# FATCA — Foreign Account Tax Compliance Act

FATCA (IRC sections 1471-1474, enacted 2010) requires foreign financial institutions (FFIs) to report US account holders to the IRS, and requires US persons to report foreign financial assets. For Palace Fund, FATCA creates obligations in two directions: the fund's reporting duties regarding its foreign investors, and the Korean investors' reporting duties regarding their US fund investment.

## How FATCA Works

FATCA was designed to prevent US taxpayers from hiding assets in offshore accounts. It operates through two mechanisms:

1. **FFI reporting**: Foreign financial institutions must identify and report US account holders or face 30% withholding on US-source payments
2. **US person reporting**: US persons with foreign financial assets above threshold amounts must report them on Form 8938

## Palace Fund's FATCA Obligations

### Is Palace Fund an FFI or NFFE?

Palace Fund is a US entity, not a foreign financial institution. However, it may be treated as a **withholding agent** that must:
- Collect W-8BEN or W-8BEN-E forms from each Korean investor
- Determine each investor's FATCA status
- Withhold 30% on "withholdable payments" made to non-compliant FFIs or non-consenting foreign investors
- Report foreign investors' information to the IRS on Form 1042-S

### Withholdable Payments

FATCA's 30% withholding applies to:
- US-source interest, dividends, and other fixed or determinable annual or periodic (FDAP) income
- Gross proceeds from sales of US securities (withholding on gross proceeds was delayed and is not currently in effect as of 2025)

If Palace Fund makes distributions that include US-source FDAP income to a Korean investor who has not provided proper documentation, the fund must withhold 30%.

### W-8 Form Collection

Every Korean investor must provide:
- **W-8BEN** (individuals): Certificate of Foreign Status of Beneficial Owner
- **W-8BEN-E** (entities): Certificate of Status of Beneficial Owner for withholding and reporting

These forms are valid for 3 years (through December 31 of the third calendar year) and must be renewed. The fund should collect W-8s before the first capital call.

Key information on the W-8BEN:
- Name, address, country of citizenship
- Foreign tax identifying number (Korean TIN)
- Treaty claim (US-Korea treaty article and rate reduction claimed)
- Certification of FATCA status

## US-Korea Intergovernmental Agreement (IGA)

South Korea and the US have a Model 1 IGA (signed June 2014). Under this agreement:

- Korean financial institutions report US account holders to Korea's National Tax Service (NTS), which exchanges the information with the IRS
- US financial institutions report Korean account holders to the IRS, which exchanges information with the NTS
- This bilateral exchange reduces the compliance burden compared to direct FFI-to-IRS reporting

For Palace Fund, the IGA means:
- Korean investors' information reported by the fund to the IRS will be shared with Korea's NTS
- Korean investors should be aware that their US fund investment will be visible to Korean tax authorities
- This reinforces the need for Korean investors to properly report the fund investment in Korea

## Korean Investor FATCA Reporting

### If the Korean Investor Is Also a US Person

A Korean national who is also a US tax resident (green card holder, substantial presence test) must file:

**Form 8938 (Statement of Specified Foreign Financial Assets)**:
- Threshold: $50,000 on the last day of the tax year or $75,000 at any time during the year (domestic filers, unmarried)
- Higher thresholds for married filing jointly and for US persons living abroad
- Reports foreign financial accounts, foreign stock, foreign partnership interests, foreign financial instruments
- Note: The Palace Fund interest itself is a US asset and does not need to be reported on Form 8938. But any Korean bank accounts or Korean investment accounts do.

**FBAR (FinCEN Form 114)**:
- Not technically part of FATCA but often discussed together
- Required if the aggregate value of foreign financial accounts exceeds $10,000 at any time during the calendar year
- Filed electronically with FinCEN by April 15 (automatic extension to October 15)
- This applies to the Korean investor's Korean bank accounts, not to their Palace Fund investment (which is a US account)

### If the Korean Investor Is a Non-Resident Alien

Non-resident aliens are generally not subject to Form 8938 or FBAR filing requirements for their non-US accounts. Their Palace Fund investment is reported by the fund to the IRS via Form 1042-S and Schedule K-1.

## FATCA Withholding vs. Treaty Withholding

FATCA's 30% withholding is separate from treaty-based withholding on investment income:

| Type | Rate | Applies To | Reducible by Treaty? |
|---|---|---|---|
| FATCA withholding | 30% | Payments to non-compliant FFIs/investors | No |
| NRA withholding (chapter 3) | 30% default | US-source FDAP to foreign persons | Yes, via US-Korea treaty |
| Section 1446 withholding | 37% | ECI allocable to foreign partners | No (but creditable) |

FATCA withholding does not apply if the investor provides proper W-8 documentation and the fund complies with its reporting obligations. It is a penalty mechanism, not a routine tax.

## Reporting Forms Summary

| Form | Filed By | Purpose | Deadline |
|---|---|---|---|
| W-8BEN / W-8BEN-E | Korean investor (to fund) | Certify foreign status and treaty claims | Before first payment |
| Form 1042 | Palace Fund | Annual withholding tax return | March 15 |
| Form 1042-S | Palace Fund | Report amounts paid to foreign persons | March 15 |
| Form 8966 | Palace Fund (if applicable) | FATCA report of financial accounts | March 31 |
| Form 8938 | US-person investors | Report foreign financial assets | With tax return |
| FBAR (FinCEN 114) | US-person investors | Report foreign bank accounts | April 15 |

## Action Items

1. Collect W-8BEN (or W-8BEN-E) from every Korean investor before the first capital call
2. Set up a tracking system for W-8 expiration dates (3-year validity)
3. Implement FATCA withholding procedures for any investor who fails to provide proper documentation
4. File Form 1042 and 1042-S annually by March 15 reporting payments to foreign investors
5. Inform Korean investors that their fund investment will be reported to both the IRS and (via IGA exchange) Korea's National Tax Service
6. For any Korean investor who is also a US tax resident: advise them of Form 8938 and FBAR obligations for their Korean accounts
7. Retain W-8 forms and withholding records for at least 3 years after the last year they are relevant