CRS and FATCA expert

Have You Been Tricked by your CRS Regulator Like This?

Peter Cotorceanu CRS, CRS Regulator, FATCA

Most fiduciaries are conscientiously trying to comply with FATCA and CRS as best they can. Therefore, it’s more than a little frustrating when regulators try to change the rules mid-stream—and in ways not authorised by local law.

In a couple of CRS countries, regulators have purported to impose obligations on Financial Institutions (FIs) that go beyond what local law requires. As a result, many FIs have, in the regulators’ minds at least, now unwittingly blown CRS deadlines. The specific jurisdictions are the British Virgin Islands (BVI) and Switzerland. And the obligations? To register on the local CRS registration portal. The deadlines were 31 July 2017 for the BVI and 31 December 2017 for Switzerland.

First a bit of background. Unlike FATCA, CRS as published by the OECD does not require FIs to register. However, many jurisdictions have taken it upon themselves to require at least some FIs to register for CRS. The registration requirements fall into three broad categories, depending on the jurisdiction:

  • Only FIs with Reportable Accounts must register.  This is the least burdensome approach—these FIs have to file reports anyway so requiring a specific registration obligation as well doesn’t add much work.
  • All Reporting FIs must register even if they have no Reportable Accounts. This approach exempts Trustee-Documented Trusts (TDTs) from registering since TDTs are Non-Reporting FIs.
  • All FIs—both Reporting and Non-Reporting—must register, again, even if they have no Reportable Accounts.

What did the BVI and Switzerland do? Well, it depends on what documents you refer to.


Under the BVI CRS Law, a “Reporting Financial Institution that has reporting Obligations” must register. (The italics are mine.) (See section 28(1) of The Mutual Legal Assistance (Tax Matters) (Amendment) (No. 2) Act, 2015, available here.) Registration is referred to as “notification” in the BVI and requires enrolling on the BVI Financial Account Reporting System (BVIFARS) portal (available here). The fact that only FIs with reporting obligations must register is underscored elsewhere in the legislation, which also states that the notification must be provided by 30 April in the first calendar year “in which the Reporting FI is required to comply with reporting obligations” under the Act. (BVI CRS law section 28(3).) (Again, the italics are mine.) (Note: The BVI’s 2017 registration deadline was subsequently extended to 30 June then again to 31 July. For 2018 and subsequent years, it remains 30 April.)

Section 2.3 of the BVI CRS Guidance Notes (updated 28 November 2016, available here) accurately quote the BVI CRS law. More specifically, section 2.3 repeats the requirement that Reporting FIs must provide notifications no later than 30 April in the first calendar year “in which the Reporting Financial Institution is required to comply with the reporting obligations” of the law. (Italics are mine.) The BVI CRS homepage (available here) also confirms near the bottom that only a Reporting FI “that has reporting obligations” must register.

Notwithstanding all of these confirmations that only FIs with reportable accounts must register, the following is buried in section 4 of the BVI CRS Guidance:

  • NOTE: Under section 29 of the CRS law the filing of nil returns is not mandatory. However, the Financial Institutions with no reportable accounts will still need to complete the notification requirement via the Portal for CRS.”

In addition, a screen shot of the BVIFARS system included on page 7 of the BVIFARS User Guide (updated 21 December 2017, available here) confirms that “all BVI Reporting Financial Institutions are required to enroll with the BVI International Tax Authority using the form below”. (Italics are mine.) Even more telling is this unambiguous FAQ 5 towards the end of the User Guide:

  • 5. Are Financial Institutions required to enrol with BVIFARS if there is nothing to report? 

For US FATCA, No  . . . .

For CRS, yes. All BVI CRS Reporting Financial Institutions must enrol, regardless of whether they have reportable accounts for the reporting period. (Italics are mine.)

Are these references in the Guidance to FIs “with no reportable accounts” and in the BVIFARS Users Guide to “all” BVI CRS Reporting Financial Institutions mistakes? Hard to believe, especially given how explicit the FAQ is. Mistake or not, this much is certain: A massive number of BVI FIs that haven’t yet had any CRS reporting obligations have not yet registered on the BVIFARS website despite these statements.

Are they in trouble? It’s difficult to see how. Neither the BVI CRS Guidance Notes nor the BVIFARS Users Guide are law. Does that mean FIs should ignore them? By no means. It’s always good to stay onside with a regulator if you’re not violating any law by doing so. Although the BVI CRS law requires only FIs with reportable accounts to register, it does not prohibit others from registering. So if the regulator thinks you should (even if you don’t have to), there’s no harm in registering. I would therefore encourage all BVI FIs with no reportable accounts to register as soon as practicable. But I wouldn’t lose sleep over the fact that the registration is now months “late”. How can you be penalised for not complying with a “requirement” that has no legal effect?


All of the following documents unambiguously provide that “Reporting Swiss Financial Institutions” must register on the Swiss CRS registration portal. (Italics are mine.):

  • The Swiss Federal Act on the Automatic Exchange of Information in Tax Matters (AEOI) of 18 December 2015 (the Swiss CRS Act), Section 3, Art. 13
  • The Swiss Ordinance on the Automatic Exchange of Information in Tax Matters (AEOI Ordinance) of 23 November 2016 (the Swiss CRS Ordinance), Section 8, Art. 31
  • The Guidelines on the Standard for Automatic Information Exchange for Financial Accounts, Common Reporting Standard of 17 January 2017 (the Swiss CRS Guidelines), Section 9.1.1. (Unlike the CRS guidance in most countries, Switzerland’s CRS Guidelines are binding.)

(English translations of the Swiss CRS Act, Ordinance, and Guidelines are available for a fee from the Swiss Association of Trust Companies (SATC) by filling out the online form available here).

The Swiss CRS registration deadline was 31 December 2017, i.e., just a few days ago.

As mentioned earlier, Reporting FIs do not include TDTs. Accordingly, based on the Swiss CRS Act, Ordinance, and binding Guidelines, one would be forgiven for thinking that TDTs did not have to register. But one would be mistaken according to a CRS FAQ released by the Swiss Federal Tax Administration (FTA) on 13 December 2017, less than three weeks before the registration deadline. The German version of the FAQ is available here (click on “Auslegungsfragen” and then on “Registrierung von Trustee-Documented Trusts”). French and Italian versions are available here and here, respectively. An unofficial English translation of this FAQ is as follows:

  • Question
  • ​Who needs to register with the FTA in the case of a Trustee-Documented Trust (TDT) and how to fill in the CRS XML Schema?
  • Answer
  • ​The FTA has ruled that if the TDT concept is used, the Trust – regardless of the classification of the Trust as a non-reporting Swiss financial institution – registers with the FTA as the reporting financial institution and adds “TDT =” before its name. If the trust has no UID, the registration can be done without UID. In the CRS-XML schema, the name of the trust must be specified in the element “Reporting FI”. Again, add “TDT =” before the name. (Italics are mine.)

How can this be? The FAQ purports to impose registration requirements not mandated by the Swiss CRS Act, Ordinance, or Guidelines. Although the SATC has done a good job of notifying its members of this FAQ, many Swiss trust companies are not members of the SATC and will not have heard of this before now.

If you’re one of them, I would encourage you to take a deep breath. I’m not a licensed Swiss lawyer, but it’s hard to imagine how an FAQ that purports to impose obligations beyond what the law requires can carry any legal weight whatsoever. It’s also hard to imagine the Swiss FTA attempting to penalise any trustees for not registering their TDTs by 31 December, especially given the late publication of the FAQ. All of that said, I would encourage Swiss trust companies to try to stay onside with the FTA by registering their TDTs as soon as is practicable.

