In general, a trust is affected by the Common Reporting Standard (CRS) when it is categorized as either a reporting financial institution (FI) or a non-financial entity (NFE) that maintains a financial account with a reporting FI. Reporting FIs have a duty to report either their “account holders” or the “controlling persons” if their account holders are passive NFEs, as defined by the CRS.
The CRS provides a methodology for its application to a trust. This is summarized in the following five steps that FIs (broadly comprising depositary institutions, custodial institutions, specified insurance companies and investment entities) must follow in order to ensure that the relevant information is collected and reported: (i) identification of the reporting FI; (ii) review of its financial accounts; (iii) identification of its reportable accounts; (iv) application of due diligence rules; and (v) reporting of the relevant information.
This methodology is followed below, firstly in the case of trusts that are FIs and secondly in the case of trusts that are NFEs.
A Trust as a Reporting Financial Institution (FI)
Most often, a trust will be a FI if it has gross income primarily (more than 50%) attributable to investing, reinvesting, or trading in Financial Assets and is managed by another Entity that is a FI. The words “managed by” imply that the FI has some discretionary authority to manage the assets of the trust, either in whole or in part.
In practice the words “primarily attributable to investing…” imply that the gross income attributable to the said activities of the trust should amount to 50% or more of the trust’s gross income during the shorter of:
- The three-year period ending on 31 December of the year preceding the year in which the determination is made, or
- The period during which the trust has been in existence.
A trust categorized as an FI will qualify as a reporting FI (i.e. it will have reporting obligations in respect of its account holders) if its trustees are resident in one or more participating jurisdictions, provided that these trustees are not a reporting FI themselves. In this latter case, the trustees and not the trust itself is responsible for reporting. Also, a trust categorized as a FI may not be a reporting FI in the case of retirement funds, whether broad- or narrow- participation.
A trust which is a reporting FI will have reporting obligations as far as the account holders or the controlling persons (those who hold the relevant financial accounts) are concerned. Financial accounts are defined by the CRS as “a debt or equity interest” in the trust; whilst “debt interest” is not defined in the CRS, “equity interest” effectively covers the settlors and beneficiaries plus any other natural person exercising ultimate effective control over the trust. This definition is wide enough to additionally cover the trustees(s) and even – somewhat paradoxically – the protector(s). Importantly, a discretionary beneficiary (defined as one who has no right to receive mandatory distributions) will only be treated as an account holder in the years during which it receives discretionary distributions from the trust.
The above financial accounts will be reportable if the debt and equity interests of the trust are held by a person resident in a participating or reportable jurisdiction. The due diligence rules stipulated under the CRS will need to be applied in order to identify the account holders and the jurisdiction in which they are resident. In a case where the account holder is an entity, the trust is required to identify and report the controlling person of this entity and, therefore, appropriate KYC/ AML procedures will need to be undertaken.
A trust which is a reporting FI will report the name and identification number of the trust, information about all the reportable persons. These are, typically, their name, address, tax residence, date of birth, tax identification number (TIN) and account number, the account balance (the total value of trust property – nil for discretionary beneficiaries) and any financial activity carried out during the year (value of payments or distributions made in the reporting period).
A Trust as a Non-Financial Entity (NFE)
If a trust is not a FI, it will be a NFE. NFEs are categorised as either active NFEs (e.g. trading trusts or regulated charities) or passive NFEs, depending on their activities.
The account of a trust which is a passive NFE and which has a financial account with a reporting FI will be reportable either if (i) the trust is a reportable person or (ii) the trust has one or more controlling persons that are reportable persons.
In the event of a trust being a reportable person, the reporting FI is required to report the name and identification number of the reporting financial institution plus information about each reportable person (name, address, tax residence, TIN, date of birth and account number). Where a trust is a passive NFE, the reporting FI will report the controlling persons of the trust, as defined above.
For each of the controlling persons, the reporting FI will report the total account balance or value and the gross payments made or credited to their account. In case the financial account held by the trust is closed during the year, the fact of closure and not the financial activity will need to be reported.
A settlor is always reported, irrespective of whether the trust is revocable (i.e. where the settlor has maintained some interest or rights in the trust) or irrevocable. Unlike the case of a trust that is a FI, beneficiaries are also always reported regardless of whether they are mandatory or discretionary. However, reporting FIs may have the option to report discretionary beneficiaries in the year in which they receive distributions from the trust.
Where the controlling persons are themselves entities, the reporting FI must identify the natural persons that are ultimate controlling persons. Only a controlling person resident in a participating jurisdiction – but not the same jurisdiction as the reporting FI – is reported.
The reporting FI must carry out appropriate due diligence measures for AML/ KYC purposes in order to determine whether the account held by the trust is reportable.
More detailed guidance is given in “The CRS Implementation Handbook”, published by the Organization for Economic Co-operation and Development (OECD) with a view to assisting in the understanding and implementation of the standard. It is expected that the Cyprus Tax Department (CTD), which has been working for some time on drafting Cyprus-specific CRS provisions, will soon issue its own guidelines.
Manager & Compliance Officer, E. Neocleous Trust Company Limited
Member of the CFA AML & Compliance Affairs Committee