Perhaps a bit lost in the FATCA shuffle, family offices organized as entities outside the United States must also consider their obligations under FATCA.

How FATCA affects a family office depends, first, on whether the family office is organized in a country that has concluded an intergovernmental agreement with the United States. I will focus on that question in a later post. The second major question is whether the family office, as an entity, either (i) acts in a fiduciary capacity for the families it services, (ii) invests or trades in financial assets for the family; or (iii) manages or administers financial assets for the family.

Family Offices As FFIs

It might surprise you to learn that FATCA may consider a family office a “financial institution” subject to FATCA. After all, a family office isn’t a bank or a brokerage.

For instance, family offices may hold financial assets for the benefit of one or more other persons, making them “custodial institutions” under FATCA. A family office also might fit FATCA’s definition of an “investment entity.” So, a family office may be subject to FATCA if its activities cause it to be an investment entity or a custodial institution. In either case, if the family office is organized as an entity in a jurisdiction outside of the U.S., it is likely a “foreign financial institution” (FFI) and thirty percent of certain U.S. source income payments may be withheld from the family office if it isn’t FATCA compliant.

Do Intergovernmental Agreements (IGAs) Help?

Intergovernmental agreements (IGAs) may reduce the burden of FATCA compliance for family offices that are FFIs. However, IGAs don’t appear to provide an exemption from FATCA if the family office otherwise qualifies as an investment entity or custodial institution under FATCA’s regulations. It’s possible that an IGA’s local implementing legislation or regulation may provide an exemption.

Even U.S. Family Offices May Be Affected By FATCA

Most importantly, both U.S. and offshore family offices will want to ensure that any FFI they are invested with or make payments to will register on the IRS’s FATCA Registration Portal by October 25, 2013. If an FFI isn’t FATCA compliant, 30 percent of certain U.S. source income payments may be withheld from the FFI, affecting the family office’s bottom line.

Additionally, a U.S. or offshore family office must determine whether it makes any withholdable payments to FFIs. If so, the family office will want to collect a withholding certificate from the FFI documenting that the FFI is FATCA compliant. If those FFIs aren’t FATCA compliant and the family office fails to properly withhold and pay to the IRS 30 percent of the withholdable payment, the IRS can hold family office employees personally responsible for 100 percent of the amount that should have been withheld.

Finally, U.S. family offices may hold accounts with or be invested in an FFI. If so, the family office may be receiving inquiries from the FFI for documentation to support its status as a U.S. person. Family offices should take these inquiries seriously and respond promptly. Failure to do so may result in the FFI considering the family office a “recalcitrant account holder” and withholding 30 percent of certain U.S. source income payments from the family office. The FFI may even forcibly redeem the investment or close the account.

Other Questions

In a later post, I’ll discuss the FATCA obligations of a family office that is an FFI. I’ll also answer the question, “What if a family office isn’t an FFI? Does FATCA still affect it?”