For what it’s worth, the BVI and Swiss regulators are not the only ones who have played sleight of hand with CRS registration requirements. As mentioned in a previous blog, the Cayman Islands CRS regulations and Guidance originally required only FIs with reportable accounts to register. The Guidance was subsequently revised to say that all FIs had to register. (See “The Cayman Guidance Notes: CRS on Steroids”, available here). But since that blog was written, Cayman has at least had the decency to go back and amend its CRS regulations to now require all FIs to register, thus once again aligning the regulations with the Guidance.

In sum, the bad news is that some CRS regulators are a little out of control when it comes to CRS registration requirements. The good news is that, last time I checked, most offshore jurisdictions were still governed by the rule of law, not by the rule of regulators’ whims. So . . .

  • if an FI has failed to register because it wasn’t legally required to do so
  • but the regulator (wrongly) thinks the FI must register anyway
  • and the registration deadline has since passed

. . . go ahead and register as soon as practicable, albeit “late”. But “Keep Calm and Carry On”. Again, how can a regulator penalise you when the registration “obligation” is not enshrined in a legally binding document?

I wish you all a wonderful 2018.

CRS and FATCA expert

Game Over for CRS Avoidance?

Peter Cotorceanu CRS, CRS Avoidance, OECD

As I mentioned in an e-mail yesterday, the OECD has published a discussion draft of proposed new rules requiring disclosure of CRS avoidance techniques. (The draft document, which was published only two days ago, is available here. The OECD’s press release is available here.) Among other things, the rules would:

  • Target advisors and fiduciaries (“Intermediaries”) with “material involvement in the design, marketing or implementation of CRS avoidance arrangements or offshore structures” and would
  • Require the Intermediaries to disclose information on the avoidance scheme to their national tax authorities.

Even more alarmingly, the rules require Intermediaries to dob in their own clients; specifically, to disclose to the Intermediaries’ tax authorities the identity of the beneficial owner (BO) involved in CRS avoidance planning. That information would then be made available to the BO’s tax authorities under the applicable CRS information exchange agreement.

First, though, it’s important to remember that:

  • The document is just a draft. The OECD has asked for written feedback by 15 January. There will be no extension.
  • The document as such, like all OECD publications, has no legal effect. However, you can expect that, once the document is finalised, it will be adopted essentially verbatim in most CRS countries. Indeed, in a few countries, the document will automatically become law as soon as it’s finalised. Those countries are the ones whose CRS implementing legislation (foolishly and perhaps unconstitutionally) automatically incorporates all CRS-related publications into local law once finalised by the OECD.

The document itself is 45 pages long. It’s not possible to give a detailed analysis in a blog of this nature—and besides, I’d bore you to tears given how hyper-technical the rules are. But here are the highlights. Buckle up!

  • The rules target two things: A “CRS Avoidance Arrangement” and an “Offshore Structure”.
  • A “CRS Avoidance Arrangement” is any “Arrangement” that it is “reasonable to conclude” is “designed to, marketed as or has the effect of, circumventing CRS Legislation or exploiting an absence thereof.” “Arrangement” is defined incredibly broadly. So broadly that it’s virtually impossible to think of any plan or step it would not cover.
    • Intent to avoid CRS is not explicitly required. However, the document uses words such as “circumventing” and “exploiting” rather than “avoiding”, which at first blush seem to imply a bad motive. Don’t be fooled though: The rules kick in if it’s “reasonable to conclude” that “circumventing” and “exploiting” was at play. This “reasonable to conclude” language adds an objective element that prevents Intermediaries from playing dumb.
    • The document gives several examples of potential CRS Avoidance Arrangements. One is moving assets or structures to non-CRS jurisdictions (think U.S.A.). But the OECD cuts banks a break here. The document says that a transfer to an account at another bank in accordance with the instructions from the bank’s customer “would not, by itself, be sufficient evidence of an arrangement between the bank and the customer to circumvent CRS legislation (or to exploit the absence of such legislation).” So banks don’t have to enquire or speculate why funds are moved to the U.S. The same should be true of offshore trustees that are replaced by U.S. trustees. But neither banks nor anyone else can advise customers to move their funds or structures to avoid CRS.
    • Another interesting example is any Arrangement that it’s reasonable to conclude is designed to, marketed as, or “has the effect of” allowing an entity to qualify as an Active NFE. However, the mere use of an Active NFE with no reasonable inference of an intent to avoid CRS should not be captured.
  • An “Offshore Structure” is a “Passive Offshore Vehicle” that is held through an “Opaque Ownership Structure”. Is your head spinning yet? Mine is!
    • Without getting into the weeds, the main gist of a “Passive Offshore Vehicle”—not to be confused with the by-now-famous “Passive NFE”—is an entity that’s offshore with respect to any BO and that doesn’t have a substantive economic activity supported by staff, equipment, assets and premises. (H-E-L-L-O most client structures!).
    • And an “Opaque Ownership Structure” is a structure that it’s reasonable to conclude is designed to have, is marketed as having, or has the effect of, in essence, allowing a BO of a Passive Offshore Vehicle to hide from CRS.  Again, although intent to avoid CRS is not required, a reasonableness inference of such an intent seems necessary given the rules’ reference to “obscuring” beneficial ownership and “creating the appearance” that the BO is not in fact the BO.
    • The rules give several examples of Opaque Ownership Structure. Notably, interest-free loans are specifically mentioned as potential devices that could be used to try to hide true BOs. Therefore, if it’s “reasonable to conclude” that an interest-free loan is being used for that purpose (even though there is no ill intent whatsoever), the rules would be triggered (if the other requirements are met).
    • Putting the above together, then, an Offshore Structure is any non-brick-and-mortar entity that is offshore with respect to the BO and that a reasonable person can conclude intentionally hides the BO from disclosure. Standard Passive NFEs and FIs shouldn’t generally qualify as Offshore Structures because disclosure will normally be required in such cases so there will be no intent to hide the BO.
    • If you think it all the way through, you’ll see that an Offshore Structure would also necessarily be a CRS Avoidance Arrangement. However, the OECD was apparently concerned enough about the specific types of avoidance techniques that fall within the definition of “Offshore Structures” to address them separately.
  • What’s the consequence of having a “CRS Avoidance Arrangement” or an “Offshore Structure”?
    • The rules impose disclosure obligations on “Intermediaries”. Intermediaries include both advisors (think lawyers and consultants) and service providers (think trust companies and corporate service providers). More specifically, Intermediaries must disclose CRS Avoidance Arrangements and Offshore Structures to the tax authorities of (i) their respective countries, and (ii) any other country where they offer those services through a branch located in that country.
    • And Intermediaries must act quickly—they must make their disclosures within 15 working days after the plan is hatched or implemented (the definition is much more technical than that, but that’s the basic idea)
    • It gets worse. “Promoters” (defined below) must disclose not just planning that’s implemented after the effective date of the rules, but planning that’s already happened. Subject to a de minimis exception, Promoters must disclose Arrangements implemented on or after 15 July 2014 even if the Promoter doesn’t do anything with respect to the Arrangement after the new rules go into effect. 15 July 2014 is, of course, the date the CRS “bible” was first published. It matters not when CRS went into effect in the Promoter’s jurisdiction. Wow!
    • The de minimis exception is that a Promoter does not have to make this retroactive disclosure if he or she knows that the value of the relevant “Financial Account” (read “debt or equity interest” when it comes to FI client structures) was worth less than USD 1 million.
    • A “Promoter” is “any person who is responsible for the design or marketing of a CRS Avoidance Arrangement or Offshore Structure”. This would capture advisors who hatch CRS avoidance plans but perhaps not fiduciaries who merely implement them but do not market them.
  • So what exactly has to be disclosed?
    • All of the relevant identifying information (e.g., name, address, TIN) of:
      • The person making the disclosure
      • The relevant BO (technically, the “Reportable Taxpayer”)
      • Any person other than the BO instructing the Intermediary, and
      • The Intermediary
    • The details (broadly defined) of the CRS Avoidance Arrangement or Offshore Structure, and
    • The jurisdiction(s) where the CRS Avoidance Arrangement or Offshore Structure has been made available for implementation
  • Believe it or not, there is some good news. Intermediaries are not required to disclose any information protected by the attorney-client privilege. But in that case:
    • The attorney-Intermediary must notify his or her home country’s tax authority that he or she has information on a CRS Avoidance Arrangement or Offshore Structure that is not required to be disclosed, and
    • The end user or BO must disclose to his or her tax authority any information on the Arrangement or Offshore Structure that is not disclosed by the Intermediary because of the attorney-client privilege. (To ensure this happens, the non-disclosing attorney-Intermediary must inform the BO of the BO’s disclosure obligation). In addition, the end user/BO must also turn him- or herself in if the attorney-Intermediary has no disclosure obligation at all (because, for example, the attorney-Intermediary is not in a CRS country). It’s not clear who would inform the BO of this duty. But one caveat applies here too: No person is required to disclose any information that would infringe that person’s privilege against self-incrimination under domestic law. The OECD does have a heart!
  • Punishment for violation of the rules is left to each jurisdiction to set. However, the OECD suggests that countries “may consider setting the penalty at a fixed rate or (if greater) at a percentage of the fees paid to the Intermediary for the services provided in respect of the CRS Avoidance Arrangement or Offshore Scheme, with the percentage set at rate that removes any economic incentive for the Intermediary to avoid disclosure.”

