FATCA

FATCA: Challenges and insights for

real estate funds
The Foreign Account Tax Compliance Act (FATCA)
is a complex reporting and withholding regime
enacted to encourage U.S. persons to disclose
their offshore accounts, investments, and income.
FATCA imposes material U.S. tax documentation,
reporting, and withholding requirements on real
estate funds. The implications surrounding the
regime are wide-ranging. If mismanaged, thecost
of noncompliance may negatively impact a funds
customer relations as well as its own investment
returns.
Recently the U.S. Department of Treasury (Treasury) and the
Internal Revenue Service (IRS) released the long-awaited proposed
regulations providing significant guidance for impacted entities.
These regulations now provide real estate funds sufficient
information to complete their assessments of the potential impact
of FATCAs requirements (or to start assessments for funds that have
yet to consider FATCAs implications) and take the necessary steps to
initiate a comprehensive implementation plan.
Background
On March 18, 2010, President Obama signed FATCA into law.
Thislegislation, enacted to prevent offshore tax abuses by U.S.
persons, includes a new Chapter 4 reporting regime that is designed
to achieve this stated intent by imposing a penal withholding tax on
certain foreign entities that refuse to disclose the identities of these
U.S. persons. The implications surrounding the new withholding
regime are wide-ranging for financial institutions, both U.S. and
non- U.S. as well as many other entities that operate on a global basis.
The statute, which provides the general framework for this new
regime, introduces an entirely new set of concepts in relation to U.S.
withholding and information reporting. The fundamental premise of
FATCA is that a Foreign Financial Institution (FFI) will be subjected
to a 30 percent rate of withholding on all withholdable payments
(generally U.S. fixed, determinable, annual or periodical income
(FDAP) as well as the gross sales proceeds on sales of assets that
generate U.S. source interest or dividends) unless the FFI enters
into an agreement with the IRS and agrees to identify certain U.S.
persons and to report them annually to the IRS.
While the statute provides the overview of the new regime,
Congress deferred the specific details relating to the implementation
and administration of the rules to Treasury and the IRS.
On February 8, 2012, Treasury and the IRS released lengthy and
detailed proposed regulations on the implementation of this new
FATCA: Challenges and insights for real estate funds

regime. Theseregulations incorporate, revise, and expand the

preliminary guidance described in three earlier IRS notices and
provide guidance not covered in those notices.
While these regulations are in proposed form and may be subject
to future modifications, they do provide KPMG professionals with
sufficient guidance to assist your business in developing strategic
and operational plans to help ensure that you are FATCA compliant by
the phased-in effective dates, which begin January 1, 2013
(July 1, 2013 for FFIs). We believe the first step for any affected
organization is to conduct an analysis of the impact that these
requirements will have on its business. In the case of organizations
that have already conducted impact assessments based on guidance
issued prior to the proposed regulations, we strongly recommend
that the conclusions drawn from that assessment be revisited as
many of the determinations made may now change.

High-level insights related to real estate funds

To assist with this endeavor, we have highlighted some key issues in
the proposed regulations that relate to real estate funds, as well as
provided information about what your business should currently be
doing in this area.
The term FFI is widely defined and encompasses most entities within
a real estate fund, as well as many other foreign entity investors.
Inaddition to receiving withholdable payments, real estate funds may
also be impacted by FATCA if they belong to an expanded affiliated
group. The reach of the expanded affiliated group rules may result
in many foreign entities otherwise isolated from U.S. investments

FATCA Essentials
For current insights on FATCA, visit KPMG LLPs FATCA
Essentials at www.kpmginstitutes.com/insights/2012/
fatca.aspx. There, among other resources and analyses,
youll find links to:
FATCA proposed regulations
KPMGs overview of business issues
KPMGs section-by-section summary of the proposed
regulations
being drawn into FATCA compliance. Finally, real estate funds may
be impacted by FATCA as a result of relationships with other financial
service participants (e.g., certain banks, distributors, or creditors).
These participants, generally classified as FFIs, may refuse to deal
with nonparticipating financial entities. As a result, foreign entities
within a real estate fund may be forced into FATCA compliance,
or potentially forfeit the funds relationship with such financial
intermediaries and counterparties.

U.S. entities of real estate funds

Many U.S. entities within real estate funds will need to ensure that
their foreign entity investors are in compliance with the regime,
or are in a class of foreign entities that are exempted from FATCA
(e.g.,foreign government investors), to avoid withholding on
payments made to those investors. This will require a U.S. entity
with foreign entity investors to collect documentation from such
investors identifying their FATCA classification. The IRS has indicated
that it intends to revise Forms W-8 and W-9 to permit a foreign entity
investor to establish its status for FATCA purposes. This should be
beneficial to many real estate funds with existing procedures in place
to fulfill their existing nonresident tax withholding obligations. Thatis,
the fund may be able to significantly leverage such procedures to
fulfill its due diligence and withholding obligations imposed by FATCA.
Certain distributions from entities that hold a majority of their assets
in U.S. real estate investments may be treated as income that is
effectively connected to a U.S. trade or business and, thereby, not
subject to FATCA withholding. Bythe same token, gross proceeds
from the sale or disposition of interests in such entities may also
be treated as effectively connected income. Under the proposed
regulations, such distributions and gross proceeds are generally
exempt from theFATCA regime.

