The Common Reporting Standard and Automatic Exchange of Information (AEOI) were developed by the 34 member states of the Organization for Economic Cooperation and Development via its permanent “Global Tax Forum”. The framework follows the USA FATCA model. AEOI was designed to help combat cross border tax evasion by individuals who were not reporting and paying applicable taxes on assets held through non-domestic (i.e. “offshore”) financial institutions whether these assets are held in the name of the individual or through certain offshore entities such as companies, trusts, foundations, partnerships and similar. It is primarily focused on individuals and “passive” income (i.e. dividends, interest, capital gains, etc.). The framework is titled the Standard for Automatic Exchange of Financial Account Information in Tax Matters or more commonly referred to as the Common Reporting Standard and covers reporting obligations, due diligence and exemption.
AEOI began for some Participating Jurisdictions from the 2016 calendar year and others from 2017. The Participating Jurisdictions beginning from the 2016 calendar year were called the “early adopters”. This includes Anguilla,Argentina, Barbados, Belgium, Bermuda, British Virgin Islands, Bulgaria, Cayman Islands, Colombia, Croatia, Curaçao, Cyprus, Czech Republic, Denmark, Dominica, Estonia, Faroe Islands, Finland, France, Germany, Gibraltar, Greece, Greenland, Guernsey, Hungary, Iceland, India, Ireland,Isle of Man, Italy, Jersey, Korea, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Mauritius, Mexico, Montserrat, Netherlands, Niue, Norway, Poland, Portugal, Romania, San Marino, Seychelles,Slovak Republic, Slovenia, South Africa, Spain, Sweden, Trinidad and Tobago, Turks and Caicos Islands, United Kingdom.
Reporting for the 2016 calendar year was due by September 2017.
Other Participating Jurisdictions have agreed to implement the framework for the calendar year beginning 2017 with reporting due by September 2018.
Each country must still sign AEOI agreements with other countries with whom they want to share this information. It is thought that most countries will first look to existing countries where they have a Tax Information Exchange Agreement (TIEA) or Double Tax Avoidance Agreement (DTAA) in place for instance to begin AEOI. In some countries this can be a lengthy process.
Financial Institutions in Participating Jurisdictions will be required to collect and report financial information to their domestic tax authorities which will in turn aggregate and report this information to foreign tax authorities of other Participating Jurisdictions with which they have entered into a AEOI agreement. You may view the current activated exchange relationships for country-by-country reporting at the following link:
Step 1: Each Financial Institution (i.e. bank, stock broker, etc.) in Participating Jurisdiction will first seek to determine if an Account Holder is a Financial Institution, an Active Non-Financial Entity (“Active NFE”) or a Passive Non-Financial Entity (“Passive NFE”) based on the above definitions/criteria. This is generally determined by a self assessment made via declaration from each Account Holder using standardized forms. This forms the basis for reporting by the Financial Institution unless the Financial Institution has reason to believe such declaration is false for any reason whereby they may investigate further, request more information/proof, etc.
Scenario 1: Account Holder is an Active NFE – life will be much easier for Active NFE’s as reporting on the account will be restricted to the jurisdiction where the “Active NFE” is either tax resident (i.e. where it files a tax return) or for tax exempt companies (like IBCs, BVI companies, etc.), the information on the account will be sent to the jurisdiction where the directors confirm the company has its “place of effective management”.
Thus, the main concern with Active NFE’s will usually be to make sure that the entity does not establish a tax residency in a high taxing jurisdiction. Otherwise, information relating to the financial account will be reported to the tax authorities in that high taxing jurisdiction. As one can imagine the tax authorities in that high taxing jurisdiction may be interested to learn that they have a previously unreported tax resident in their jurisdiction especially if it has sizeable income/assets.
Scenario 2: Account Holder is a Passive NFE – reporting will go the the tax authorities of the jurisdiction of residence of each Controlling Person.
STEP 2: The Financial Institution will check to see if the Account Holder of a Reportable Account is resident in another country (i.e. a non-resident Acount Holder) from where the Financial Institution is located which is a Reportable Jurisdiction, for an Active NFE and for a Passive NFE the Financial Institution will ascertain the “Controlling Persons” and whether one or more of those persons is resident in a Reportable Jurisdiction.
STEP 3: the Financial Institution will send information on the Reportable Accounts as above to domestic tax authorities.
