What is FATCA? US tax rules for foreign banks

What FATCA is and who it covers

FATCA refers to the Foreign Account Tax Compliance Act, a United States law passed in 2010. The main point of FATCA is to make banks and other financial institutions outside the US identify and report accounts belonging to ‘US persons’ to the US Internal Revenue Service, sometimes through local tax authorities. That’s why, in many countries, you’ll find banks ask if you have any connection to the US when you open an account.

This applies if you are a US citizen, have a green card, or fit the IRS residence test for tax. Because US law taxes its citizens on their worldwide income no matter where they live, you may have to disclose bank accounts abroad just because you fit the ‘US person’ definition. There’s more on global tax residency in what tax residency is.

Why banks ask about US status

When you apply to open an account at a bank or payment provider, you’ll probably be asked if you’re a US person. You might see this as a checkbox or a separate form. If you are, you’ll need to provide a W-9 form, which includes your US tax ID. If you’re not, a W-8 form is the usual requirement (the W-8BEN is one common version for individuals). These forms let the bank know what to report and whether US tax must be withheld on your account.

FATCA is not optional for banks with links to the US; if they fail to comply, they risk a 30 percent cut on certain money coming from the US, which could mean a payment for your freelance contract or investment return. Because of the complexity and reporting burden, some banks outside the US choose not to serve US customers at all.

Accidental Americans and FATCA

‘Accidental Americans’ refers to people who have US citizenship under US law, sometimes because they were born in the US or have an American parent, but who may not have lived there since childhood. Many only discover this status when a bank flags it. Because FATCA defines US persons by citizenship as well as where they live, these individuals can run into account freezes or requests for extra paperwork, even if they haven’t filed a US tax return before.

FATCA on its own is about reporting, not collecting tax. Filing requirements can still apply, and those who find themselves in this position often end up seeking specialist US tax advice.

Frequently asked questions

How does FATCA differ from the common reporting standard?

FATCA is limited to the United States and runs mainly through deals between the US and other countries. It’s based on citizenship status, not just residency. The common reporting standard, or CRS, is set by the OECD, is active in over 100 jurisdictions, and relies on a person’s tax residence instead. The US has not joined CRS, so if you are a US person, FATCA is the law that matters for your accounts. More is explained in what CRS is.

Do FATCA rules apply if I am not American?

If you’re not a US person under US tax law, FATCA requirements do not apply directly to you. You may still be asked to fill out a W-8 series form so the bank can record your non-US status, and you could see separate reporting under CRS rules if you have accounts overseas. Your actual tax residency, plus any links to the US, determine your duties. You can review foreign account reporting details for your country, and if you aren’t sure about your US status, you should get confirmation from a qualified tax adviser or the IRS directly.