The above is just an executive summary, if you will, of the proposed new rules. There are many nuances and some exceptions that are not mentioned. But at least now you have the flavour of what’s likely coming to a country near you very soon.

Bear in mind too that, once in effect, the above rules will work hand-in-glove with the general CRS anti-avoidance legislation that almost all CRS countries have adopted. That legislation attempts to nullify any arrangements that have a main purpose of CRS avoidance. The new rules go much further by requiring planners and other Intermediaries to proactively report the arrangements to the tax authorities.

Back to the question posed at the outset: Is it now game over for CRS avoidance techniques? It’s too early to say definitively. There are certainly some creases in the proposed new rules. But to paraphrase a holiday song, “it’s starting to look a lot like Christmas game over”. Or very close. Except, of course, for advisors in the U.S., that great CRS void. Talk about making America grate again!

And on that cheerful note: Happy Holidays everyone!

It’s been a privilege to serve you in 2017. I enjoy hearing from you, so if you get a moment, please drop me a line at


CRS and FATCA expert

Hot off the Press: On SRIP trusts, Singapore blinks… Or, is that a wink?

Peter Cotorceanu CRS, OECD, SRIP trusts

On 18 July, Singapore published adjustments to its OECD CRS FAQs (available here), featuring modification of the guidance on settlor reserved investment power (SRIP) trusts. In the prior version of the FAQ (as analysed in my blog of 25 April), the Inland Revenue Authority of Singapore (IRAS) stated in FAQ B.5 that a SRIP trust would not qualify as an FI because the manager of the assets held by the trust (i.e., the settlor) would not itself be an FI. The revised version is no longer so certain.

The updated version holds that such SRIP trusts may still qualify as professionally-managed investment entity (PMIE) type FIs insofar as the trustee is an FI and conducts “any of the activities or operations described in subparagraph (A)(6)(a) [of the CRS standard] on behalf of the trust.” The revision is essentially a punt, granting fiduciaries of SRIP trusts leeway to deploy their own interpretation of the “managed by” standard in application to the administrative activities of the trustee that are unconnected to the trust’s investment decisions (e.g., the discretionary authority to order a distribution of trust assets). Arguments cut both ways on that point.

This FAQ restores the status quo and puts Singaporean SRIP trusts in the same position as those in most other jurisdictions: The CRS status of a SRIP trust depends on the interpretation of the rules by the trustee. Nonetheless, this FAQ did not appear from nowhere. I wonder whether Singapore has made a merely cosmetic change for the sake of placating the OECD and other watchdogs? I have to believe (pure speculation of course) that that OECD got to Singapore and made them reverse the previous FAQ. Is this a sign that the OECD’s CRS Disclosure Facility is working? Or perhaps that the OECD staff who follow this blog (hi!) have been paying close attention? Whatever the reason, Singapore has blinked. That said, by making such a tepid reversal of the prior FAQ position, has Singapore in effect dog whistled to the local industry that it will not zealously police the CRS classification of SRIP trusts? Has Singapore perhaps winked rather than blinked, then?

Whatever motivations underlie this change, however, one thing is clear: Even after this change, the prior argument regarding SRIP trusts remains plausible (though by no means a slam dunk). That argument is that a SRIP trust, even one with a commercial trust company as trustee, is an NFE, not an FI, where investment powers are not subsequently delegated to an FI, e.g., are retained by the settlor or delegated to another individual or non-FI. As pointed out in my 25 April blog, that argument is based on the following sentence in the CRS Commentary:

  • However, an Entity does not manage another Entity if it does not have discretionary authority to manage the Entity’s assets (in whole or part).

The only way to effectively foreclose that argument is for the OECD to amend this sentence of the Commentary. But even if the OECD does that, that change doesn’t have the effect of law—the OCED is not a legislature. No, the change would have to be incorporated into local law for it to have any binding effect. And the process has to be undertaken country by country by amending legislation or regulations. The only exception is those countries (and there are some) that have unwisely (perhaps unconstitutionally?) incorporated into local law CRS and the Commentaries as amended from time to time by the OECD.

Bottom line: Despite Singapore’s reversal, the argument remains viable that certain SRIP trusts with commercial trust companies as trustees nonetheless fail the “managed by” test. The OECD has no-one to blame but itself (and creative advisors).


CRS and FATCA expert

Hey FFI Agreement, what’s new?

Peter Cotorceanu FATCA, FFI Agreement

As set forth in the last blog, the deadline for the renewal of FATCA FFI Agreements is pending and all affected FIs must submit their renewal application by the end of July or risk removal from the FATCA GIIN List. (Remember, though, that not all FIs with GIINs have to renew—check the last blog for details.) While the offer to renew has the whiff of Corleone about it (i.e., one that no FI can refuse), Responsible Officers (ROs) ought to familiarise themselves with the modifications to the FFI Agreement before renewing their contracts with the IRS. Fortunately, there are not many material changes, few that impact fiduciaries, and none that ought to lead an RO to wake up with a horse’s head in his or her FATCA bed!

Many of the changes reflect revisions to the chapter 3 (Qualified Intermediary (QI)) and chapter 4 (FATCA) regulations released in late December 2016. The significant ones are listed below in order of perceived relevance to the fiduciary industry. As you’ll see, most of them are highly technical. The important point is not to get bogged down in the weeds, but at least to know what’s changed (to the extent any of this is really comprehensible as a practical matter!)

