What Is an Exemption From FATCA Reporting Code?

The Foreign Account Tax Compliance Act (FATCA) is a U.S. federal law enacted to address tax evasion by U.S. persons holding financial assets in offshore accounts. FATCA aims to promote transparency in the global financial services sector. It requires certain U.S. taxpayers to report their foreign financial assets to the Internal Revenue Service (IRS) and places reporting obligations on foreign financial institutions (FFIs). Specific exemptions exist, allowing certain entities and situations to be excluded from these requirements.

What FATCA Requires

FATCA primarily obligates Foreign Financial Institutions (FFIs) worldwide to identify and report information about financial accounts held by U.S. persons to the IRS. This includes details on accounts held by U.S. citizens, green card holders, and certain resident aliens. If an FFI fails to comply with these reporting requirements, it may face a 30% withholding tax on certain U.S.-source payments.

To facilitate compliance, the U.S. Treasury Department has developed Intergovernmental Agreements (IGAs) with various foreign governments. These IGAs allow FFIs to report information to their local tax authorities, who then exchange the data with the IRS. This framework helps ensure U.S. persons’ offshore financial activities are transparent to the IRS.

Who Is Exempt From FATCA Reporting

Several categories of entities and situations are exempt from FATCA reporting, reflecting a focus on those that pose a lower risk of tax evasion. These exemptions apply to certain Foreign Financial Institutions (FFIs) and Non-Financial Foreign Entities (NFFEs).

Exempt FFIs include governmental entities, international organizations, certain retirement funds, small, local financial institutions, and foreign central banks. These institutions are generally not considered to facilitate tax evasion.

Beyond fully exempt FFIs, there are “Deemed Compliant FFIs.” These institutions are treated as compliant without direct IRS agreement, provided they meet certain conditions. Examples include non-reporting FFIs as defined in IGAs, certain investment entities, sponsored investment entities, and restricted funds.

Non-Financial Foreign Entities (NFFEs) are foreign entities that are not financial institutions. NFFEs can be exempt if they are “Active NFFEs,” meaning they are primarily engaged in an active trade or business with limited passive income. Other exempt NFFEs include publicly traded NFFEs and certain passive NFFEs that do not have substantial U.S. owners. If a passive NFFE does have one or more substantial U.S. owners, information about those owners must be reported.

Understanding Exemption Codes

Financial institutions utilize specific codes, often on IRS forms like Form W-8BEN-E, to categorize entities and accounts for FATCA purposes, including those that are exempt or deemed compliant. These codes streamline the process by providing a standardized way to communicate an entity’s FATCA status to a withholding agent or payer.

For instance, entities may claim status as a “Governmental Entity,” “International Organization,” or “Exempt Retirement Plan.” An “Active Non-Financial Foreign Entity” (Active NFFE) is a common designation for operating companies. Other codes exist for various types of “Deemed Compliant FFIs,” such as “Non-reporting IGA FFI” or “Certified Deemed-Compliant FFI.” These codes ensure that the financial institution accurately classifies the account holder and applies the correct withholding and reporting rules, or exemptions, as applicable.

Documenting Your Exemption Status

To establish an exempt status for FATCA purposes, individuals and entities generally self-certify their status to the financial institution holding their account. The primary method for this self-certification is through the completion and submission of an appropriate IRS Form W-8.

For individuals, Form W-8BEN is used to certify foreign status and claim treaty benefits or exemptions. Entities complete Form W-8BEN-E to establish their foreign status and FATCA classification. On Form W-8BEN-E, the entity selects its specific FATCA status, including applicable exemption categories, and provides any corresponding codes. The responsibility for accurately completing these forms and providing them to the financial institution rests with the account holder. This documentation enables the financial institution to correctly apply FATCA rules and avoid imposing unnecessary withholding.