The new US withholding tax regime came into force on January 1. As a result financial institutions located outside the US holding US securities for their clients will need to enter a legal contract with the Internal Revenue Service (IRS), as ‘qualified intermediaries’ (QI) by the end of this year.
Failure to do so could lead, at best, to additional charges from custodians and huge documentation problems, or at worst a possible tax hike of up to 31% on client income.
To reach the qualified intermediary level, firms must undergo staff training, a client communications appraisal and implement changes to procedures and systems, should they be necessary.
If a client of a financial instituion is a beneficial owner of securities then an entitlement under the new regime can be worked out with the IRS.
If a customer is an intermediary, then a financial institution must establish whether it is a QI also.
QIs may give an omnibus declaration in respect of all their non-US customers, whereas non-qualified intermediaries will have to provide information on each beneficial owner to avoid the 30–31% withholding tax.
Industry analysts suggest that investment managers who are account holders for their clients may need to become QIs to maintain confidentiality and streamline the process.