Many private equity and venture capital (PE/VC) firms have foreign investors and may have organized fund entities in non-U.S. jurisdictions, such as the Cayman Islands. As such, withholding taxes levied on non-U.S. investors and compliance with the Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standards (CRS) continue to be important aspects of the tax compliance cycle for these firms.Firms with non-U.S. investors should be considering readiness for 2021 compliance now, and firms with Cayman Island fund structures should be aware of the latest developments for their 2020 FATCA and CRS compliance.
Tax Form Re-Solicitation
A PE/VC firm that makes payments of U.S. source fixed, determinable annual, or periodic (FDAP) income needs to be mindful of expiring investor W-8 series forms ahead of the 2021 tax year.
The re-solicitation process should be underway to review the current population of investor tax forms and identify those that will expire Dec. 31, 2020. This process usually takes a considerable amount of time in reviewing the population and identifying the forms that will expire, contacting investors to request updated tax forms (and supporting evidence if necessary), and reviewing the tax forms provided to ensure they are accurate. Here is a quick refresher on tips for requesting updated tax forms and what to do if December 31 arrives, but the updated tax form is not in hand.
Expiration of Forms
The Form W-9, Request for Taxpayer Identification Number and Certification, generally remains valid indefinitely. However, it is important to review files for any change in circumstances that could impact its reliability. Generally, all of the Form W-8BEN, W-8BEN-E, W-8EXP and W-8ECI are valid from the signature date on the form until December 31 of the third succeeding calendar year. This is unless there is a change in circumstances that would cause any information on the form to be incorrect.
Generally, a Form W-8IMY remains valid until the status of the person whose name is on the certificate is changed in a way relevant to the tax form or there is a change in circumstances that makes the information on the form no longer correct. The indefinite validity period does not extend, however, to any other tax form, documentary evidence, or withholding statements associated with the tax form.
If an updated tax form has not been received, the PE/VC firm now has an expired tax form on file for this investor after December 31. If the PE/VC firm cannot associate a FDAP payment with a reliable tax form for the recipient at the time of payment, then it must apply the presumption rules.
Any reportable payments made to U.S. persons (e.g., assuming a Form W-9 is no longer reliable due to change in circumstances) may be subject to backup withholding. Payments of amounts to non-U.S. investors should be reviewed to determine if they are subject to withholding under Internal Revenue Code Chapter 3 or Chapter 4. Withholding agents will have to refer again the extensive presumption rules, but generally, such payments could be subject to a 30% withholding rate where a new tax form has not been provided by the investor. If you are making these types of payments and still do not have an updated tax form by January 1, consider requesting an Affidavit of Unchanged Status to cover the payment period.
Foreign Partnership – Cayman Island Portal Update and Extended FATCA/CRS Due Dates
Another development to watch if you have funds organized in the Cayman Islands is the latest news around FATCA and CRS reporting for 2020. These international provisions come with stringent reporting requirements that, if not followed, could stick PE/VC firms and their investors with steep fines.
Effective in 2020, the Cayman Islands’ Department for International Tax Cooperation (DITC) has developed a new portal (called the DITC Portal) for registration (notification) and reporting purposes, which will eventually encompass all legislative frameworks. All user accounts from the previous AEOI Portal has been migrated to the new DITC Portal along with their assigned Financial Institutions (FIs). The Authorizing Person (AP) and Principal Point of Contact (PPoC) should have received an email from the DITC which contains steps on how to log onto the DITC Portal. This portal has finally opened in early November 2020 after significant delays.
Due to the global outbreak of the COVID-19 virus, the original due dates for each of the FATCA and CRS filings has been extended. The FATCA and CRS reporting deadline for the 2019 reporting period was Sept. 18, 2020 and has been extended from Nov. 16, 2020 to Dec. 16, 2020 due to the delay in opening of the portal. The delay of the portal in light of the upcoming IRS deadline has put PE/VC firms with filing obligations under a short timeline to submit the essential information for their filings. It is vital that firms now move forward to make all of the necessary filings promptly.
Additionally, PE/VC firms with investments domiciled in the Cayman Islands have new registration requirements with the Cayman Islands Monetary Authority (CIMA). Any investment vehicles that qualify as reporting financial institutions for CRS will be required to file a CRS Compliance form by March 31, 2021 (this has been extended from the initial due date of Dec. 31, 2020) for their initial year (2019 tax year). After the first annual CRS Compliance form is submitted, subsequent forms must be filed by September 15 (i.e., the compliance form for the 2020 tax year must be submitted by Sept. 15, 2021).
For More Information
International reporting requirements require extensive documentation and reporting, which may be especially challenging to manage in a year where filing deadlines have been disrupted by the COVID-19 pandemic. For comments, questions, or concerns about your firm’s reporting, please contact a member of our team.
Published on December 04, 2020