STEP 4: Domestic Tax authorities will transmit standardized information (account balance, income, dividends, capital gains, etc. for the year) to other Participating Jurisdictions with which they have such an agreement in place in bulk on a yearly basis by September for the previous calendar year (presumably to allow time for accounts to be prepared for the prior year before reporting).
“Active NFE” means any NFE that meets any of the following criteria:
“Controlling Persons” means the natural persons who exercise control over an Entity. In the case of a trust, such term means the settlor, the trustees, the protector (if any) the beneficiaries or class of beneficiaries, and any other natural person exercising ultimate effective control over the trust, and in the case of a legal arrangement other than a trust, such term means persons in equivalent or similar positions. The term “Controlling Persons” must be interpreted in a manner consistent with the Financial Action Task Force Recommendations (i.e. the natural person “beneficial owner” behind any “nominee shareholder”, etc.).
Note: “beneficial owner” in countries is generally viewed to be an individual that benefits or exercises control of some minimum amount; international standards (i.e. FATF) set this threshold at 25% but some countries have thresholds as low as 5%.
“Financial Information” to be reported with respect to Reportable Accounts includes all types of investment income (including interest, dividends, income from certain insurance contracts and other similar types of income) and also account balances and sales proceeds from financial assets.
“Financial Institutions” include custodial institutions (e.g. custodian banks, brokers, etc.), depository institutions (e.g. banks), investment entities (mutual funds, private equity funds, etc.) and specified insurance companies.
“NFE” means any Entity that is not a Financial Institution (i.e. “Non-Financial Entity”)
“Participating Jurisdiction” means a jurisdiction (i) with which an agreement is in place pursuant to which it will provide the information specified in Section I, and (ii) which is identified in a published list.
v”Passive NFE” means any: (i) NFE that is not an Active NFE; or (ii) an Investment Entity described in subparagraph A(6)(b) that is not a Participating Jurisdiction Financial Institution.
“Place of Effective Management” will ordinarily be the place where the most senior person or group of persons (for example a board of directors) makes its decisions, the place where the actions to be taken by the entity as a whole are determined; however, no definitive rule can be given and all relevant facts and circumstances must be examined to determine the place of effective management. An entity may have more than one place of management, but it can have only one place of effective management at any one time.
In general when assessing the place of effective management, jurisdictions have adopted the “substance over form” criteria. Therefore, a “nominee” director who merely does what he or she is told and does not give any independent thought or input into his/her decisions as a board member is not going to pass any test.
Additionally, other criteria such as the following are important in establishing the place of effective management and to support the “substance over form” criteria:
“Reportable Account” means an account held by one or more Reportable Persons or by a Passive NFE with one or more Controlling Persons that is a Reportable Person with a Financial Institution.
“Reportable Jurisdiction Person” means an individual or Entity that is resident in a Reportable Jurisdiction under the tax laws of such jurisdiction, or an estate of a decedent that was a resident of a Reportable Jurisdiction. For this purpose, an Entity such as a partnership, limited liability partnership or similar legal arrangement that has no residence for tax purposes shall be treated as resident in the jurisdiction in which its place of effective management is situated.
“Reportable Person” means a Reportable Jurisdiction Person other than: (i) a corporation the stock of which is regularly traded on one or more established securities markets; (ii) any corporation that is a Related Entity of a corporation described in clause (i); (iii) a Governmental Entity; (iv) an International Organization; (v) a Central Bank; or (vi) a Financial Institution.
Those attempting to implement a “hide and hope” strategy when it comes to offshore structures are going to have the net close in on them at some point. It is only a matter of time. It is imperative that anyone with an existing offshore structure or looking to establish a new offshore structure clearly understands the tax reporting and financial implications of the structure.
Each situation must be considered independently, but where tax mitigation or deferral is an objective, there are generally four main criteria to consider as a starting point:
Sterling is a boutique offshore services provider focused on providing compliant solutions to our clients that will hold up under scrutiny for the long term. We welcome intermediaries as well and can jointly help devise the best solutions for the end user clients. Sterling holds multiple licenses and provides a broad suite of services in order to allow us to provide compliant solutions for as broad a cross section of clients in as many different circumstances as possible, keeping in mind that requirements, circumstance and laws are ever changing over time. This allows us to be your partners for the long term. Some examples of the compliant structures and services we can provide are as follows:
Whether you are with an existing services provider who cannot deliver the necessary products and services to provide you with a compliant structure in the new world we now live it or are looking to set up a new structure in a compliant manner, Sterling is the answer to your requirements.
Contact Us now for a free initial consultation!