A Direct Reporting NFFE (Non-Financial Foreign Entity) is an entity classification under the U.S. Foreign Account Tax Compliance Act (FATCA).
What is an NFFE?
An NFFE is a foreign entity that is not a foreign financial institution. An NFFE can be either an Active NFFE or Passive NFFE. A Passive NFFE must disclose its substantial U.S. beneficial owners on Form W-8BEN-E (Certificate of Foreign Status for Entities). Once the FFI has the information on Form W-8BEN-E, it reports the account information and substantial U.S. owners to the IRS on its annual FATCA filing.
What is a Direct Reporting NFFE?
Alternatively, a Passive NFFE could register with the IRS as a Direct Reporting NFFE and report the information on substantial U.S. owners directly to the IRS.
The Direct Reporting NFFE registers for a Global Intermediary Identification Number (GIIN) and files an annual report to report information on its U.S. persons who own more than 10% of the Company’s stock.
Example of a Direct Reporting NFFE Scenario
Company ABC Ltd (the “Company”), a limited company (LTD) formed in the Cayman Islands, has five equal investors. One investor, John Doe, is a U.S. citizen and owns 20% of the foreign corporation. The Company opens a brokerage account in the Cayman Islands and invests in various stocks and bonds. John Doe personally manages the Company’s investments, so the Company does not meet the definition of a foreign financial institution (FFI). Instead, the entity is a Passive NFFE under U.S. FATCA.
In 2022, the foreign brokerage entity was required to report information on the substantial U.S. owners because the Company was a Passive NFFE. The foreign brokerage company reported John’s beneficial ownership and share of income in the Passive NFFE.
In 2023, the Company decided to register as a Direct Reporting NFFE. The Company was still a Passive NFFE; however, because it is now registered as a Direct Reporting NFFE, the Company is responsible for its owner FATCA filings. The foreign brokerage entity was no longer required to report information on the Company to the IRS. Instead, the Company filed its owner U.S. FATCA return as a direct reporting NFFE.