Cayman Islands signed a "Model 1" intergovernmental agreement on FATCA ("IGA"). The United States considers this IGA already to be in effect, despite the need for implementing measures in the Cayman Islands. This IGA is the second such agreement with a country that is neither an OECD member nor signatory to an income tax treaty with the United States; Costa Rica signed an IGA on 26 November. It is the first non-reciprocal IGA, meaning that U.S. financial institutions are not obliged to report information about their Cayman Islands accountholders to the IRS, for automatic exchange with the Cayman Islands. This is the twelfth IGA overall that the United States has signed, which noted that it had reached "agreements in substance" on FATCA with 16 other countries.
The signing of this IGA should be welcomed by those private investment fund sponsors who form Cayman entities to make investments in U.S. markets, and those who invest in such funds. Notably, Cayman investment vehicles that are within scope ("Reporting Cayman Islands Financial Institutions") will avoid entering into legal agreements with IRS and will report account information solely to the Cayman Tax Information Authority, rather than the IRS. The other standard benefits of an IGA are also available, including: (i) replacing the obligation to withhold on recalcitrant account holders and non-compliant FFIs with a mere reporting obligation; (ii) limiting the obligation to withhold on U.S.-source payments to qualified intermediaries that have assumed primary withholding responsibility under U.S. regular withholding rules (extremely rare in the funds industry); (iii) removing the risk of U.S. withholding on gross proceeds that is due to commence 1 January 2017; and (iv) relaxing the requirement that all group members be FATCA-compliant, provided that those Related Entities or branches resident in jurisdictions that preclude FATCA compliance are not used to circumvent FATCA...
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