The Foreign Account Tax Compliance Act, or FATCA, is a U.S. law that requires foreign financial institutions and certain other entities to report information about financial accounts held by U.S. taxpayers or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.
What is the FATCA (Foreign Account Tax Compliance Act)?
FATCA was enacted in 2010 to combat offshore tax evasion by U.S. persons. Under this law, foreign banks, investment funds, insurance companies, and other financial institutions must identify and disclose accounts owned by U.S. citizens, U.S. residents, and certain U.S. entities to the U.S. Internal Revenue Service (IRS). This includes both direct ownership and indirect ownership through entities.
If a foreign financial institution does not comply, the U.S. imposes a 30% withholding tax on certain U.S.-source payments to that institution. FATCA also places reporting requirements on certain non-financial foreign entities to disclose substantial U.S. owners.
For U.S. taxpayers, FATCA means that if they hold foreign financial assets above specific thresholds, they must report them annually to the IRS using Form 8938, in addition to any other reporting requirements such as the FBAR (Report of Foreign Bank and Financial Accounts).
For non-U.S. founders with U.S. companies, FATCA is relevant when the company opens foreign bank accounts, works with international investment structures, or has U.S. owners who are subject to reporting. Even if the company itself is not a financial institution, FATCA compliance may be required to maintain banking relationships abroad, since foreign banks often ask for documentation like a Form W-9 or W-8BEN-E to determine FATCA status.
FATCA operates under a network of intergovernmental agreements (IGAs) between the United States and other countries, which streamline the reporting process and help ensure compliance. Understanding FATCA is important for any business or individual with cross-border financial activities involving the U.S., as failure to comply can result in significant penalties and loss of access to certain banking services.