  • Clarification in Section 3.04(c) and the preamble that Reporting Model 2 FIs must treat Passive NFFE account holders as Non-Participating FFIs (NPFFIs) (and withhold accordingly) where the Passive NFFEs neither list their US Controlling Persons nor certify that they have none.
    • Annex I of the IGAs ends in a cul-de-sac with no clear outlet for entities that properly certify their Passive NFFE entity statuses while neglecting the Controlling Person component of the certification, leaving room for interpretation. The FFI Agreement now explicitly mandates treatment as NPFFIs.
    • The same provisions additionally affirms that Reporting Model 2 FIs may not use the documentation rules from Annex II of their IGAs (e.g., determining the entity’s classification based on publicly available information) in order to classify entity payees that are not account holders.
    • The IRS closed out this section with an unveiled threat that Reporting Model 2 FIs overly reliant on the presumption rules “may be determined to be significantly non-compliant with the requirements of an applicable IGA.”
      • Although provisions in the FFI Agreement are not directly applicable to Model 1 IGA FIs, the view of the IRS on the matter is now plain and the implications for Model 1 FIs presumably resemble those for their Model 2 kin.
    • The implication of the above points will tend to affect fiduciaries administering entities holding financial assets in Model 2 IGA (and perhaps Model 1 IGA) jurisdictions, where some FIs may now seek further certifications regarding FATCA status or Controlling Persons, if the FI’s initial due diligence procedures appear lax in retrospect.
  • Deletion of the reference to a Model 1 IGA Trustee-Documented Trust (TDT) amongst the potential reporting obligations of a Participating FFI (PFFI) trustee.
    • As noted in the preamble, the deletion acknowledges that reporting by such Model 1 IGA TDTs is outside the scope of the FFI Agreement, which governs the compliance activities of Model 2 and non-IGA FIs.
    • Practically speaking, this deletion has scant effect, but confirms relief for ROs of trustees documenting TDTs in Model 1 IGA jurisdictions from certifying the reporting of such TDTs’ account holders.
  • Clarification per Section 6.02(B) that account holder payment reporting by PFFI partnerships covers gross amounts made or credited to the interest holders and creditors of the partnership, including any full or partial redemption payments.
  • Adjustment of RO certification deadlines throughout Section 8 in alignment with the deferrals announced in 2016.
  • Addition of so-called “survival obligations” following termination of an FFI Agreement (by either the FI or the IRS), requiring the erstwhile FI to:
    • Complete all relevant compliance duties (e.g., account holder reporting) related to the calendar year of the termination per Section 12.03(c); and
    • Submit a final periodic RO certification covering the period up until the date of termination per Section 12.10.
  • Allowance for an FI to assume the full year’s FATCA account holder and Form 1042-S reporting for accounts acquired through merger or bulk acquisition within a reporting period per Sections 6.02(B)(2) and 6.05(F) and thus to relieve the previous FI of any reporting with respect to those accounts and/or payments.
    • In theory, this provision would apply to trustees assuming the trusteeship of TDTs through merger with or acquisition of the former trustee, permitting them to submit a combined FATCA account holder report for that year as the accounts of a TDT are formally reported as if they were the accounts of the trustee.
  • Deletion of multiple references to transitional rules and deadlines (e.g., pre-existing account holder due diligence), the compliance timelines for which have since elapsed.

As mentioned at the outset, many of these changes are hyper-technical. The bottom line is that, if you are an FI that must renew the FFI agreement (see the previous blog), you better do so by the 31 July deadline, now less than two weeks away. If you fully understand all of the above and the other provisions of the FFI agreement, well, that’s gravy.

CRS and FATCA expert

Time to Renew the FFI Agreements

Peter Cotorceanu Blog, FATCA, FATCA Entity Classification

Upon registration for a GIIN via the IRS FATCA Registration Portal, certain FIs (i) subject to a Model 2 IGA, or (ii) not subject to any IGA automatically entered into a contract with the IRS known as the FFI Agreement. The FFI Agreement sets forth the FI’s rights and responsibilities (with responsibilities outnumbering rights heavily). In the scrum of FATCA registration and preparation in late spring 2014, one item in the FFI Agreement may have been overlooked: Its expiration date. Per Section 12.01 of the 2014 FFI Agreement, all FFI Agreements expired on 31 December 2016. As such, it is well past time to renew the agreement and the deadline to do so is set for 31 July 2017, less than three weeks away. The updated 2017 FFI Agreement is included in Rev. Proc. 2017-16, available here.

The renewal process is straightforward for those registered FIs that need to renew, but confusing for those that do not. The IRS amended the homepage for all registered FIs on the IRS FATCA Registration Portal to include a “Renew FFI Agreement” link under Available Account Options. By clicking though, renewing FIs can affirm their wish to submit their renewal. Prior to the submission of the renewal, renewing FIs may review and edit their original registration information, as warranted. Once submitted, the Responsible Officer (RO) should receive confirmation of the submission and, ultimately, the FFI Agreement’s renewal status on the homepage will reflect the IRS’s approval of the agreement’s renewal. Failure to satisfy the FFI Agreement renewal requirement by the 31 July deadline will result in the termination of the FFI Agreement (retroactive to 1 January 2017) and removal of the FI from subsequent FATCA GIIN Lists.

The appearance of the “Renew FFI Agreement” link on an FI’s homepage, however, does not necessarily mean that the FI must renew an agreement. Primarily, Participating FFIs and Reporting Model 2 FIs are subject to renewal obligations. The rest, including critically Reporting Model 1 FIs (unless they operate branches in non-IGA or Model 2 IGA jurisdictions) and sponsoring entities/trustees of trustee-documented trusts (acting in those roles), are exempt from the renewal obligation. Irrespective of the renewal requirement though, all registered FIs will find the “Renew FFI Agreement” link on their homepage (note: Sponsoring entities/trustees of trustee-documented trusts should not even have such a link). However pursuant to an FAQ released on 3 July (available here), a registered FI without a renewal obligation will not be penalized if it neglects to click through the link in order to affirm that it does not need to renew.

Below please find a table of the FATCA statuses most relevant to fiduciaries and the corresponding FFI Agreement renewal requirement:

FATCA Entity ClassificationJurisdiction TypeRenewal Requirement?
Particiapting FFINon-IGAYes
Reporting Model 2 FIIGA Model 2Yes
Reporting Model 1 FI (with no branches in any non-IGA jurisdictions)IGA Model 1No
Reporting Model 1 FI (with branches in any non-IGA jurisdiction)IGA Model 1Yes
Sponsored Investment Entity (SIE)AllNo
Sponsored, Closely Held Investment Vehicle (SCHIV)AllNo
Trustee-documented Trust (TDT)
(Note: TDTs are not available for trusts not covered  by an IGA)
IGA Models 1 and 2No
Owner-documented FFI (ODFFI)AllNo
Passive NFFEAllNo
Active NFFEAllNo
Sponsoring Entity (as sponsor)AllNo
Trustee documenting TDT (as documenting trustee)AllNo

Although the IRS proactively notified ROs via e-mail of the renewal requirement (and intends to send a reminder message ten days prior to the due date), this notification is oddly unspecific, ordering the RO to log-in to the FI’s portal account without further elaboration as to the purpose or deadline. Accordingly, some ROs may defer the activity until too late and needlessly endanger their compliant FI status. There is no benefit to a delay (especially with summer holidays increasingly governing many minds). We advise all registered FIs with renewal obligations to log into their account promptly, click the “Renew FFI Agreement” link under Available Account Options and proceed accordingly.

In closing, an early reminder for those who renew their agreement: The 2017 FFI Agreement expires automatically on 31 December of next year and it too will need to be renewed.

