Simmons Gainsford Common Reporting Standard CRS

Common Reporting Standard (CRS) starting from 31 May 2017

The Common Reporting Standard (CRS) was developed by the OECD as a global standard for automatic exchange of financial account information. Over 50 countries implemented CRS from 1 January 2016 and Financial Institutions in these jurisdictions will begin reporting information to their local tax authority during 2017.

CRS contains a number of similar concepts and requirements to the US FATCA system. Broadly it requires entities classified as Financial Institutions to apply due diligence and report information on Financial Account Holders that are resident in Participating Jurisdictions. The scope of CRS is broader than FATCA and the expectation is that there will be significantly more reporting of information on assets held by persons outside of their country of residence.

The first CRS reporting deadline is fast approaching. The reporting in the UK starts from 31 May 2017 and the Channel Islands from 30 June 2017.

What is a Financial Institution

CRS generally defines banks, funds and asset managers as Financial Institutions but can also bring within the  scope other types of entities typically established for investment purposes. Specifically if an entity meets the following two conditions it will be classified as a Financial Institution:

  1. the entity primarily receives income from financial assets (for example, dividends); and
  2. a third party has the discretion to manage the investments or investment strategy on behalf of the entity.

In practice this will affect a large number of trusts, personal investment companies, holding companies and other entities that would not typically be considered Financial Institutions in the more traditional sense.

If an entity is a Financial Institution as a result of meeting the two tests above then it will need to identify the holders of its equity and / or debt and report information on any that are resident for tax purposes in a participating CRS jurisdiction.

For example, a UK resident trust that is a Financial Institution and has a beneficiary resident outside the UK in a participating CRS jurisdiction which has received distributions during a calendar year should be reported to HMRC.

What if an entity is not a Financial Institution?

If an entity is not a Financial Institution, then it will be a Non-Financial Entity (NFE). Whilst an NFE should not have due diligence and reporting obligations itself, Financial Institutions (such as banks) that it has relationships with, will likely request confirmation on whether it is ‘Active’ or ‘Passive’ for CRS purposes. Many entities will already have had similar enquiries under FATCA.

The assessment of their status should be made by reference to a series of different tests but broadly if an entity primarily receives income from passive sources (for example, dividends, rents and royalties) and the assets that it holds are for the production of this income then it will likely be a Passive NFE.

Where this is the case, Financial Institutions (such as banks) will need to request tax residency information from the ‘natural persons’ that exercise control over the entity either by virtue of ownership or other means (for example, beneficiaries of a trust). The Financial Institution requesting the information will be required to report information where any Controlling Persons are resident in a participating CRS jurisdiction.

Next Steps

Entities should understand how they are classified under CRS to determine what (if any) obligations they may have themselves by virtue of meeting the definition of a Financial Institution.

In addition, Financial Institutions are likely to request this information as a condition of account opening and some may require this in order to maintain an existing relationship. Therefore understanding whether entities are classified as Financial Institutions, Active or Passive NFE’s is important to ensure the impact of the CRS reporting is understood and correctly applied.

If you need help or advice on the CRS, please contact us.

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