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Mauritius: Impact of FATCA on Mauritius Entities

Impact of FATCA on Mauritius Entities
Stephen V. Scali
Conyers Dill & Pearman
Stephen V. Scali is Head of Mauritius Office at Conyers Dill & Pearman
I. Background
FATCA is a U.S. federal law that aims to reduce tax evasion by U.S. persons. FATCA has significant extraterritorial implications and, most notably, requires foreign financial institutions (“FFIs”) to report information on accounts of U.S. taxpayers to the U.S. Internal Revenue Service (“IRS”). If an FFI fails to enter into the necessary reporting arrangements with the IRS, a 30{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} withholding tax is imposed on U.S. source income and other U.S. related payments of the FFI.
In order to facilitate reporting under, and reduce the burden of compliance with FATCA, Mauritius has signed a Model 1A intergovernmental agreement with the U.S. (“the U.S. IGA”). The U.S. IGA allows Mauritius entities that are FFIs to comply with the reporting obligations imposed by FATCA without having to enter into an agreement with the IRS. Instead, a Mauritius FFI may report directly to the Director General of the Mauritius Revenue Authority (the “Mauritius Revenue Authority”) and, provided it complies with the relevant procedures and reporting obligations, will be treated as a deemed compliant FFI that is not subject to automatic withholding on U.S. source income and other U.S. related payments.
The U.S. IGA provides for reciprocal tax reporting by U.S. financial institutions (“U.S. Reporting FIs”). Accordingly, U.S. Reporting FIs will be required to comply with equivalent reporting obligations and report information on accounts of Mauritius taxpayers. The details of the U.S. reciprocal reporting regime and timeframe for reporting are awaited and are not the subject of this article.
II. What Does FATCA Mean for Mauritius Entities?
The impact FATCA will have on a Mauritius entity fundamentally depends on one key question: is the Mauritius entity an FFI?
While FATCA has significant implications for Mauritius entities that are FFIs—such as banks, custodians, hedge funds, private equity funds, trust companies, trusts and other regulated entities—a typical Mauritius holding company or joint venture vehicle will not generally be an FFI and should not be materially affected by FATCA.
Accordingly, the first step a Mauritius entity needs to take is to determine its FATCA classification and, in particular, whether or not it is an FFI. A broad summary of how to determine whether a Mauritius entity is an FFI and a description of the steps that must be taken if the Mauritius entity is an FFI, are addressed in III and V.
Any Mauritius entity that is not an FFI—such as a typical Mauritius holding company—will be a non-financial foreign entity (an “NFFE”) for the purposes of FATCA. Mauritius NFFEs are not generally subject to registration or reporting requirements under FATCA, but they will be required to self-certify their status to financial institutions and other withholding agents with whom they maintain accounts to avoid FATCA withholding. This is discussed further in IV.
III. When Will a Mauritius Entity Be Classified as a “Foreign Financial Institution”?
FATCA is very complex and a detailed analysis is required in each case to determine if a Mauritius company is in fact an FFI. However, generally, the following four categories of Mauritius entities will be FFIs and will be directly affected by FATCA’s registration and reporting requirements:

• Investment Entities: Broadly, an entity that conducts (or is managed by an entity that conducts) trading or portfolio and investment management activities as a business on behalf of a customer or otherwise invests, administers or manages funds or money on behalf of other persons.
• Custodial Institutions: An entity that holds, as a substantial portion of its business (broadly, more than 20{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} of gross revenues), financial assets for the account of others.
• Depository Institutions: An entity that accepts deposits in the ordinary course of a banking or similar business. Entities that fall within this definition include entities regulated in Mauritius as banks or non-bank deposit taking institutions.
• Specified Insurance Companies: An insurance company (or its holding company) that issues, or is liable under, certain cash value or annuity contracts.
Set out below are categories of Mauritius entities alongside some basic guidance on whether such Mauritius entities will be FFIs. In cases where such entities may be FFIs, we also consider whether any exemption to registration and reporting may be available.