Panama Antes Up: AEOI Regulations Published

Peter Cotorceanu Blog, CRS, FATCA, OECD

The relationship between Panama and international tax transparency has proved a bit tumultuous over the past two years (or hadn’t you heard?). As a result, the country’s release of FATCA and OECD CRS regulations on 12 May (available here) prompted considerable curiosity (in me anyway) as to Panama’s chosen approach. Unfortunately, my poor Spanish hampers any detailed analysis of the new rules. Subject to a few specific comments below, though, nothing that I translated seems out of line with the global norms of AEOI implementation. Unsurprisingly, it seems that Panama took a safe approach. However, for any readers with Panamanian interests, you must of course review the regulations for yourself or speak to an advisor with local and Spanish-language expertise to confirm your obligations. (You might consider José Andrés Romero TEP (, reachable at José is knowledgeable about all things FATCA and CRS. Indeed, this blog was written with José’s invaluable help.)

For basic organisational purposes, the key deadline dates are:

  • Start of CRS new account on-boarding: 1 July 2017. A mid-year start date is unusual but not unique. A few other countries have adopted the same approach (e.g., Australia, Canada, and New Zealand).
  • Completion of pre-existing high value individual account due diligence for CRS: 30 June 2018 (see article 19). Interestingly, identification of pre-existing individual accounts as high or lower value is to be determined based on values as of 31 December 2017, not earlier (see articles 2.3 and 2.4). Therefore, at least for accounts that fluctuate in value, it won’t be possible to know which set of pre-existing individual account due diligence rules to apply until 31 December this year. To avoid having to wait till 31 December to begin due diligence on pre-existing individual accounts, one can apply high-value account due diligence to all pre-existing individual accounts, both high and low value. That makes the value as of 31 December 2017 irrelevant. However, this is not an appealing option. High value pre-existing individual account due diligence is quite burdensome, requiring an annual “relationship manager” enquiry and, in some cases, a review of both electronic and paper records. A better alternative might be to apply new account due diligence to all pre-existing individual accounts. But that will require getting Self Certifications from existing customers, which is not always easy or even possible. The bottom line is that, unless a Financial Institution takes one of these alternative routes, it won’t be able to begin pre-existing individual account due diligence for accounts that fluctuate in value until 31 December 2017. That reduces from one year to six months the time to complete such due diligence. In addition, it creates a circularity problem. An account is not reportable until it is identified as such after application of due diligence rules. Therefore, unless one of the alternatives mentioned above is employed, no pre-existing individual account due diligence can be completed until 2018. That means that no pre-existing individual accounts would be reportable for 2017 (because due diligence wouldn’t have been completed till 2018.) But the first reportable year is 2017.  It would be odd indeed that new accounts opened on or after 1 July 2017 would be reportable for 2017, but no individual accounts opened before 1 July 2017 would. Regulatory mistake?
  • Completion of pre-existing lower value individual account due diligence for CRS: 30 June 2019 (see article 19). As noted above, a pre-existing lower value individual account is to be identified as such on December 31, 2017, not earlier (see article 2.4).
  • Completion of all pre-existing entity account due diligence for CRS: 31 December 2019 (see article 25).
  • CRS Reporting due for Depository Institutions and Specified Insurance Companies: 30 June for prior year’s tax period (i.e., first reporting deadline is 30 June 2018 for tax year 2017).
  • CRS Reporting due for Custodial Institutions and Investment Entities: 30 July for prior year’s tax period (i.e., first reporting deadline is 30 July 2018 for tax year 2017). It’s very unusual to have different reporting deadlines for different types of FIs. I understand that the Netherlands also takes this approach, but I don’t know of any other countries that do. I also find it a bit odd that 30 July, not 31 July, is the deadline for Custodial Institutions and Investment Entities. Did someone copy and paste the 30 June deadline for Depository Institutions and Specified Insurance Companies, change “June” to “July”, and forget to change “30” to “31”? That’s my guess—pure speculation, mind you.
  • Registration for Reporting Financial Institutions due 90 days after the effective date of the regulations, which was 12 May 2017. It’s not clear whether one should include 12 May in counting the 90 days, but to be safe, one should. In that case, the registration deadline is 9 August 2017.

The OECD and the G-7: The Dynamic Duo of Fighting Tax Crime

Peter Cotorceanu Blog, CRS, CRS Disclosure Facility, OECD

On 5 May, the OECD announced the opening of a “CRS Disclosure Facility”. (The Announcement is available here.) The Disclosure Facility is intended to facilitate reporting of “loopholes”, “schemes”, “products”, or “arrangements” that may be used for circumventing CRS.

The OECD’s announcement was followed on 13 May by a formal request from the G-7 member states at the annual meeting in Bari, Italy that the OECD crackdown on methods of avoiding CRS reporting or concealing beneficial ownership of assets (the “Bari Declaration”(available here)). Strange that the G-7’s request came after the OECD had already moved on the issue, at least with respect to CRS. But as they say in Paris, “c’est la vie”.

The clear signal from both organisations is that the myriad devices being used worldwide to aid the concealment of taxable assets and income through avoidance of CRS reporting and other means must be targeted and tackled.

“Good on ya’”, as we say back in New Zealand. Mostly.

Look, I’m all in favour of flushing out tax evasion and tax evaders. That’s a noble goal and one that I fully support. The offshore world should as well.

That said, as you should know by now, I am an equally vocal proponent of the right to privacy in financial matters provided the privacy is being used for legitimate reasons. Yes, governments have the right to know if we’re paying our taxes. But, in  my view, governments do not have the right to know anyone’s financial affairs if those affairs are conducted in a fully-compliant fashion, tax and otherwise. And, as we all know, both CRS and FATCA ask for far more information than is relevant to tax compliance, which is those regimes’ ostensible goal. Therefore, as much as I support the OECD’s and G-7’s overall tax compliance aims, I equally support compliant people’s right to avoid FATCA and CRS reporting if they can do so legally.

Now, let me descend from my soapbox to address the more mundane details of the new CRS disclosure facility . . . .

The “Facility” is a website, available here. Anyone can go to the website and enter details about techniques that may be used for circumventing CRS. The information can be entered anonymously or with full disclosure of the user’s identity and other details. The website asks whether the avoidance technique is being actively promoted or used and, if so, the countries or regions where it is being used. Finally, the website allows the user to upload documents or provide links to “publicly available” materials in which the technique is described or promoted.  Not quite sure why the OECD wants only “publicly available” materials. To that extent, the OECD is far more scrupulous than certain tax authorities who have made a habit of buying stolen—most definitely not “publicly available”—data.

According to the OECD, it will analyse the data it collects to determine whether the source of the loophole is local implementation misstep or some fault in the CRS standard itself. In the former case, the errant jurisdictions will be told how to repair the defect as part of the standard CRS review process. In the latter case, the OECD may publish an FAQ to resolve a question of interpretation.  Or, if the flaw is one of fundamental CRS design, the OECD may issue revisions to the CRS Standard or Commentary.

While CRS itself is a significant advance in the efforts to confront tax evasion, the “loopholes” in it are legion. As many of you know, I’ve written a detailed article on one of the best-known loopholes, i.e., moving assets and structures to the U.S. (The article is called “Hiding in plain sight: how non-US persons can legally avoid reporting under both FATCA and GATCA” and is available here). As the article makes clear, only fully compliant persons should even attempt to use these avoidance techniques. Or any others (and there are quite a few!). But, as the article also makes clear, avoiding CRS is not easy especially given most countries’ CRS anti-avoidance legislation. We’ll take a closer look at such legislation in an upcoming blog.

