The UAE has multiple agreements with foreign countries that ensure compliance with the tax laws in the countries involved. An example of this is the FATCA in the UAE. All US investors residing in the country must comply with certain regulations in order to legally operate in the country.
In this article, you will find information about FATCA in the UAE, the aspects of this law, the individuals affected by it, the assets that must be reported, and how we can help you get to know more about this law appliance around the world.
- What is FATCA?
- Aspects of the FATCA
- What must be reported under the FATCA?
- Types of taxpayers reporting to FATCA
- Who is affected by FATCA?
- FATCA in the UAE
- How to fill out the FATCA form in the UAE?
- How can we help you get to know more about FATCA in the UAE?
1. What is FATCA?
The Foreign Account Tax Compliance Act (FATCA) is a law that requires U.S citizens living abroad or at home to file annual reports on any foreign account holdings they have.
The FATCA declaration started in 2010 as part of the Hiring Incentives to Restore Employment (HIRE). Its goal was to promote transparency in the global financial services sectors.
1.1 Some keynotes about this law
- FATCA requires US citizens to file annual reports on any foreign account holding and pay any taxes owed on them.
- The US residents who do not report their foreign accounts holding over $50,000 in a single year are subject to penalties.
- The tax revenues brought in by the FATCA pay for the business incentives introduced in the HIRE Act
2. Aspects of FATCA
The FATCA act was signed by former US President Barack Obama as part of the Hiring Incentives to Restore Employment (HIRE). This law was designed to incentivize companies to hire unemployed workers. This was a response to the high rate of unemployment during the 2008 financial crisis.
One of the principal incentives offered to businesses through the HIRE act was an increase in the business tax credit for any new employee that worked for at least 52 weeks. Other incentives include benefits, a payroll tax holiday, and an increase in the expense deduction limit for new equipment purchased in 2010.
2.1 FATCA: Focus on tax evasion
This law looks to eliminate tax evasion by American businesses and individuals that are earning taxable income abroad. While it is not illegal to keep an offshore account, failure to disclose it to the Internal Revenue Service (IRS) is illegal since the country taxes all assets and income of its citizens on a global scale.
The FATCA declaration was in part created to fund the costs of the business incentives offered in HIRE. FATCA provisions that every US taxpayer report all financial assets held outside the country annually and pay any taxes due on them. The revenues produced by this act cover the costs of the hiring incentives offered in the HIRE act.
The US residents that do not report their financial assets and their foreign account holdings are likely to receive sanctions.
3. What must be reported under the FATCA?
As said before, every American taxpayer with financial assets totaling $50,000 or more must fill out a FATCA form. Those assets can be in stocks, bonds, bank accounts, and other financial instruments. However, there are certain exceptions. One major one is the assets from a foreign branch of a U.S institution.
3.1 Foreign institution compliance
Non-financial foreign entities (NFFE) and Foreign financial institutions (FFI) must comply with this law by disclosing the identities of US citizens with accounts. And the value of the assets in those accounts to the FATCA Intergovernmental Agreement (IGA) or the IRS.
The FFI that does not comply with the Internal Revenue Service will be excluded from the market of the United States and have a 30% of any withholdable payment withheld from them as a tax sanction. These payments can include income generated from the U.S financial assets held by these banks such as periodic profits, dividends, and interests.
NFFEs and FFFIs that agree to the law must report annually the address, name, and tax identification number (TIN) of each account holder that meets the requirements of a U.S citizen. As well as the account balance, account number, and any withdrawals and deposits on the account for the year.
3.2 Reporting thresholds for individual taxpayers
The reporting thresholds for foreign assets can vary whether you live abroad or you file a joint income tax return. According to the IRS:
- If you file separately from your spouse or you are single, you must submit a form if you have more than $200,000 foreign assets at the end of the year if you live abroad. Or more than 50,000 if you live in the U.S
- If you file tax with your partner, the threshold doubles.
4. Types of taxpayers reporting to FATCA
4.1 For taxpayers living abroad
The IRS requires the taxpayers living abroad to fill out a form under the following circumstances:
- You are in a marriage filing a joint income tax return and the total value of your foreign financial assets is more than $400,000 on the last day of the tax year. Or more than $600,000 at any moment during that single year.
- You are not a married person filing a joint income tax return and the total value of your foreign financial assets is more than $200,000 on the last day of the year or more than $300,000 at any moment during that single year.
4.2 For taxpayers living in the U.S
The IRS requires the taxpayers living in the United States to fill out a form under the following circumstances:
- You are unmarried and the total value of your foreign assets is more than $50,000 on the last day of the tax year or more than $75,000 during the whole year.
