets out the basis for the review of existing or new customers. The financial institution must search the accounts of natural persons for indications of the account holder's US tax liability. Such indications include US citizenship or an address in the USA.
If there is an indication referred to in IGA I, the financial institution must clarify whether the account holder is liable for tax in the USA on the basis of documents to be submitted by the customer and/or the customer's self-certification. If so, the account or custody account must be reported.
- Review of existing company accounts
Company accounts must also be checked with regard to Annex 1 of IGA I to determine whether a reporting obligation exists. Account holders that are themselves financial institutions but do not participate in FATCA (non-participating foreign financial institutions, NPFFIs) and other organisations (non-financial foreign entities, NFFEs) that primarily generate passive income and whose controlling persons are subject to tax in the USA are reported. The audit procedures prescribed for financial institutions are permanent tasks that financial institutions must fulfil. This is derived from possible changes to an account holder's data (address, powers of attorney, etc.), deadlines and other findings. Depending on the circumstances, this may have an impact on whether a customer and their account/deposit are or remain subject to reporting requirements.
If a US indication comes to light during the review of an existing customer, the institution must contact the customer. If the customer wishes to avoid a report, he must submit additional documents to prove that there is no tax liability in the USA (refutation of circumstantial evidence).
Similarly, a client is obliged to inform the financial institution of any changes in his circumstances that could have an impact on US tax relevance.
Audit requirements for new clients
Since 1 July 2014, banks have been required by law to check new customers for tax liability in the USA in accordance with defined requirements. This check applies to private individuals as well as companies (legal entities and partnerships).
- Checks for private individuals
If a private individual opens an account, a self-certification of US tax liability must be obtained in accordance with IGA I. If a US tax liability exists, the bank must and will request further documents and treat the customer and their account/deposit as reportable.
- Verification for companies
New corporate customers must also be checked for a tax liability in the USA. If this is the case or at least applies to the controlling persons of a passive NFFE, the bank must report the accounts concerned.
Notification
Financial institutions are obliged to report data on a reportable customer/account/custody account to the Federal Central Tax Office (BZSt) annually in accordance with a prescribed reporting scheme. This data is then forwarded by the BZSt to the US tax authorities (IRS).
The reporting deadline is the middle of the year following the reporting year. The report contains, among other things
- Personal data such as name, address, tax and account number
- Account balance as at 31 December of the previous year (or the balance immediately prior to an account closure within the reporting year)
- Custody accounts:
Gross interest, dividends and other income
Gross proceeds from redemption, sale or assignment
- Deposit accounts: Gross interest income
- Other forms of investment: Gross income
Information and links to the forms
Self-certification of tax residency under CRS and FATCA to clarify the status as a US person (US status)
The following questions are all required in accordance with the agreements concluded with the IRS (US tax authority) under the FATCA regulations in order to clarify a client's possible US status.
Five questions:
- Do you have US citizenship (even in the case of dual citizenship)?
- Do you have a US immigrant visa (e.g. "green card")?
- Have you stayed in the USA for a longer period of time (at least 31 days) in the current year or will you take up such a stay in the current year and do you fulfil the other requirements of the substantial presence test described below?
The total length of stay in the USA within the last three years is at least 183 days. Days spent in the current calendar year count in full (1/1), those from the previous year count as 1/3 and days spent in the previous year count as 1/6.
Note:
Exceptionally, a stay under the "substantial presence test" is not relevant if you have spent or will spend less than 183 days in the USA in the current calendar year and can prove that you have a residence outside the USA with which you maintain a close relationship.
In this case, you must apply for exemption from US person status on US tax form 8840 and submit a favourable ruling from the US tax authorities (IRS) on the exemption.
- Are you taxed jointly with a US spouse in the USA?
- Is there any other US tax liability? If yes, what is the reason for this? Is the tax liability limited or unlimited?
To the form “Self-certification of tax residency according to CRS and FATCA”
To the form “Self-certification of tax residency according to CRS and FATCA for legal entities”
It may also be necessary to submit the W-8BEN. It documents the clear classification of tax residency within the meaning of FATCA if this is not clear or contradictory from the available information. The W-8BEN is valid from the year of issue plus three full calendar years.
If the documentation is incomplete or insufficient, the bank is obliged to report this to the Federal Central Tax Office.
Link to the W-8BEN form (natural persons)
Completion aid for form W-8BEN (german)
Legal entities (companies) must legitimise themselves with either a W-8BEN-E or a W-8IMY, depending on the type of company:
Link to Form W-8BEN-E
Link to “Instructions for Form W-8BEN-E”
Link to the form W-8IMY (company)
Link to “Instructions for Form W-8IMY”
According to US withholding tax regulations:
Link to Form W-9
Instructions for Form W-9 (german)
Link to Form W-8Exp
Completed and signed forms can be sent to Sutor Bank by post, fax or e-mail.
Important note:
Please understand that we do not provide tax advice for legal reasons. If you have any questions about taxation details, please contact a tax consultant.