A. Hedge Funds and Private Equity Funds
Almost all hedge funds and private equity funds will be Investment Entities and therefore qualify as FFIs under FATCA. The one exception is that funds where more than 50{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} of the gross revenues are from real estate (or other non-financial assets) will generally fall outside the definition of Investment Entity (and therefore FFI) for the purposes of FATCA.1 There are some other limited exemptions available to hedge funds and private equity funds, but these are expected to be of limited practical utility for the vast majority of such funds.
1 In the private equity context, this “gross revenues” test may also exempt Mauritius portfolio companies from being Investment Entities.
It is important to note that, where a master-feeder structure is used, both the master fund and the feeder fund will be FFIs. Furthermore, a subsidiary Mauritius trading entity of a hedge fund is also likely to be an Investment Entity and therefore an FFI.2 In VI, the possibility of using a “Sponsoring Entity” to facilitate FATCA compliance for structures with multiple FFIs is discussed.
2 The position is more complex for Mauritius subsidiaries of private equity funds and advice should be sought.
Mauritius managers and advisers of hedge funds and private equity funds and Mauritius entities that act solely as managers and advisers of hedge funds and private equity funds will typically not need to register and report as FFIs.
Although Mauritius managers and advisers fall within the definition of Investment Entity (and therefore FFI), the U.S. IGA contains an exemption for a Mauritius FFI that qualifies as an Investment Entity solely because it (a) renders investment advice to, and acts on behalf of; or (b) manages portfolios for, and acts on behalf of, a customer for the purposes of investing, managing, or administering funds deposited in the name of the customer with a participating FFI. Accordingly, Mauritius managers and advisers will generally not be required to register with the IRS and report on their own account.
B. Mauritius Holding Companies and Joint Ventures
As noted above, a typical Mauritius holding company or joint venture vehicle that owns assets on its own account and does not operate as an investment fund would not generally be expected to be an FFI for the purposes of FATCA. Rather, this type of Mauritius holding company will generally be an NFFE (discussed in IV).
However, the directors of a Mauritius holding company that have or wish to open a bank or securities account will still need to consider its FATCA classification carefully. Such a Mauritius holding company will likely be required to certify its status to the relevant financial institution to avoid withholding, as discussed in IV.
C. Mauritius Securitization Vehicles
A typical Mauritius securitization vehicle will normally be an Investment Entity and therefore an FFI for the purposes of FATCA, subject to limited transitional relief for pre-existing vehicles.
D. Financing SPVs
Mauritius entities that are established solely for the purpose of borrowing or granting security in relation to the provision of debt finance to an underlying business typically will not be FFIs. Similarly, Mauritius entities which are established to own and finance aircraft, ships or other form of moveable asset of a similar nature would not typically fall within the definition of an FFI.
E. Trusts with a Mauritius Trustee
The treatment of trusts under FATCA is complex. Mauritius FATCA rules only apply to a trust where a majority of the trustees are resident in Mauritius or where the settlor of the trust was resident in Mauritius at the time the instrument creating the trust was executed. Subject to some complex optionality for trustees, the majority of trusts that have a Mauritius trust company acting as trustee will likely be FFIs for FATCA purposes.
Private trust companies (“PTCs”) are also likely to be FFIs for the purposes of FATCA, although this needs to be considered in each case. In particular, if the PTC and its directors are not remunerated for acting as trustee, the PTC and the underlying trust may conclude that it does not meet the definition of an FFI on the basis that the PTC is not conducting business.
Clients with trusts that have a Mauritius trustee or a Mauritius PTC are advised to liaise with their advisers to determine the most appropriate course of action for their trust.
F. Insurance Companies
Only insurance companies that issue or are required to make payments with respect to a cash value insurance contract or an annuity contract will be FFIs pursuant to FATCA. Captive insurers and insurance companies that do not write annuities or whole life insurance products will generally be NFFEs.