In sum, the CRS disclosure facility is a great leap forward (and not, one hopes, in the Maoist sense) in combatting tax evasion. But of course it will also be used to find out how fully compliant people are avoiding CRS. I for one will not be posting any information on the OECD’s website. However, if any of you wishes to post my “Hiding in plain sight” article and the techniques it discusses on the website, have at it. Not much the OECD can do to close the U.S. “loophole”, at least not until the OECD has the intestinal fortitude—not to mention suicidal wish—to give a red card to the U.S., which just happens to be the OECD’s largest funder.

As a closing point, by seeking expert input and even allowing for anonymous whistle-blowing, the OECD is smartly taking advantage of a typically underused resource: Practitioners with a strong understanding of the rules. I wonder, though, just how much information the OECD is going to collect. Whatever happens, as long as overly burdensome regulatory regime like CRS exist, there will be those who seek to avoid them. Some for illegitimate reasons, yes. But some also for perfectly legitimate ones. More power to the latter. Let’s hope they can stay one-step ahead of big brother despite the OECD’s new CRS Disclosure Facility.

CRS and FATCA expert

Cayman CRS Guidance Part 2: Entity Equity-Interest Holders

Peter Cotorceanu Blog, Cayman Guidance Notes, CRS, Entity Equity, Interest Holders, OECD

In the last blog, we looked at several aspects of the Cayman CRS guidance that go above and beyond what CRS itself requires. In today’s blog, we look at a different aspect of the Cayman guidance. At first blush, this aspect appears to follow a requirement of the OECD’s CRS Implementation Handbook that flatly contradicts CRS. Read closely, however, it is (almost) perfectly consistent with CRS.

We’ll start with the CRS Implementation Handbook and then see what Cayman has done. But first some background.

As many of you know, a “financial account” in a trust that is an FI includes an “equity interest” in the trust. An “equity interest” is held by the settlor, certain beneficiaries, and “any other natural person exercising ultimate effective control over the trust.” So far, so good.

What if the equity interest is held by an entity? Under CRS itself (not the Handbook), the answer depends on the classification of the entity holding the interest.

There are only three possibilities: The entity holding the interest might be:

  • an FI
  • an Active NFE, or
  • a Passive NFE.

Let’s take each of these in turn.

  • FI: If the entity holding the interest in the FI is also itself an FI, the FI in which the interest is held does nothing. FIs don’t report other FIs and don’t look through them for Controlling Persons. This makes sense. After all, FIs have CRS reporting obligations. Therefore, the FI holding the interest will have its own reporting obligations. Consequently, there’s no need for the FI in which the interest is held to have its own separate reporting obligations or to look through the interest-holding FI for Controlling Persons.
  • Active NFE: Active NFE is the most privileged of all CRS classifications. Active NFEs have no CRS reporting obligations and are not looked through for Controlling Persons. Therefore, if an Active NFE has an equity interest in an FI, the Active NFE won’t report, and the FI will not look through the Active NFE for Controlling Persons. Subject to limited exceptions, the FI will report the Active NFE itself, but it won’t report the people behind the Active NFE.
  • Passive NFE: Just like Active NFEs, Passive NFEs have no CRS reporting obligations. But if a Passive NFE has an equity interest in a trust that is an FI, the trust must look through the Passive NFE for Controlling Persons. The FI trust will then report both the Passive NFE and the Controlling Persons, assuming they reside in countries with which the trustee’s country has a CRS information exchange agreement.

All of the above is basic CRS. Therefore, if a settlor or beneficiary who is an equity-interest holder in an FI trust is an entity, apply the above rules depending on the entity’s own CRS classification.

The waters get a little murkier with respect to equity-interest holders other than settlors and beneficiaires, i.e., persons who exercise “ultimate effective control” over trusts. In effect, the trust must identify any natural person (i.e., individual) who effectively calls the shots for the trust. Such an individual might or might not have a formal role in the trust. Key is that the person actually runs the show, whether formally or informally. And it’s irrelevant whether the person is exercising control through an entity or directly as an individual. The only thing that matters is that the person is exercising “ultimate effective control” over the trust, which is a pretty high threshold.

If you’re interested in my thoughts on whether protectors as such should be treated as exercising “ultimate effective control” over their trusts, read my previous blog on that topic, available here. A trickier question is whether trustees should be treated as exercising that sort of control. The OECD’s Implementation Handbook says “yes”. But is that right?

There is no question that, in the abstract, trustees generally exercise “ultimate effective control” over their trusts. There may be exceptions for BVI VISTA trusts, Cayman STAR trusts, and other trusts that narrowly circumscribe trustees’ duties. But in general, there’s no doubt that trustees generally meet this criterion. Except that, in this particular context, there’s a strong argument that they don’t.

How so?

As with any legal definition, one has to consider the drafting history to discern its intended meaning. The definition of equity-interest holders in trusts was based on the definition of “Controlling Persons” of Passive NFE trusts. Take a look at the following table, which lays the two definitions side by side:

Controlling Persons of Passive NFE TrustsEquity-Interest Holders in FI Trusts
·      the settlor(s),

·      the trustee(s),

·      the protector (if any),

·      the beneficiary(ies) or class(es) of beneficiaries, and

·      any other natural person(s) exercising ultimate effective control over the trust

·      a settlor or

·      the trustee(s),

·      the protector (if any)

·      beneficiary of all or a portion of the trust, or

·      any other natural person exercising ultimate effective control over the trust


As you can see, while both trustees and protectors are expressly listed as Controlling Persons of Passive NFE trusts, they were both deleted from the definition of equity-interest holders in FI trusts. Why? Well, put yourself in the shoes of the draftsperson. You’ve been asked to come up with a definition of persons who hold an “equity interest” in a trust. As a matter of trust law, does a trustee hold an “equity interest” in its trust? Absolutely not. Trustees hold legal title to trust assets, but they do not hold equitable title. Only beneficiaries do. So, as a draftsperson, you are going to get out your big red pen and run a line through “trustee”. Which is precisely what the draftsperson of this provision did.

How about protectors?  Protectors don’t hold any title at all in trusts—not legal title and not equitable title. So, as a draftsperson, you are once again going to take your big red pen and this time run a line through “protector”. Which is also what the draftsperson of this provision did.

You decide to leave “settlors” in. Settlors, as such, don’t hold equitable title unless they are also beneficiaries. Nevertheless, you figure that the trust assets originated with them so, what the heck, they’re important enough to stay in the definition. And you also decide to leave in the catch all “any other natural person exercising ultimate effective control over the trust”. After all, if a third-party is running the show, you want to know who that person is.

Which brings us back to the question whether trustees should be treated as exercising such control.

Take a step back. You’ve just finished putting a big red line through “trustee” because trustees don’t hold equitable title. It you thought that trustees were nevertheless captured as persons “exercising ultimate effective control”, what would you have accomplished by deleting the express reference to trustees? Nothing. Except confusion. In my view, therefore, the deliberate deletion of “trustees” from the definition of equity-interest holders demonstrates a clear intent that they are not captured by the “ultimate effective control” language. Otherwise, the deletion would have been meaningless. The draftsperson might as well have left the red pen in his or her pocket.

Now back to the Handbook. The Handbook says that the reference to any other natural person exercising ultimate effective control over the trust includes “at a minimum” the trustee as an equity-interest holder. In my view, for the reasons set forth above, this is wrong turn number one.

