FATCA was enacted in March 2010 as part of the Hiring Incentives to Restore Employment Act as an administrative tool to prevent and detect offshore tax evasion and improve taxpayer compliance. The provisions of FATCA were intentionally broad and significantly expanded the existing US information reporting regime by imposing additional documentation, withholding, and reporting requirements on payments to US accounts, foreign financial institutions (FFIs), and certain non-financial foreign entities (NFFEs) with substantial US owners. While final regulations released in January 2013 provided additional clarity and details regarding the impact of FATCA, the definition of a financial institution still remains broad and includes a number of entities not normally considered as vehicles for tax evasion.
A captive insurance company is an example of an entity that can produce surprising results when the FATCA rules are applied - affecting both the captive and other entities involved in the arrangement. This may occur notwithstanding that captive insurance companies provide a variety of financial and business benefits relating to insuring risks for many multinational enterprises. One surprising result is that some captives may fall under the definition of an FFI thereby triggering various reporting and withholding obligations. Other foreign asset reporting requirements of the US owners of captive insurance companies may also arise.