Under FATCA and its implementing regulations, an entity is an “investment entity” (and, therefore, a financial institution potentially subject to FATCA) if the entity’s gross income is primarily attributable to investing, reinvesting or trading in financial assets and the entity is “managed by” certain specified entities (generally those in the banking or financial asset management business). Under applicable regulations, “managed by” generally meant “discretionary management” over the assets of the investment entity.
The Proposed Regulations clarify that an entity will not be treated as an “investment entity” solely because it invests into a mutual fund or other pooled investment vehicle (i) that is widely held and (ii) where the financial institution offering interests in the vehicle does not have specific discretionary authority over the entity’s investment (for example, if the mutual fund offers shares to the public generally without a tailored investment mandate).
This change clarifies a question taxpayers had regarding when a vehicle investing in public funds could become subject to FATCA (solely by reason of those investment activities).