- You are married filing a joint income tax return and the total value of your financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any moment during that single year.
- A similar situation happens when you are in a marriage but filing separate income tax returns. And the total value of your foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.
4.3 Penalties for non-compliance
There are penalties for failing to file the FATCA form. The IRS can impose a $10,000 penalty for failing to file taxes. And an additional penalty of up to $50,000 if the citizen continues to not file after the notification by the IRS. And a 40% penalty for understanding taxes attributable to non-disclosed assets.
4.4 The cost of compliance
Although the non-complying costs with FATCA are high, the compliance costs for foreign financial institutions are also high. Some studies stated that 250,000 foreign financial institutions were being impacted by FATCA’s reporting requirements.
5. Who is affected by FATCA?
The FATCA declaration has an important impact on all businesses that are owned by U.S citizens. This includes Dual Nationals and U.S passport holders who live abroad. Also, Green Cards holders, people that spend a certain amount of days per year in the U.S, and U.S partnerships and corporations.
The FATCA legislation affects all of the above. It also affects every bank in the world. In fact, your bank will need to share your account information on an annual basis with the IRS. The IRS will mainly look at the highest amount of money that was on your account during that year.
6. FATCA in the UAE
In the UAE, generally, depository institutions like banks, custodial institutions like mutual funds, private equity funds, investment entities like hedge funds, and certain types of insurance companies must comply with the FATCA.
To implement the Foreign Account Tax Compliance Act effectively, the US has signed Intergovernmental Agreements (IGA) with the United Arab Emirates (US-UAE IGA) in 2015 and 112 other jurisdictions.
Under the UAE law, all Emirates and entities should comply with the US-UAE IGA, and the entities can be classified into the following:
- Financial institutions (FIs) (can further be categorized into Reporting FIs and Non-reporting FIs.
- Non-financial foreign entities (NFFE)
Authorities like ADGM, DIFC, and the Central Bank of UAE are responsible for regulating the Reporting FIs. Such FIs get the support of their respective regulatory authority to comply with FATCA. Other FIs that do not get the support of any specific regulatory authority are called unregulated FIs and obtain the support of the Ministry of Finance (MoF) in FATCA in the UAE compliance.
The US-UAE IGA deals with exempt and deemed compliant FIs, and it has been categorized into four classes:
6.1 Exempt beneficial owners: Other than funds
The international organization, government entity, and the central bank are the exempt beneficial owners from FATCA. The government entities include the government of the UAE, any political subdivision of the government, etc. And all of these are exempt from FATCA in the UAE compliance.
These entities must be wholly controlled by one or more UAE government authorities. Such entity’s earnings fall into its account or in the account of any government authority. And at the time of dissolution, all the assets will vest in any government entity.
6.2 Exempt beneficial owners: Funds
Entities like pension funds of beneficial owners, broad and narrow participation retirement funds, and investment funds owned by the exempt beneficial owners, fall under this category and are exempt from FATCA in the UAE compliance.
Narrow participation retirement funds are very different from the broad participation retirement funds. The main difference is that the first one has less than 50 participants, and non-resident partners cannot use more than 20% of the fund’s assets.
6.3 Deemed compliant: Limited or small scope FIs
This deemed compliant category comprises local banks, financial institutions with a local client base, qualified credit card issuers, and financial institutions with only low-value accounts. The value of the accounts of these FIs is very low and they have a local presence. Each FIs under this section has specific conditions to comply with if they want to fall in this category.
6.4 Deemed compliant: Investment entities
This category includes foreign corporations, sponsored investment entities, investment advisors, investment vehicles, collective investment vehicles, and investment management. Each entity under this section must comply with a lot of conditions before they classify in this category.
Non-reporting FIs, generally, do not need to report information to the UAE. However, they must provide self-certifications to withholding agents to avoid withholding US source payments to them. Then, once considered exempt or deemed compliant, there would not be too much work, which means less burden on the team and will reduce costs.
Certain saving accounts, like accounts held by an estate, escrow accounts, life insurance contracts having certain terms, and partner jurisdictions accounts are excluded from the definition of financial accounts and therefore the reportable FIs do not report them.
7. How to fill out the FATCA form in the UAE?
The process to fill out the FATCA form in the UAE is the following:
- Login to your NPS account
- Click on “FATCA Self-Certification”
- Submit the required details under the “FATCA/CRS Declaration Form”.
- Click on submit
- Read and tick “Declaration and authorization by all customers”
- Click on confirm
- Enter OTP received on your registered mobile number
- Lastly, after authentication through OTP, Acknowledgment for the completion of FATCA Self-Certification will appear.
8. How can we help you get to know more about FATCA in the UAE?
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