Common Reporting Standard

Common Reporting Standard

Preface:

Nowadays, there is a growing international commitment towards greater transparency and tacking corruption, money laundering, tax evasion and terrorist financing. In order to facilitate this, many countries have participated in international organisations that provide guidance and mechanisms.

The ‘Common Reporting Standard’ was concluded on 29^th of October 2014 by the contracting parties of the Global Forum of the Organisation for Economic Co-operation and Development (OECD) and states their commitment to the new international standard for the automatic exchange of financial information in tax matters.

The Standard consists of the Model Competent Authority Agreement, intended as a template for intergovernmental agreements, and the Common Reporting Standard (CRS) that contains the reporting and due diligence standard that underpins the automatic exchange of information.

The Standard provides for annual automatic exchange of financial account information between the member states, including balances, interest, dividends, sales proceeds from financial assets, covering accounts held by individuals, shell companies, trusts and other similar arrangements.

One can argue that CRS could be correlated to FATCA and the European Union Directive on Administrative Cooperation.

Local and Global Implementation:

More than 65 countries and jurisdictions have already publicly committed to implementation, while more than 40 have committed to specific and ambitious timetable leading to the first automatic information exchanges in 2017.

Cyprus is included in the countries that have declared to automatically exchange information as from 2017 which will related to information with respect to 2016.

For a list of signatories which is periodically updated please visit the OECD website http://www.oecd.org/tax/exchange-of-tax-information/Status_of_convention.pdf 

 

CRS integration into the Cyprus Tax Laws:

In order to amalgamate the Standard’s requirements into the domestic legislation of Cyprus, a Decree was published on the 31^st of December 2015, in accordance with the provisions of Article 6(16) of the Assessment and Collection of Taxes Law of 1978 to 2015. The Decree entered into force on 1st January 2016 and describes the application of CRS in the island by the Tax Department for assistance and guidance.

It is very important to note that what is classified and declared under FATCA for an individual or corporation, the same must apply under CRS reporting. It is therefore critical that the CRS and FATCA self-certification forms are completed correctly in order to avoid incorrect or unnecessary reporting for the entity and its controlling persons.

Entity Classification:

All corporations residing in Cyprus have to examine and clarify their identity in the light of the CRS definitions:

• A Reporting Financial Institution (“FI”);
• A non-reporting FI;
• An Active non-Financial Entity (“NFE”)
• A Passive NFE

Defining FI under CRS:

The Decree provides guidance as to the types of accounts, as well as the physical or legal persons, which fall within its scope. In accordance with the Decree, those institutions that fall with the definition of a “financial institution” are required to set out the appropriate controls and procedures in order to identify, collect and report information of account holders. The term “financial institutions” includes:

1. Depository Institutions: entities that accept deposits in the ordinary course of a banking or similar business;
2. Specified Insurance Companies: insurance companies that issue or are obligated to make payments for cash value insurance contracts or annuity contracts;
3. Custodial Institution: entities that hold, as a substantial portion of their business, financial assets for the account of others and
4. Investment Entities: entities whose primary business involve certain asset management or financial services for or on behalf of a customer; or whose gross income is primarily attributable to investing, reinvesting, or trading in financial assets, if the entity is managed by another financial institution.

For each of the above entities, a separate test whether the entity’s characteristics comply, has to be thoroughly examined.

Reporting/Non-Reporting Financial Institutions (FI):

Once an entity has been classified as a Financial Institution, the next step is to determine whether the entity is a Reporting FI or Non-Reporting FI.

It is suggested to define non-reporting FIs before anything else in order to find out whether reporting is required or not. Some examples are:

              -        A corporation that is listed and trades in its country’s securities market

              -        A Governmental entity

              -        An International Organisation

              -        A Central Bank

              -        A pension fund of a Governmental Entity

              -        A Broad participation retirement fund

              -        An exempt Collective Investment Vehicle where all interests in the collective investment vehicle are held by                          or through individuals or entities that are not reportable persons

              -        Any other entity that presents a low risk of being used to evade tax, that shares similar characteristics to any                        of the above entities

Non-reporting FIs are specifically excluded from reporting obligations because they pose a low risk of tax evasion.