But the next wrong turn—and it’s is a doozy—is the main topic of today’s blog. Here’s what the Handbook says:

  • If a settlor, beneficiary or other person exercising ultimate effective control over the trust is itself an Entity, that Entity must be looked through, and the ultimate natural controlling person(s) behind that Entity must be treated as the Equity interest holder.

Hold on cowboy! That’s just, well, all mucked up. (I’m biting my tongue here.)

That sentence from the Handbook would be much more accurate if “Entity” were replaced with “Passive NFE”:

  • If a settlor, beneficiary or other person exercising ultimate effective control over the trust is itself a Passive NFE an Entity, that Passive NFE Entity must be looked through, and the ultimate natural controlling person(s) behind that Passive NFE Entity must be treated as the Equity interest holder.

The only problem with this rewritten sentence—and this is a technical quibble—is that the Controlling Persons wouldn’t actually be equity-interest holders. The Passive NFEs would be. The Controlling Persons would be just that: Controlling Persons. But the important point is that both the Passive NFEs and their Controlling Persons would be reportable under CRS (assuming the applicable CRS information exchange agreements were in place).

The way to make the sentence completely accurate is to rewrite it along these lines:

  • Natural persons exercising ultimate effective control over a trust must be identified regardless of whether they act as individuals or through entities

But, of course, that’s not what the Handbook says. Instead, the Handbook directly contradicts CRS by totally ignoring the CRS classification of entities that are equity-interest holders in trusts and treating them all, in effect, as if they were Passive NFEs.

The confusion caused by this verbal sleight of hand is compounded by the fact that the concept of “control” is relevant in two completely different contexts. First, there is the phrase “Controlling Persons”, which is a defined term and which is relevant only to Passive NFEs. Second, there is the phrase “other natural person exercising ultimate effective control over the trust” which, as the above Table shows, is relevant to both FIs and Passive NFEs. That phrase is not defined but certainly does not mean the same thing as “Controlling Persons”. We know that because the definition of “Controlling Persons” includes that very phrase (along with settlors, beneficiaries, trustees, and protectors). So the two concepts can’t mean the same thing. “Persons exercising ultimate effective control” is a narrower concept than, and is subsumed within the definition of, “Controlling Persons”.

Again, my view is that neither trustees nor protectors should be treated as natural persons “exercising ultimate effective control over the trust”. Of course, reasonable people can take a different view. Fair enough. But, as I’ve said before, what’s key is that the person in question must exercise “ultimate effective control”. It’s irrelevant whether they do so directly or through an entity. But they must—one way or the other, directly or indirectly—exercise ultimate effective control over the trust. It’s critical, therefore, not to conflate the concept of “Controlling Persons”, which is a defined term and not relevant in the present context, with the narrower concept of persons exercising ultimate effective control.

Now let’s turn to what the Cayman guidance say on this topic, which is real subject of today’s blog. Subject to an exception for publicly traded companies, the guidance says:

  • In order to determine whether there is any other natural person exercising ultimate effective control, it will be necessary to look through any entity exercising such control (such as a corporate protector or enforcer).

Hurrah! Hats off to the TIA! They got it right. Almost entirely. And certainly much better than the Handbook.

First, unlike the Handbook, the Cayman guidance does not incorrectly say that FI trusts must look through all entity equity-interest holders, including settlors and beneficiaries, and identify their Controlling Persons. Rather, the guidance correctly zeroes in on just the phrase “other natural person exercising ultimate effective control”. Second, unlike the Handbook, the Cayman guidance does not muddy the waters by referring to “controlling persons” as such, which is a separate concept relevant in a completely different context (i.e., with respect to Passive NFEs). Third, unlike the Handbook, the Cayman guidance does not say that trustees are to be treated as “exercising ultimate effective control” over their trust. All good so far. However, there is one problematic part of this sentence from the Cayman guidance. It is the reference to a “corporate protector or enforcer”. The guidance can be read to imply, though it does not expressly say, that all protectors and enforcers are to be treated as if they exercise ultimate effective control over their trusts and that, therefore, all corporate protectors or enforcers are to be looked through. This would certainly be consistent with the OECD’s CRS FAQ on protectors. However, for the reasons set forth in my blog on that topic (available here), the assumption that all protectors exercise ultimate effective control over their trusts is questionable to say the least.

What about “enforcers”? If you’re from Cayman, you know that Cayman STAR trusts use “enforcers” rather than “protectors”. Enforcers are charged with enforcing STAR trusts. Therefore, “enforcers” arguably come a lot closer than run-of-the-mill protectors to exercising ultimate effective control over their trusts.  In any event, the reference to “enforcers” in the Cayman guidance puts to rest any argument that a person with a protector-like role isn’t, in effect, a protector for Cayman CRS purposes: If it walks like a duck and quacks like a duck, it’s a duck!

One final point. The Cayman guidance says that an entity that exercises ultimate effective control must be looked through to determine whether there is any natural person exercising such control. It does not say—and neither should it—that the “Controlling Persons” of such an entity are to be treated as exercising ultimate control over the trust. For example, the Controlling Persons of a company generally include any person who has a greater than 25% ownership interest in the company. But a person with 50% or less ownership doesn’t actually exercise control over that entity, at least not through ownership. Therefore, a 50%-or-less shareholder of a company that exercises ultimate effective control over a trust should not be treated as exercising ultimate effective control over the trust even if the person owns more than 25% of the entity, i.e., the threshold for Controlling Persons of Passive NFEs.

To make this more concrete, take a protector company that, for whatever reason, you have determined actually exercises ultimate effective control over its trust. There are three equal shareholders, each with equal voting rights. If that company were a Passive NFE, each shareholder would be a Controlling Person of the company because each owns more than 25% of the shares. However, in my view, none would be a natural person exercising ultimate effective control over the trust because none can control the company that controls the trust.

In conclusion, as we saw in the last blog, the Cayman TIA requires some things of Cayman FIs above and beyond what CRS requires of FIs generally. More’s the pity. However, when it comes to entity equity-interest holders in trusts that are FIs, the Cayman guidance mercifully does not follow the CRS Implementation Handbook down the garden path. The only problematic part of the guidance is its apparent assumption that all protectors and enforcers necessarily exercise ultimate effective control over their trusts. But, hey, no-one’s perfect.

CRS and FATCA expert

The new Cayman Guidance Notes: CRS on Steroids?

Peter Cotorceanu Cayman Guidance Notes, CRS

CRS’s global success depends on the integrity of local enforcement, especially in traditional “tax havens”. Cayman’s new CRS guidance notes put its financial services industry on notice that CRS will be enforced vigorously on the Islands.

The new guidance notes were issued on 13 April 2017. They came hot on the heels of the previous draft, which was issued on 3 March 2017, a mere six weeks before the current version. The new guidance notes:

  • significantly broaden the scope of Cayman-resident entities required to register with the Cayman Tax Information Authority (TIA), and
  • require all sorts of documentation not required by CRS itself.

Registration: Pursuant to the recent revisions, all Cayman FIs must enroll or be enrolled on the Cayman reporting portal. This means that Non-reporting FIs such as Trustee-Documented Trusts (TDTs) as well as Reporting FIs must register. In this respect, the guidance notes go beyond what both the Cayman CRS statute and initial version of the guidance notes require, namely, that only Reporting FIs must register.

