Under the Foreign Account Tax Compliance Act (FATCA), foreign financial institutions (FFIs) and certain other non-financial foreign entities must report on the foreign assets held by their U.S. account holders on certain types of cross-border payments or risk being subject to a 30% withholding tax penalty. FATCA was enacted in the U.S. to deter tax evasion and non-compliance with U.S. tax rules by U.S. persons investing in or through offshore entities.
Notably certain FFI investment entities such as private equity funds, hedge funds and similar investment vehicles (including any feeder or master fund investment vehicle) are required to complete identification of investor accounts in order to identify U.S. account holders and to report them to the IRS. Reporting may also include investment funds with no U.S. investors to document their FATCA statuses. FFIs that do not comply with these FATCA requirements are subject to a 30% withholding tax penalty on certain U.S.-sourced investment income they receive from U.S. funds or underlying U.S. portfolio companies.