The corporations that are classified as Reportable are subject to due diligence and reporting requirements. If not, then none is required.

 

Non-Financial Entities (“NFE”):

If the reportable entity is not a FI then the next step is to be considered as Non-Financial Entity. The latter is divided into:

-        Passive NFE; or

-        Active NFE

Active NFE:

Active NFEs are entities that publicly trading in the stock market or related to such Entity and does not receive passive income or primarily hold amounts of assets that produce passive income. Some xamples of passive income are dividends, royalties, interest, rents etc.

It is vital to comprehend that if the examined Entity is in any case a passive NFE, the controlling persons are always reportable.

Below find in detail all the criteria that make a company an Active NFE. For each criterion a small testing mechanism has to be examined. One must be confident that all information examined is correct and accurate because it is generally known that ‘the devil is in the detail’.

 

Criterion No1: Based on Income and Assets

• Less than 50% of the NFE’s gross income for the preceding calendar year or other appropriate reporting period is passive income; and
• Less than 50% of the assets held by the NFE during the preceding calendar year or other appropriate reporting period are assets that productive or are held for the production of passive income.

 

Criterion No2: ‘Substantially all criterion’ - Holding Company

• Substantially all (80%) of the activities of the NFE consist of holding (in whole or in part) the outstanding stock of, or providing financing and services to, one or more subsidiaries that engage in trades or businesses other than the business of a Financial Institution.
• The Entity does not qualify for this status if the latter functions as:

• An investment fund 
• Private equity fund
• Venture capital fund
• Leveraged buyout fund
• Any investment vehicle whose purpose is to acquire or fund companies and then holds interests in those companies as capital assets for investment purposes

Criterion No3: ‘Treasury Centre’ – Financing Company

• The NFE primarily engages in financing and hedging transactions with, or for, Related Entities that are not FI, and;
• Does not provide financing or hedging services to any Entity that is not a Related Entity; and
• The group of any such Related Entities is primarily engaged in a business other than that of a FI

 

Criterion No4: Under CRS definitions & examples

These are several other criteria – not so commonly used:

• Exempt nonfinancial start-up companies or companies entering a new line of business.

              - When a new entity is recently incorporated, not yet operating a business it is given the chance to be                                     considered as active.  

              - If the intention of the company is to operate business and not to have passive income then it is given the window                   of 2 years – 24 months to be classified as Active.

• Excepted nonfinancial entities in liquidation or bankruptcy given the fact that the NFE was not a FI in the past five years and it is already in the process of liquidation
• Publicly traded corporation: Where the stock of the NFE is regularly traded on an established securities market
• Exempt Beneficial Owners: where the NFE is a Governmental Entity, an International Organisation, a Central Bank or an Entity wholly owned by one or more of the foregoing.

 

Criterion No5: Non-Profit Organisations

• Must be registered and operated exclusively for philanthropic, religious, educational and generally charitable purposes
• To be exempt from income tax in its jurisdiction of residence
• The members of the non-profit organisation should not have any rights to the assets or the income of the same organisation

 

Reporting and Timing:

The authorised credit institutions and other financial institutions in Cyprus are required to collect information  and submit it to the relevant tax authorities, that will in turn forward annually the information on an automatic basis to the tax authorities of the countries of tax residence of each account holder, provided the account holders are tax residents of countries that implement CRS.

Under the Decree, the information to be reported concerning account holders of financial institutions includes their name, address, residence for tax purposes, tax identification number, date and place of birth.

Moreover, information regarding the financial accounts balances and any income relating to these accounts, such as interest, dividends, income from certain insurance products, as well as the gross sale proceeds of any financial assets should also be reported.

 

Sanctions for non-compliance:

No withholding but specific sanctions apply as provided from each participating member state’s national law.

Incorrect classification of an entity under CRS and/or FATCA, or no submission of a CRS and/or FATCA self-certification form, may result in prevention of opening new accounts, or even closure or suspension of accounts maintained with FIs.

Moreover, reputational risks for the entity are always at stake if the perception is created that the entity does not provide accurate information in a transparent matter.