The Foreign Account Tax Compliance Act (“FACTA”) was enacted in 2010 and implementation began July 1, 2014. The law was created to increase reporting of foreign financial assets, and it enforces reporting by establishing a withholding tax on payments made to foreign entities. The Act is being implemented in phases, but it has already impacted the way international insurance and reinsurance contracts are negotiated.
Lawmakers approved FACTA in hopes that it will identify U.S. citizens and U.S. residents who own financial accounts at foreign financial institutions (“FFI”s) or interests in non-financial foreign entities but do not disclose such holdings or report the associated income on their U.S. tax returns. FFIs include banks, securities, brokerages, commodities dealers and insurance companies that issue or are obligated to make payments with respect to certain cash value insurance or annuity contracts.
FATCA withholding applies to U.S. source premiums paid to a non-U.S. reinsurer, and the withholding tax applies in addition to U.S. federal excise taxes on premium payments.
In order to ensure FATCA compliance and avoid the withholding tax, insurers and reinsurers are including the following terms in their contracts:
- Assurance of FATCA exempt status
- Proof of FATCA compliance
- The right to withhold FATCA tax should a premium payment become subject to FATCA withholding
- No right to set-off
- No cancellations or defense
Most FFIs will be able to prove FATCA status by completing a valid withholding certificate and giving it to the U.S. person making insurance or reinsurance premium payments. They can avoid withholding if they have made a section 953(d) election, allowing them to be considered a U.S. persons for FATCA purposes.
PIB Law represents national banks, retailers, reinsurers, insurers, mortgage lenders and financial services companies from its offices in New Jersey, New York City, Philadelphia, Boston, San Antonio, and Chicago. For more information on reinsurance and insurance issues, contact PIB Law at 908-725-9700.