Does the Foreign Account Tax Compliance Act, 26 U.S.C. sec. 1471 et seq. (“FATCA”) apply to funds transferred from one non-U.S. foreign entity to a second non-U.S. foreign entity where such funds are transferred at least in part by a U.S. financial institution?

As a way or background, effective July 1, 2014, FATCA applies as a tax on income generated by all U.S. citizens, regardless of where such citizens reside.

26 U.S.C. sec. 1471(a) states: “In the case of any withholdable payment to a foreign financial institution which does not meet the requirements of subsection (b), the withholding agent with respect to such payment shall deduct and withhold from such payment a tax equal to 30 percent of the amount of such payment.”

In order for FATCA to apply, an account must constitute a financial account that is owned, directly or indirectly, by a U.S. person, defined as: 1) a U.S. citizen, 2) a U.S. resident, 3) a U.S. entity, or 4) a U.S. Owned Foreign entity.

Because definitions 1-3 above are usually clear, for example, a client is or is not a U.S. citizen or resident, and a client is or is not a U.S. entity, it is definition #4 where most complex analysis comes into play. A U.S. Owned Foreign entity is defined in 26 U.S.C. sec. 1471(d): “as any foreign entity which has one or more substantial United States owners.”

The analysis will then focus on whether the entity has owners, members, shareholders, or other ownership that are U.S. citizens or U.S. citizens that will determine the conclusion to most FATCA inquiries.