A Passive Non-Financial Foreign Entity (“Passive NFFE”) is a foreign entity that is not a foreign financial institution (FFI) under the Foreign Account Tax Compliance Act (FATCA).
Under the Treasury Regulations, a Passive NFFE is an NFFE other than an Excepted NFFE.1 An excepted NFFE includes the following entity types:2
- Active NFFE
- Publicly Traded Entity
- Territory NFFE
- Excepted Nonfinancial Entities
- Direct Reporting NFFE
- Sponsored Direct Reporting NFFE
Under a Model 2 IGA, a Passive NFFE means an NFFE that is not (i) an Active NFFE, or (ii) a withholding foreign partnership or withholding foreign trust.
A Passive NFFE means an entity that meets one of the following:
- 50 percent or more of the NFFE’s gross income for the preceding year is passive income; or
- 50 percent or more of the weighted average percentage of its assets (calculated quarterly) are assets that produce passive income.
Passive income generally includes dividends, interest, rents, royalties, annuities, capital gains and losses, and foreign currency gains and losses.3
Example of Passive NFFE and Reporting Obligations
Company A Ltd (the “Company”) is a Bermuda limited company with a Swiss brokerage account. The Company’s sole shareholder is John Smith, a U.S. citizen who lives in New York, NY.
Company A invests in various publicly traded stocks and bonds, and its gross income consists of interest, dividends, capital gains, and capital losses. John manages the investment portfolio and does not hire a third-party investment management company.
Given that the Company only generates passive category income and uses 100% of its assets to generate passive income, it is a Passive NFFE under the Bermuda Model 2 IGA.
When completing Form W-8BEN-E (Certificate of Foreign Status for Entities), the company should select Passive NFFE for its Chapter 4 status and list John Smith as the substantial U.S. owner of the Passive NFFE.
FFI’s with reportable accounts would disclose Company A’s information and John as a substantial U.S. owner.