FATCA

What it means

FATCA, the Foreign Account Tax Compliance Act, is a 2010 US law that requires financial institutions worldwide to report accounts held by US taxpayers to the US tax authorities. The United States taxes its citizens by citizenship rather than residence, and FATCA is meant to stop Americans hiding income in foreign accounts.

Slovakia has an intergovernmental agreement with the US under which Slovak banks and other financial institutions report to the Slovak Financial Administration, which passes the data to the US. Institutions that did not cooperate would face 30 % withholding tax on payments from the US, which is unacceptable for banks.

FATCA became the model for CRS, the global standard for information exchange between other countries. While CRS looks at tax residence, FATCA also looks at US citizenship, so it covers people who have never lived in the US but hold a US passport, for example because they were born there.

How it works in practice

When an account is opened for a company or an individual, the bank requires a declaration of whether the client is a US person. For companies it also asks about the beneficial owners and, for passive entities, reports them if they are US persons. This is part of KYC procedures that banks update regularly.

A Slovak company with a US shareholder or director should expect extra forms when opening a business account, such as US forms W-9 or W-8BEN-E. We recommend getting advice on completing them, as a wrong classification can lead to withholding tax or a blocked account.

For Americans living in Slovakia, FATCA does not mean higher tax but a duty to file in the US as well and report foreign accounts. Double taxation is removed by the double tax treaty and US foreign tax credit rules.

What to watch out for

The most common problem is so-called accidental Americans, born in the US without knowing they are US citizens with tax obligations. A bank may identify them from their place of birth and ask for documents. Resolving it takes time, so it is better to deal with it before the bank raises it.

A false declaration to a bank, such as concealing US citizenship, is a breach that can lead to the account being closed. For companies, a wrong FATCA classification leads to incorrect reporting that is hard to correct later.