The Common Reporting Standard (CRS) is now in full force. Early adoption was undertaken in some jurisdictions beginning in 2017, with the rest coming online for 2018, and with most jurisdictions having midsummer filing requirements. Foreign investment companies must now take note of these new and broad reporting requirements. Modeled in large part on the United States Foreign Account Tax Compliance Act (FATCA), passed in 2010, CRS has implemented an extensive reporting requirement for foreign financial institutions located in participating jurisdictions. Developed by the Organization for Economic Co-operation and Development as a multinational agreement between approximately 100 different countries, CRS represents a massive effort on the part of numerous nations to help counteract tax avoidance through the use of foreign financial institutions.
Instead of merely tracking and reporting on the accounts of their US investors / account holders, investment companies now have to track and do a similar reporting on their foreign investors with a tax residency located outside of the country in which the entity is based. This can present a whole new set of challenges for companies located in places like the Cayman Islands, where the majority of their non-US investors are individuals or entities located outside of the Caymans.
One of the more challenging and difficult aspects of implementing CRS compliance comes in CRS’s use of tax residency. Unlike FATCA, which is primarily based on the nationality and residency of the investor, determining a foreign person’s tax residency may be particularly cumbersome. For instance, individuals may have dual citizenship and hold residencies in multiple countries. CRS provides an outlet for this in the form of self-certification, which should be obtained when the account is opened, whereby the investment company requires the investor to provide a form that details their applicable tax residency. Even this may not be enough though. While the company can normally rely on such self-certifications, if they have contradictory evidence, such as mailing addresses or phone numbers based in other countries than the one claimed by the investor, the company may still need to do further confirmation. In addition, exceptionally large accounts over $1,000,000 require a higher level of due diligence on the part of the investment company. This due diligence should be documented and reviewed periodically to ensure proof of compliance.
Self-certification also presents another data collection hurdle. CRS requires different, and more, information than FATCA does. In addition to tax residency, address, and CRS classification status, investment companies need to obtain the investor’s date of birth, and often place of birth, as well as relevant tax data such as tax identification information used in the investor’s tax residency versus the W-8 as required under FATCA for US persons.
Another major consideration is the difference in reporting thresholds. For instance, in the case of FATCA, there is a de minimis threshold, whereby investment companies need not report individual investors with holdings under $50,000. No such de minimis threshold exists within CRS for individual account holders, meaning that many smaller accounts will have to be reported. The same is true for entities holding accounts. Under FATCA, there is a de minimis threshold of $250,000 and under CRS there is none.
Additionally, under CRS, an investment company has an obligation to determine if there are controlling persons, basically a natural person(s) with beneficial control of the fund, and report if he or she is a tax resident in a participating jurisdiction. This obligation exists even if there are layered tiers (such as partnerships invested in the investment company) between the controlling person and the investment company and those entities are CRS compliant. If there is no individual that is deemed to be a controlling person, then the individual(s) exercising control over the entity, such as a fund manager, would be deemed to be the controlling person(s). If the investment company has a controlling person with a filing requirement under CRS, the investment company has a filing requirement. This can serve to expand the number of entities with filing requirements and increase due diligence burdens.
Investment companies need to be aware that both FATCA and CRS compliance requirements have now been adopted into the local laws of most nations. This means that failure to accurately and timely comply with the new filing requirements may carry fines and penalties for both the investment company and, in many jurisdictions, the individuals responsible for managing the company. Penalties could include monetary fines, or even the dissolution of the investment company if non-compliance is severe and repetitive.
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