Requiring all FIs to register also goes beyond what almost every other CRS jurisdiction mandates. Unlike FATCA, with its IRS registration portal and GIIN numbers, CRS itself doesn’t require any FIs to register. As a result, many countries don’t require any FIs to register for CRS purposes. Other countries do require some FIs to register. For example, a number of countries require Reporting FIs with actual reportable accounts to register. Other countries go a step further and require all Reporting FIs to register regardless of whether they have any reportable accounts. But Cayman has gone even further. The new Cayman guidance notes require all FIs to register regardless of whether they are Reporting or Non-reporting FIs and regardless of whether they have any reportable accounts. This means for example, that all TDTs will have to register even though they won’t be filing any reports. (As many of you know, the trustees of TDTs, not the TDTs themselves, file any required reports on behalf of the TDTs.) Given that Cayman is a popular trust jurisdiction, the requirement that all Cayman TDTs register imposes a significant administrative burden on Cayman trust companies who may have dozens, hundreds, or even thousands of such structures on their books.

Perhaps partly because of this burden, a separate recent announcement postponed the Cayman registration deadline from 30 April to 30 June 2017. (The announcement also postponed the 2017 financial account reporting deadline from 31 May to 31 July 2017). Further details on the registration process will be set forth in the Cayman AEOI Portal User Guide, which is expected to be released in the coming weeks.

Documentation: In addition to the expanded registration requirement, the guidance notes impose further structural compliance obligations on Cayman FIs, requiring notably that

  • all Cayman FIs have written CRS compliance policies and procedures
  • all Cayman trustees administering TDTs have written compliance policies for such trusts, and
  • all Cayman FIs that delegate their CRS compliance obligations to third-party service providers have written agreements setting forth the terms of the delegation.

Ouch! None of the above is required by CRS itself. One can understand the Cayman regulator wanting to ensure CRS compliance by Cayman FIs. But this is paperwork overkill. These requirements go above and beyond what Cayman’s peers are requiring. They put Cayman FIs, especially trust companies, at a decided disadvantage to their competitors in other jurisdictions by raising administrative costs substantially.

The Cayman TIA’s strict enforcement goals are laudatory. However, the means used to achieve those goals have left a lot of Cayman trust companies frustrated and wondering why they must go above and beyond similarly placed firms in other jurisdictions. Not without some justification, Cayman trustees are asking whether the Cayman TIA has used an elephant gun to shoot a fly.

The next blog will address another provision of the new Caymans guidance notes, specifically, one that (i) requires all entity “account holders” in FI trusts to be looked through for Controlling Persons, and (ii) treats all protectors and enforcers as “account holders” of FI trusts. Stay tuned.

CRS and FATCA expert

Trusts with Settlor Reserved Powers: The New CRS Avoidance Tool?

Peter Cotorceanu CRS, CRS Avoidance Tool, OECD

In a topic critical to the CRS classification of certain trusts, a divergence is emerging between the prevailing consensus view and the rule as expressed in recent local guidance. To wit, are discretionary trusts for which the settlor reserved control over the investments of the trust assets nonetheless “managed by” their trustees? If the answer is no, then in the absence of subsequent delegation by the settlor of the investment authority to a third-party asset manager or other relevant FI, such so-called settlor reserved investment power trusts (SRIP trusts) ought to be classified as NFEs (rather than Professionally-Managed Investment Entity (PMIE) type FIs). This would mean, for example, that if the trust had a U.S. bank account or no bank account at all,  there would be no CRS reporting obligations, at least at the trust level. Indeed, some advisors are in fact advocating the use of SRIP trusts for the very purpose of avoiding CRS reporting.

In order for a typical private wealth trust to qualify as a PMIE under FATCA and CRS, another FI, such as a corporate trustee, must manage the assets of the trust. From the beginning of the interpretation of FATCA’s application to the trust industry, a debate originated over how the “managed by” test applied to SRIP trusts. Those who believed that standard trustee duties satisfy the test argued that the plain meaning of the term “manage” is broad enough to capture the control exercised by the trustee of a discretionary trust over the distribution of the assets to its beneficiaries. This position was bolstered by the unofficial IRS suggestion to err in favor of an FI status if in doubt. The counter-arguments, however, theorized that FATCA seemed more interested in third parties’ exercise of control over investment decisions. The fiduciary industry and its advisors eventually adopted the view that a trustee does “manage” its trusts regardless of whether the trustee had investment powers. However, the IRS never fully and finally settled the issue and thus the uncertainty persisted through the introduction of CRS.

Then along came CRS. A solitary sentence in the CRS Commentary has given weight to the argument that a trustee does not “manage” a trust unless the trustee has investment powers. Here’s what the Commentary says:

  • However, an Entity does not manage another Entity if it does not have discretionary authority to manage the Entity’s assets (in whole or part).

Some equate the phrase “discretionary authority to manage the Entity’s assets” with “discretionary authority to manage the Entity’s investments” , which is not exactly what the language says. For example, doesn’t a trustee of a discretionary trust have discretionary authority over the trust assets by virtue of the mere fact that the trustee gets to decide whether to distribute them? Quite arguably. That said, the phrase “discretionary authority to manage  . . . assets” is ambiguous. I for one cannot say definitively that a trustee of a discretionary trust without investment powers has such authority. Reasonable arguments support both views.

Recently, two jurisdictions – Singapore and the Bahamas – have issued explicit guidance on this issue. In its CRS FAQs, the Inland Revenue Authority of Singapore (IRAS) stated in FAQ B.5 that a SRIP trust would not qualify as an FI because the manager of the assets held by the trust would not itself be an FI. By negative implication, therefore, the other powers exercised over the assets of a discretionary trust by the trustee do not satisfy the “managed by” test. Just a few weeks ago, the Bahamas made this implication express, stating in Example 3 of its  not-yet-publically-released draft guidance notes that: “A trust where the right to direct investments is reserved to the settlor or is vested in an individual investment manager, would not be an Investment Entity as it would not meet the ‘managed by’ test, notwithstanding it may appoint a trustee that is a Financial Institution.” (Emphasis added).

As neither jurisdiction makes this decision elective or grandfathers trusts already classified as FIs for FATCA and/or CRS purposes, trustees of SRIP trusts in these two jurisdictions confront a challenging decision. The straightforward approach is to accept the NFE treatment. This option, while simple for some SRIP trusts, may not be for other SRIP trusts based on one or more of the following concerns:

  • Conflicting FATCA and CRS classifications;
  • Retroactive reversal of a FATCA classification (especially unwelcome if the trust reported under FATCA);
  • Additional beneficiary disclosure and documentation; and
  • CRS reporting by the bank (or other FI) maintaining the trust’s financial account of beneficiaries or others who otherwise would not be reported due to, for example, differing reporting jurisdiction networks. (This assumes that the trust in question would be classified as a passive, not an active, NFE. This is a reasonable assumption given that almost all trusts that are not FIs will indeed be passive, not active, NFEs.)

Trustees of SRIP trusts presented with one of the above problems may prefer to tinker with the allocation of the investment authority, rather than alter the trust’s classification to passive NFE. In other words, the trustee might indeed be granted some investment discretion, however circumscribed, so that the trust will meet the “managed by” test. As CRS does not dictate how much investment authority equals management over the assets or that such management authority needs to be exercised, a formal delegation of a nominal portion of the settlor’s investment powers to the trustee could suffice to restore the PMIE status of the trust.

Perhaps more alarming than the actual divergence highlighted in this blog (which is defensible and limited to SRIP trusts) is the reminder that the “C” in “CRS” is ever misleading and that the fragmentation of rules remains a threat, especially for the fiduciary industry. As such, trustees and other fiduciaries may not assume that any interpretation settled in one jurisdiction will not be upended in another. So, as they say, watch this space . . . .