Foreign entities of real estate funds

Many foreign entities within real estate funds will be FFIs.
Compliance with FATCA will require an FFI to enter into an agreement
with the IRS (an FFI Agreement), under which it agrees to certain
obligations. FFIs that enter into FFI Agreements will be referred to as
participating FFIs. Some of the more complex obligations include:
Identifying and reporting U.S. accounts, which may force a fund
to perform a review of information obtained from its investors
to search for certain indicia of U.S. ownership. Theconcept of
U.S. ownership may require tracing through some interposed
entities, e.g., other foreign funds, or nominee accounts.

FATCA: Challenges and insights for real estate funds

Reporting the name, taxpayer identification number, account

balance, and income of those U.S. accounts. The reporting
obligations will be phased in beginning in 2014 (with respect
to 2013).
Withholding on withholdable payments (U.S. sourced FDAP
andgross proceeds) to FFIs that do not comply with FATCA
(i.e.,nonparticipating FFIs).
Withholding on withholdable payments to recalcitrant
account holders (i.e., those that refuse to provide information
required to comply with FATCA).
Maintaining the ability to close an investors account where the
investor refuses to waive its rights under a local jurisdiction that
prevents the reporting of information required by FATCA.
Pursuant to the proposed regulations, foreign entities of a real
estate fund that are not FFIs may be classified as nonfinancial
foreign entities (NFFEs), and may be subject to the withholding
and reporting requirements of FATCA. As the nature of the income
received by such foreign entities is generally passive, such entities
will generally be treated as passive NFFEs, and will be required to
comply with FATCA.
In anticipation of the implementation of FATCA, most real estate
funds will need to review their operating models, including the
identification and documentation of customers, the product
portfolio, and internal processes/IT systems. Theywill need to
examine their ownership structures to assess the expanded
affiliated group rules, as well as their distribution models and
relationships with fund administrators and other service providers.
Finally, they will need to understand their legal and organizational
structures, as well as the legal jurisdictions within which they
operate, to understand any amendments to existing agreements
that will be required under FATCA.
As these changes may require significant time and investment, they
should be identified sooner rather than later to allow sufficient time
for implementation. Moreover, balancing the increased compliance
costs without adversely affecting investor returns will raise client
relationship challenges.

Bilateral agreement alternative

An intergovernmental approach to FATCA was announced in a joint
statement from the United States, France, Germany, Italy, Spain, and
the United Kingdom on February 8, 2012.
Participating countries have agreed to explore a common approach
to FATCA implementation through domestic reporting and reciprocal
automatic exchange and based on existing bilateral tax treaties.
The possible framework announced in the joint statement may
significantly alter the obligations of U.S. entities as well as FFIs.
KPMG will provide additional details and further information regarding
the intergovernmental approach to FATCA as Treasury and the IRS
move forward with the potential framework and release definitive
guidance pertaining to the approach. The existence of certain
alternative methods of complying with FATCA may be considered in a
real estate funds operating model for future compliance.

Key areas of risk for funds

a fund or its distributors to avoid FATCA withholding. A mismanaged

FATCA transition may result in withholding that diminishes after-tax
returns to investors, thereby creating a negative perception for fund
sponsors in the market that may detrimentally impact future capital
raising efforts. Furthermore, an inability to comply with FATCA may
mean that many foreign creditors and distributors simply refuse to do
business with that fund.

The key areas of risk that arise for a fund under FATCA include:
Commercial risk: A real estate fund may have obligations as a
withholding agent (for U.S. funds) or under the FFI Agreement (for
foreign funds). Failure to meet those obligations may put a fund or
its sponsor at risk for unpaid taxes, penalties and interest. Further,
termination of an FFI Agreement, due to the inability to meet the
obligations outlined by the IRS, may put the entire fund at risk of
FATCA withholding on investment returns.

The real estate fund with the greatest understanding of the key
issues and the most-up-to-date and integrated withholding system
may be viewed as having a competitive advantage in the competition
for capital.

