In an important development for alternative investment firms, the Cayman Islands finalised agreements under the US Foreign Account Tax Compliance Act (Fatca) on Wednesday night, Hong Kong time.

The model 1 intergovernmental agreement (IGA) and a new tax information exchange agreement (TIEA) pave the way for automatic exchange of information under Fatca.

They mean that foreign financial institutions in the Cayman Islands – a widely used offshore jurisdiction for hedge funds and private equity funds – only have to provide the relevant information to the Cayman regulator to avoid the withholding tax on their US-sourced income.

This will reduce the administrative and compliance burden and therefore potentially mean lower costs for Cayman funds, says Arwel Lewis, a Hong Kong-based partner at offshore law firm Walkers.

The official signing will be held “as soon as possible”, say both governments, after which the texts will be publicly available. The Cayman government had indicated on March 15 it would adopt the agreements.

Various fund jurisdictions either have signed Fatca IGAs with the US or are set to do so. Ireland did so in December, while the British Virgin Islands and Luxembourg agreed in March and May, respectively, to follow suit.

Fatca requires non-US financial institutions to report to American tax authorities details of their US account holders and investors worth more than $50,000. Those failing to comply face a 30% withholding tax on US-sourced income.

The Act was initially due to come into force from January 1, 2014, but last month was postponed by six months, giving firms more breathing space and governments more time to strike IGAs.

Following its signing with the US, the Cayman government will have further discussions with the UK’s Treasury to finalise the terms of the UK model 1 IGA Fatca agreement. The UK last October became the first country to sign a Fatca IGA with the US.

The commitment to the IGA received the widespread support of Cayman’s financial services industry, following significant consultation between it and the government, as well as with US officials, notes Walkers' Lewis.

US Treasury Deputy Assistant Secretary (International Tax Affairs) Robert Stack says: “Cayman has had a longstanding relationship with the United States regarding the exchange of tax information, dating back to the original TIEA that was signed in 2001."

“We are especially pleased that the conclusion of an IGA will provide certainty to Cayman’s significant fund industry with respect to Fatca implementation.”