GLOBAL – European real estate funds are inadequately prepared for the likely impact of the Foreign Account Tax Compliance Act (FATCA), US legislation designed to ensure US investors pay tax on capital deployed overseas, according to PwC.
Under the legislation, from 2014, financial institutions will be liable to 30% withholding tax on US income if they fail to supply information on US investors.
Although it is still unclear whether FATCA's 'financial institutions' will include real estate funds and REITs, PwC real estate partner Ros Rowe said it was up to funds to establish whether it would affect them and how they could comply.
"Entities were hoping it would go away," she said. "Now that it seems there will be an agreement between the US and the UK, funds need to find out what they have to do to comply."
Industry consultation in the UK will end this month.
In the meantime, a draft agreement between the US tax authorities and five EU member states stipulating reciprocal data-sharing could emerge as early as the end of the year.
Robin Silverthorne, senior tax manager at PwC, pointed out that an exemption for "actively traded" REIT shares, which exists in the US, would not remove the obligation to provide the US tax authorities with data – on counterparties involved in REIT joint ventures, for example.
PwC is seeking clarification from the UK government on whether domestic REITs will share the same exemption as pension funds, for instance.
Although Rowe acknowledged that FATCA would increase costs and complexity for property funds, she said the Alternative Investment Fund Managers Directive (AIFMD) had effectively kept it off the radar.
"FATCA hasn't made as much noise," she said.
"The whole AIFMD issue has taken up a lot of time.
"Smallish standalone funds will be able to meet the deadline, but will be a big challenge for other funds to look at themselves and decide whether they are a financial institution.
"If they are managing another investor's assets and making distributions, it could be that they have some role within FATCA."