Reputational risk: Sponsors of real estate funds rely on a continuous

flow of capital based on their value proposition within the market.
Direct and indirect investors may be required to make disclosures to

FATCA implementation time line FFIs

June 30, 2013
Deadline to enter into FFI
Agreements with IRS

February 8, 2012
IRS issues FATCA
proposed regulations

September 30, 2014

January 1, 2014
Withholding begins Reporting to IRS
June 30, 2015
on nonparticipating begins
Deadline for FFIs to complete second
FFIs and recalcitrant
stage of diligence reviews
accounts

Spring 2012
A Draft FFI Agreements

2012

2013

2014

July 1, 2013
FFIs accountable for
identifying all new
U.S. and recalcitrant
accounts

Fall 2012
Final FFI
Agreements
Summer 2012
Final FATCA regulations
expected

2015

January 1, 2015
Withholding applies to
gross proceeds
June 30, 2014
Deadline for FFIs to complete
remediation on all presumed FFIs
and high-value accounts

January 1, 2017
Earliest application of passthru
payments withholding on foreign
source payments

2016

2017

March 31, 2016

Reporting to IRS on
U.S. and recalcitrant
accounts to include income

FATCA implementation time line U.S. withholding agents

February 8, 2012
IRS issues FATCA
proposed regulations

2012

January 1, 2014
Withholding begins on
nonparticipating FFIs and other
nonparticipating entities

2013

2014

January 1, 2013
Grandfathered obligations: Payments made on
Summer 2012 nonequity obligations (with a defined term) outstanding
Final FATCA
as of January 1, 2013 are exempt from FATCA
regulations
to be released Begin tracking reportable data
Update onboarding process for new accounts to
include the Chapter 4 requirements

Contact us
KPMG LLP, a leading services provider to the financial services
industry, has put in place an experienced, multidisciplinary
team of tax and advisory professionals to help you meet FATCA
requirements. They have provided FATCA advice to a wide range
of financial services organizations and are distinctly positioned to
help you achievecompliance by the varying effective dates while
maintaining business as usual.

FATCA: Challenges and insights for real estate funds

March 15, 2015

Reporting to the IRS
begins on forms
1042 and 1042-S

2015

January 1, 2015
Withholding applies to
gross proceeds

2016

2017

March 15, 2016

Reporting on gross proceeds to the IRS
begins on forms 1042 and 1042-S

If you would like to discuss any aspect of FATCA, or how KPMG

can help you integrate FATCA into your business environment,
please contact one of the KPMG professionals on the overleaf.

How KPMG can help you integrate FATCA into your business environment
Provide deep understanding of
FATCA technical requirements
and assessment of current state

Provide day-to-day project

management
Provide cross-border coordination
for international projects

Assist in delivering FATCA

approach and resolving risks

Leverage and revise existing reporting

systems

Map current business processes

Design and implement effective
business processes

Tax

Facilitate change management

Project
Management

Leverage and revise antimoney laundering

(AML)/"know your customer" (KYC)
procedures
Leverage existing systems projects

Leverage the use of existing ERP

functionality to fulfill FATCA
requirements
Integrate FATCA technology tools
Design customized technology tools
for FATCA implementation

Business
Process
Transformation

IT-enabled
Transformation

Operational
Transformation

Client/Customer
Documentation

Assess AML/KYC client/customer

information and documentation and
related control risks
Design, document, implement, and
test controls

Some of these services may not be available to audit clients.

National FATCA leaders:

David Neuenhaus
Practice Leader FATCA
T: 973-912-6348
E: dneuenhaus@kpmg.com

Mark Price
Principal, Tax
T: 202-533-4364
E: mhprice@kpmg.com

David Richardson
Managing Director, Tax
T: 212-954-8750
E: drichardson@kpmg.com

Laurie Hatten-Boyd
Principal, Washington National Tax
T: 206-213-4001
E: lhattenboyd@kpmg.com

Laurence Birnbaum-Sarcy
Managing Director, Advisory
T: 212-872-5808
E: lbirnbaumsarcy@kpmg.com

Robert Broughton
Managing Director, Advisory
T: 203-406-8208
E: rbroughton@kpmg.com

Brian Clark
Principal, Advisory
T: 212-954-4057
E: baclark@kpmg.com

Robert Alpert
Director, Advisory
T: 617-988-1161
E: ralpert@kpmg.com

Non-Financial Foreign Entities

Industry FATCA contacts:

Mark Naretti
Managing Director, Tax
T: 212-872-7896
E: marknaretti@kpmg.com

Real Estate
Edward Liva
Partner, Tax
T: 212-872-4400
E: eliva@kpmg.com
James Sowell
Principal, Washington National Tax
T: 202-533-5710
E: jsowell@kpmg.com
Banking & Finance
Tom Zegel
Partner, Tax
T: 212-872-5599
E: tzegel@kpmg.com

Melinda Schmidt
Director, Tax
T: 302-260-9284
E: mtschmidt@kpmg.com
Carl Cooper
Managing Director, Tax
T: 540-845-8240
E: carlmcooper@kpmg.com
Investment Management
Deanna Flores
Principal, Washington National Tax
T: 858-750-7340
E: djflores@kpmg.com

Kim Majure
Principal, Washington National Tax
T: 202-533-5270
E: kmajure@kpmg.com
Pension Funds
David Neuenhaus
Principal, Tax
T: 973-912-6348
E: dneuenhaus@kpmg.com
Private Equity
Glenn Mincey
Partner, Tax
T: 212-954-8255
E: gmincey@kpmg.com
Catherine Skokowski
Senior Manager, Tax
T: 212-954-2606
E: cskokowski@kpmg.com

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to
specific situations should be determined through consultation with your taxadviser.

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