G. Branches and Foreign Subsidiaries
Branches of entities are treated separately for FATCA purposes—an overseas branch of a Mauritius FFI will not be covered by the Mauritius IGA and must consider the rules applicable in that branch’s jurisdiction, whether under an IGA or the U.S. regulations. A foreign subsidiary of a Mauritius FFI must also comply with the FATCA rules in its home jurisdiction.
IV. Mauritius Entities that are Not FFIs
As noted above, any Mauritius entity that is not an FFI—such as a typical Mauritius holding company—will be an NFFE. Although NFFEs are not generally subject to registration or reporting requirements, they will still be required to self-certify their status to financial institutions with which they maintain financial accounts to avoid FATCA withholding.
In this regard, the U.S. W8-BEN-E form has recently been amended to require entities to confirm their FATCA classification to U.S. withholding agents and provide related information with respect thereto. Mauritius entities that hold accounts with financial institutions can certainly expect to complete these W8-BEN-E forms and provide other FATCA-related certifications.
There are two categories of NFFE:

• Active NFFE: The criteria which would qualify an NFFE as being an Active NFFE are numerous, and include where less than 50{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} of its gross income for the preceding calendar year is passive income (such as dividends, interest, royalties, annuities and rent) and less than 50{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} of the assets held during the preceding calendar year or other appropriate reporting period are assets that produce or are held for the production of passive income. For Active NFFEs, completion of the W8-BEN-E form essentially only requires completing the information on the first page, ticking “Active NFFE” on question 5 and then certifying that the entity is an Active NFFE in question 39.
• Passive NFFE: Broadly, a Passive NFFE is an NFFE that is not an Active NFFE. For Passive NFFEs, the W8-BEN-E also requires the NFFE to certify whether or not it has any substantial U.S. owners (broadly, a U.S. person with a 10{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} or more interest). To the extent it has substantial U.S. owners, the name, address and U.S. taxpayer identification number of each substantial U.S. owner must be provided.
It is important each Mauritius NFFE establishes which category it falls into so it can provide the necessary certification to financial institutions with which it maintains accounts.
V. What Does a Mauritius FFI Need to Do to Comply with FATCA?
If a Mauritius entity is an FFI for which an exemption is not available, the following steps will need to be taken:

(1) Obtain a Global Intermediary Identification Number (“GIIN”): Any Mauritius reporting FFI (or “registered deemed compliant” FI required to be registered with the IRS) should liaise with its primary U.S. FATCA advisers to register via the IRS portal and obtain a GIIN as soon as possible to minimize any risk of incurring U.S. withholding tax on payments it receives and, in the case of a Mauritius reporting FFI, to qualify for the benefit of the U.S. IGA as regards FATCA withholding. (Note that, with effect from January 1, 2015, certain transitional rules regarding registration, which broadly exempted the payor of a FATCA “withholdable payment” from the requirement to obtain a GIIN for a Mauritius reporting FFI, no longer apply.)
(2) Identify Reportable Accounts: FATCA and the U.S. IGA impose an obligation on Mauritius Revenue FFIs to identify and report details of “reportable accounts” to the Mauritius Revenue Authority. “Reportable accounts” are financial accounts where the account holder is either a “Specified U.S. Person” (broadly, any U.S. person or person liable to pay U.S. tax with some exceptions) or is a non-U.S. entity the controlling persons of which include one or more Specified U.S. Persons. Financial accounts include any depositary or custodial accounts and also, in the case of certain Investment Entities, any debt or equity holdings in the FFI. In the case of Mauritius funds, the relevant account is the shares each investor holds in the fund.
