QJ/QI Status

The Bahamas is in discussions with US officials concerning application for Qualified Jurisdiction (QJ) status under new rules expected to be implemented next year.

As of January 1, 2001 it is expected that changes in the procedures governing withholding tax will become effective in the United States. The measures are targetted at US citizens owning US securities, with the intent of preventing tax avoidance on earnings or sale of such securities via foreign intermediaries, i.e. any financial institution operating outside the US.

This will impact Bahamian financial institutions holding US securities on behalf of clients, from the viewpoint of “customer confidentiality”. For each payment being received by the owner of US securities via a foreign intermediary, various reporting forms will have to be completed – whether the owner is a US citizen or not. Such forms require the disclosure of the beneficial owner’s identity in respect to earnings — either payment of any dividends or proceeds of sale. Non disclosure could result in 30% of any payment to the customer being withheld in the US, even if the customer is non US and not liable to pay US taxes. Additionally, failure to comply with reporting obligations under the new regulations could result in penalties against foreign intermediaries.

Under a qualified intermediary (QI) system, the confidentiality of non US owners of US securities can be maintained, without subjection to substantial withholding. QIs are required to enter into a contract with the Internal Revenue Service of the US and to meet certain obligations. In order for a foreign intermediary to qualify for QI status, however, the jurisdiction in which it operates must be a qualified jurisdiction (QJ). QJ status is contingent on a certain qualifying standard of a “know your customer” regime being in place.

An application from The Bahamas for QJ status, a prerequisite for financial institutions in the country wishing to apply for QI designation, is under review by the IRS.