FATCA (Foreign Account Tax Compliance Act) is US legislation enacted in 2010 requiring foreign financial institutions worldwide to identify and report accounts held by US persons to the IRS. Non-compliant institutions face a 30% withholding tax on US-source income. Most countries operate under Intergovernmental Agreements (IGAs) allowing domestic reporting to their own tax authority which then exchanges with the IRS.

Does FATCA apply to US citizens living abroad?

Yes. FATCA applies to all US citizens regardless of residency. The US taxes citizens on worldwide income and their foreign banks must identify and report their accounts. US citizens abroad must also file FBAR and potentially Form 8938 annually where applicable thresholds are met.

What is the difference between FBAR and Form 8938?

FBAR (FinCEN Form 114) is filed with FinCEN when aggregate foreign accounts exceed USD 10,000 at any point during the year. Form 8938 is filed with the IRS at higher thresholds (USD 50,000 for single filers) and covers a broader range of foreign financial assets. Both are required where both thresholds are met — they are not alternatives.

What happens to foreign companies with US owners under FATCA?

Foreign non-financial entities with US persons holding 25%+ equity must disclose those substantial US owners to the financial institutions where they hold accounts. This allows FATCA to identify the US beneficial owners behind holding company structures.

Glossary · SearchOffshore

What Is FATCA?

FATCA (Foreign Account Tax Compliance Act) is US legislation enacted in 2010 requiring foreign financial institutions worldwide to identify accounts held by US persons and report them annually to the IRS. It is the US equivalent of CRS and was, in many respects, its predecessor — prompting the OECD to develop CRS as a global multilateral equivalent.

Enacted: 2010 (HIRE Act); effective from 2014 Administered by: US Internal Revenue Service (IRS) Applies to: US citizens, US residents, US entities, non-US entities with US owners Foreign institutions: Banks, funds, trusts, insurers worldwide

Background

Why FATCA Was Created

FATCA was enacted by the United States Congress in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act. Its stated purpose was to combat offshore tax evasion by US persons using foreign financial accounts to conceal income and assets from the IRS. The catalyst was the UBS scandal in 2008–2009, in which UBS, Switzerland's largest bank, admitted to helping approximately 52,000 US clients conceal USD 20 billion in assets from the IRS and agreed to pay a USD 780 million fine and hand over client names.

FATCA was transformative because it placed the reporting burden not on US taxpayers (who were already legally required to disclose foreign accounts) but on the foreign financial institutions themselves. By threatening to impose a 30% withholding tax on US-source payments to non-compliant institutions, FATCA effectively compelled the global banking system to become an extension of the IRS's enforcement apparatus.

How FATCA Works

The FATCA Mechanism

Foreign Financial Institutions (FFIs)

Banks, investment funds, insurance companies, trust companies, custodians and other financial institutions outside the US must register with the IRS, implement FATCA due diligence procedures and report US person account information annually — or face the 30% withholding sanction on US-source income.

US Person Identification

FFIs must identify "US persons" among their account holders — including US citizens (regardless of residence), US green card holders, certain US-resident aliens, and US-controlled entities. Self-certification forms (W-9 for US persons, W-8 series for non-US persons) are used to document status.

Intergovernmental Agreements (IGAs)

Rather than requiring each FFI to report directly to the IRS, most countries signed Intergovernmental Agreements (IGAs) with the US. Under Model 1 IGAs, FFIs report to their own local tax authority, which then exchanges information with the IRS. Under Model 2 IGAs, FFIs report directly to the IRS. Most major offshore jurisdictions operate under Model 1 IGAs.

30% Withholding Sanction

The enforcement mechanism: non-compliant FFIs (those that have not registered and agreed to report) face a 30% withholding tax on US-source income — dividends, interest, gross proceeds from US securities. In practice this sanction created overwhelming commercial pressure to comply.

Who FATCA Affects

FATCA — Who Must Comply and What Must Be Reported

Party	FATCA Obligation	Key Action Required
US citizens (anywhere in the world)	Subject to FATCA reporting by their foreign banks	Provide W-9 to foreign financial institutions; ensure annual Form 8938 filed with US tax return if thresholds met
US green card holders	Treated as US persons for FATCA	Same as US citizens — provide W-9 to foreign institutions
US-resident aliens (substantial presence test)	US persons for FATCA during period of US residency	W-9 during residency; W-8 after departure (if no longer US resident)
Foreign banks and financial institutions	Must identify US persons and report to IRS (via local tax authority under Model 1 IGAs)	Register with IRS; implement FATCA procedures; annual reporting
Foreign companies with US ownership	Passive NFFEs with substantial US owners must disclose those owners to their financial institutions	Disclose US beneficial owners (25%+) to the financial institution
Foreign trusts with US settlors or beneficiaries	May be classified as US trusts; complex FATCA classification rules apply	Specialist US trust and tax advice required

US Persons and Offshore Banking

The Practical Impact on US Persons Offshore

FATCA has had two principal practical effects on US persons with offshore financial relationships:

Bank account closures and restrictions. Faced with the compliance cost and legal liability of maintaining US person accounts, many foreign banks — particularly in Switzerland, Singapore, Channel Islands and Luxembourg — significantly restricted or entirely exited their US client base. Some private banks still accept US clients but only above substantial minimum asset thresholds and only with full W-9 compliance and US tax advisor sign-off. The result is that US persons have meaningfully fewer offshore banking options than non-US persons.

