FATCA/CRS: Updated Annex II to the Netherlands-US IGA

04/09/20

On 19 August 2020, the Dutch Ministry of Finance published the updated official Annex II to the Netherlands-US Intergovernmental Agreement (“IGA”) with regard to the Foreign Account Tax Compliance Act (“FATCA”). The updated Annex II to the IGA introduces the sponsoring regime and backdates with retroactive effect. The sponsoring regime is added by way of two new subsections ‘C’ and ‘D’ to Section II (Deemed-Compliant Financial Institutions) of Annex II of the IGA to include additional entities as Non-Reporting Netherlands Financial Institutions that are treated as deemed-compliant FFIs for purposes of section 1471 of the Internal Revenue Code.

General observation

The IGA Annex II is updated in alignment with industry expectations to add the sponsoring regime to domestic execution of FATCA compliance programs. Particularly relevant is the retroactive effect of the update.

Previous newsflashes about FATCA/CRS you can find here.

Confirmation current Dutch market practice Sponsored FIs

Prior to the updated Annex II, Dutch Financial Institutions (“FIs”) that had chosen to operate under the sponsoring regime were doing so under the US Internal Revenue Code (“US IRC”) and the associated Treasury Regulations. Even though Annex II of the US-Netherlands IGA (“the IGA”) did not include the sponsoring regime, most Dutch FIs that were operating under the sponsoring regime applied the sponsored regime in the Treasury Regulations via article 1q of the IGA. This presented a number of unexpected issues for such FIs. Namely, there was uncertainty in regard to Dutch FIs being obliged to:

register all Sponsored FIs with the Internal Revenue Service “IRS” to obtain their own separate Global Intermediary Identification Numbers (“GIINs”); and
make periodic certifications to the IRS about the adequacy of their FATCA compliance program.

Under other Model 1 IGAs, the addition of the sponsoring regime in Annex II created (a) an allowance whereby only Sponsored FIs that identified US reportable accounts were required to obtain their own separate GIIN, and (b) for the local tax authority to take responsibility for audits or other monitoring of FATCA compliance, therefore eliminating the requirement for periodic certification to the IRS.

A number of early signed Model 1 IGAs were missing the sponsoring regime in Annex II (including the US-Netherlands IGA) and this therefore became an industry-wide, multi-jurisdictional issue.

The US government has been gradually updating the Annex II to these IGAs with the intention to add the sponsoring regime and make it retroactive. The intention was always there for the sponsoring regime to operate in the manner described above for other Model 1 IGA jurisdictions.

Observation

Most Sponsoring/Sponsored Dutch FIs have been operating under the Annex II description of the sponsoring regime. As the Annex II is update with retroactivity, Dutch FIs shall not face any negative consequences of having:

not obtaining separate GIINs for FIs without any US reportable accounts; and
not submitting the periodic FI certification to the IRS - as long as they have otherwise complied with the obligations of FIs set out in the IGA and Dutch guidance.

Reporting Requirements of a Sponsoring and Sponsored FIs

Under the sponsoring regime, the intention is that FIs can file one single FATCA report under the GIIN of the Sponsoring FI, whilst identifying each Sponsored FI within the single report. This “single report” approach does not exist under the Common Reporting Standard (“CRS”). As such, Dutch FIs may have to file separate reports under CRS while filing a sort of “consolidated report” with other Sponsored FIs under the GIIN of the Sponsoring FI.

Observation

Reporting in the Netherlands under the sponsoring regime has known several hic-ups. In the first year, it was only possible to use a Dutch entity with a Dutch GIIN-number acting as Sponsoring FIs. Foreign (non-Dutch) Sponsoring FIs encountered difficulties in submitting the single reports. Today, where a Sponsoring FI is not a Dutch FI, it must seek guidance from the DTA in order to account for the fact that it does not have a domestic Dutch tax identification number called an RSIN (and therefore cannot submit the FATCA report). It is yet to be seen if the Dutch government will make any updates to the reporting requirements under FATCA given the update to the IGA.