      Identifying Reportable Accounts involves two separate processes, one for existing accounts and one for new accounts:
(a) Existing accounts: FFIs will also need to perform due diligence on “financial accounts” that they maintained as at June 30, 2014 (subject to certain de minimis thresholds for small accounts). Specifically, accounts that are reviewed must be searched for prescribed U.S. indicia, including U.S. place of birth and U.S. address. If the account holder is a Specified U.S. Person, details of their account must be reported (as described below). If the account holder is not a Specified U.S. Person but there are U.S. indicia in relation to its account, the Mauritius FFI must take steps to “cure” the U.S. indicia. In particular, self-certification by the account holder and further documentation evidencing the person is not a Specified U.S. Person is likely required. If the account holder does not respond or it is not otherwise possible to cure the U.S. indicia, the account should be treated as reportable. The deadline for completing due diligence on existing accounts depends on a number of factors, including the balance of the account. Most critically, remediation of U.S. indicia needs to be completed on all accounts over $1 million by June 30, 2015.
(b) New account procedures and due diligence: For new accounts opened with the FFI after July 1, 2014,3 it is necessary to carry out due diligence and obtain self-certification regarding whether the account holder is a Specified U.S. Person. If U.S. indicia are found that suggest the person may be a U.S. taxpayer, prescribed steps will need to be taken to confirm this. For accounts opened by another participating FFI, the FFI’s GIIN should be obtained and verified against the publicly available IRS FFI list. In general terms, all Mauritius FFIs should be revising their account opening forms and/or subscription agreements to ensure they comply with FATCA rules in relation to new accounts. For funds, it is also important to update offering and constitutional documents to ensure FATCA is appropriately addressed.
(3) Reporting: On or before July 31, 2015, Mauritius FFIs must make their first report to the Mauritius Revenue Authority in relation to accounts held by Specified U.S. Persons or a non-U.S. entity with one or more controlling persons that are Specified U.S. Persons. The U.S. IGA prescribes the information that needs to be reported. Most significantly, it requires the balance of value of the relevant account held by the Specified U.S. Person to be reported. Expanded information is required for the subsequent reporting period ending July 31, 2016. The Mauritius FI is required to make a report even if it is a NIL report. Upon receipt of a report, the Mauritius Revenue Authority will pass the reported information to the IRS.
3 Although it should be noted that IRS Notice 2014-33 generally allows FFIs to treat new accounts opened before January 1, 2015 as “pre-existing,” subject to certain modifications of the compliance rules for such accounts.
VI. Simplified Reporting for Groups of FFIs
If a group has one or more eligible Investment Entities, the group may elect to register one “Sponsoring Entity” for FATCA reporting purposes. The appointment of a Sponsoring Entity effectively allows all FATCA compliance and reporting to be delegated to one entity in the group. To appoint a Sponsoring Entity:

(a) The Sponsoring Entity must be authorized to act on behalf of the sponsored Investment Entities and agree to carry out all due diligence and reporting obligations on behalf of the sponsored Investment Entities.
(b) The Sponsoring Entity has to register and obtain a sponsoring GIIN.
(c) If the sponsored Investment Entities hold reportable accounts, the Sponsoring Entity will ultimately be required to register each sponsored Investment Entity that it manages.
A Sponsoring Entity must report to the Mauritius Revenue Authority all reportable accounts of its sponsored Mauritius Investment Entities.
VII. Conclusion
FATCA is a controversial piece of legislation, not least because it imposes a significant compliance burden on FFIs. However, the automatic exchange of information and increased transparency introduced by FATCA looks to become the global standard. In addition to FATCA, 94 countries (including Mauritius and all other OECD countries) have committed to implement the OECD’s Common Reporting Standard (the “CRS”) (as of June 4, 2015). The CRS, which is based on FATCA and requires the automatic exchange of information on assets and income of citizens of all signatory countries, will likely be bought into force around 2017. Accordingly, the implementation of robust systems by Mauritius FFIs to comply with FATCA can be viewed as important preparation for what is likely to be a new global standard on information exchange.
For the majority of Mauritius companies which are not FFIs, it is very much a case of “business as usual”. Other than having to determine their FATCA classification and certify/evidence their status to financial institutions with which they hold accounts, FATCA should hopefully have a limited impact on day-to-day operations.
For More Information
Stephen V. Scali is Head of Mauritius Office at Conyers Dill & Pearman.