Heightened reporting requirements. US persons with foreign financial accounts must now file both FBAR (FinCEN Form 114, filed with FinCEN) and Form 8938 (Statement of Specified Foreign Financial Assets, filed with the IRS as part of the annual tax return) where applicable thresholds are met. The penalties for failure to file are among the most severe in US tax law — wilful FBAR violations alone can result in penalties exceeding the account value itself.

Reporting Form	Filed With	Threshold (Single/MFJ)	What Is Reported	Penalty for Wilful Failure
FBAR (FinCEN 114)	FinCEN (Treasury)	Aggregate foreign accounts > USD 10,000 at any point	Account number, institution, max balance, owner details	Greater of USD 100,000 or 50% of account balance per violation
Form 8938 (FATCA)	IRS (with Form 1040)	USD 50,000 / USD 100,000 (higher for overseas residents)	Foreign financial assets, foreign accounts, specified foreign financial interests	USD 10,000 per failure; up to USD 50,000 for continued failure; 40% accuracy penalty on understatements

FATCA and Offshore Jurisdictions

Intergovernmental Agreements by Key Offshore Jurisdiction

Jurisdiction	IGA Type	Effective Date	Notes
Cayman Islands	Model 1	2014	FFIs report to Cayman TIA; TIA exchanges with IRS
BVI	Model 1	2014	FFIs report to BVI ITA
Jersey	Model 1	2014	Report to Jersey Comptroller of Revenue
Guernsey	Model 1	2014	Report to Guernsey Revenue Service
Isle of Man	Model 1	2014	Report to Income Tax Division
Switzerland	Model 2	2014	FFIs report directly to IRS under Swiss IGA
Singapore	Model 1	2015	Report to IRAS; exchange with IRS
UAE	Model 1	2015	Report to UAE MOF
Luxembourg	Model 1	2014	Report to Luxembourg ACD
Bahamas	Model 1	2014	Report to Bahamas Competent Authority

FAQ

FATCA — Common Questions

Yes — FATCA applies to all US citizens regardless of where they live in the world. The United States is one of very few countries that taxes its citizens on worldwide income regardless of residency. A US citizen who has lived in the UK for 20 years and holds a UK bank account is still a US person for FATCA purposes — their UK bank is required to identify them as a US person and report their account to HMRC, which then exchanges the information with the IRS. The US citizen must also file US tax returns, FBAR and potentially Form 8938 annually if applicable thresholds are met. This applies regardless of whether any US tax is ultimately owed (foreign tax credits often reduce or eliminate the actual tax liability).

Both FBAR and Form 8938 require US persons to disclose foreign financial accounts and assets, but they are separate requirements filed with different authorities covering overlapping but distinct information. FBAR (FinCEN Form 114) is filed with FinCEN (the Financial Crimes Enforcement Network, a Treasury bureau) and must be filed whenever aggregate foreign financial accounts exceed USD 10,000 at any point during the year. Form 8938 is filed with the IRS as part of the annual tax return (Form 1040) and applies at higher asset thresholds (USD 50,000 for single filers at year-end; higher thresholds for married filers and those living abroad). Form 8938 covers a broader range of foreign financial assets including interests in foreign entities and certain foreign financial instruments in addition to bank accounts. Both forms are required where both thresholds are met — they are not alternatives to each other.

Renouncing US citizenship does eliminate future FATCA obligations — after the renunciation is legally effective, the individual is no longer a US person and their foreign accounts are no longer reportable under FATCA. However, renunciation is a complex, expensive and irreversible process that triggers an exit tax for "covered expatriates" (those meeting net worth or average annual tax thresholds) — effectively treating all worldwide assets as sold at fair market value on the date of expatriation. All outstanding US tax filings and FBAR filings must be up to date before renunciation can be processed. The current renunciation fee is USD 2,350. This is a significant decision that requires specialist US tax and legal advice.

Yes — foreign entities can be caught within FATCA's scope in two ways. First, if the foreign entity is a "foreign financial institution" (FFI) — a bank, investment fund, trust company, insurance company — it has direct FATCA registration and reporting obligations regardless of ownership. Second, if the foreign entity is a "Non-Financial Foreign Entity" (NFFE) with US persons holding 25% or more of its equity, it must disclose those "substantial US owners" to the financial institutions where it holds accounts. This is how FATCA reaches through holding company structures to identify the US beneficial owners behind them — paralleling the way CRS treats Passive NFEs.

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