In 2014 the Organization of Economic Cooperation and Development (OECD) released the Standard for Automatic Exchange of Financial Account Information in Tax Matters, also referred to as the Common Reporting Standard (CRS). The CRS was released in order to combat tax fraud and to increase protection on the proper functioning of tax systems. The essence of the CRS is that the tax authority of each Member State will communicate to the competent authority of any other Member State, information relating to taxable periods starting from 1 January 2014.
The CRS provides an exhaustive list of information that must be gathered by each competent authority through the various financial institutions located in the relevant jurisdiction.
Similar to FATCA in the United States, the CRS distinguishes between different types of accounts (i.e. accounts of individuals, account of entities, pre-existing and new accounts).
Currently there are around 100 countries (both EU and non-EU), which expressed their intention to implement the CRS – notable non-EU member countries include the British Virgin Islands and the Cayman Islands.
The changes brought about by the CRS are to be implemented in national legislations of EU Member States during 2016 with consecutive enforcement starting on the 1st of January 2017.
Who has to report via CRS?
Entities which are deemed to be financial institutes resident in Malta will be required to submit the relevant data. The definition of an entity is quite broad and covers a legal person or a legal arrangement such as a corporation, partnership, trust or foundation.
What constitutes a Financial Institute for CRS?
Financial institutes which are required to make the relevant submission are known as Reporting Malta Financial Institution (RMFI). For CRS purposes a RMFI includes any and all of the following:
- A Custodial Institution – any entity which holds, as a substantial portion of its business, financial assets for the account of others.
- A depository Institution – any entity which accepts deposits in the ordinary course of a banking or similar business.
- An Investment Entity – any entity trading in markets, money, foreign exchange, interest rates, commodities futures trading, transferable securities, individual and collective portfolio management etc.
- A specified Insurance Company – any entity that is an insurance company that issues, or is obligated to make payments in respect to a Cash Value Insurance Contract or Annuity Contract.
There are number of instances where financial institutes may be considered as a Non-Reporting Financial Entity (NRFE). This would be the case where an entity will be deemed as being at a low risk of being used for tax evasion. For example, a trust will be considered as NRFE to the extent that the trustee of a trust is a RMFI and all information required to be reported is submitted by the trustee.
What information is reportable?
Broadly speaking the information which must be reported by a RMFI is information which:
- identifies the account holder;
- identifies the account and the financial institute where the account is held; and
- information relating to the activity taking place in the account and the account balance.
This information forms a picture to ascertain the compliance risk of the account holder which the authorities use to determine whether all information has been properly declared.
Reportable details include income from employment, director’s fees, life insurance products, pensions, ownership of and income from immovable property, all types of investment income (including interest, dividends, income from certain insurance contracts and other similar types of income), account balances and sales proceeds from financial assets.
CRS and Maltese Trusts
A trust is a fiduciary relationship, rather than an entity with its own separate legal personality. The parties to a trust must include a settlor, a trustee and at least one beneficiary. These parties can be natural persons or entities. The beneficiaries may be named individuals or members of a group of people (a class of beneficiaries). A beneficiary could have the right to receive mandatory distributions or may receive discretionary distributions.
A trust is considered to be subject to the CRS rules in Malta if one or more of the trustees are resident in Malta. This applies unless the trustee knows the required information is being reported elsewhere (such as in the case where the trust is treated as tax resident in another jurisdiction).
If there is more than one trustee, the trust may be considered a Reporting Financial Institute in all participating jurisdictions in which the trustees are resident. If the trustees are each resident in different jurisdictions the trust would be a Reportable Financial Institute in each of those jurisdictions and each trustee would separately report in respect of their reportable accounts.
However, if the trust is considered to be tax resident in just one particular jurisdiction and the trustee reports all the information required there would be no requirement to report in any other jurisdiction.
Generally the CRS rules will apply to Trusts in two circumstances:
- When a trust is a RMFI; or
- When a trust is a NRFE that maintains a Financial Account with a RMFI.
Maltese Trust as a RMFI
The most likely scenario in which a Trust will be deemed a RMFI would be if it falls within the definition of an Investment Entity such as in the case of when a trust has gross income primarily attributable to investing, reinvesting or trading in Financial Assets and is managed by another entity that is a RMFI. This would include trusts that are collective investment vehicles or other similar investment vehicles established with an investment strategy of investing, reinvesting or trading in Financial Assets.
If the Trust is an Investment Entity the Regulations define its Financial Accounts as the debt and Equity Interest in the Entity. Debt interest is not defined in the CRS regulations therefore debt interest will be determined in accordance with the Laws of Malta including the FATCA guidelines.
Maltese Trust as a NRFE
If a Trust is not considered to be a RMFI it will be a NRFE. NRFE’s are either active NRFE’s or passive NRFE’s depending on their activity. It is very unlikely that a Trust would fall to be an active NFE unless such a Trust was a regulated charity.
Generally we would expect that a Trust would be a passive NRFE as the trustee would, in their own right, be deemed a RMFI; therefore the trustee may be required to report the relevant trust information for CRS purposes.
A trust will be a reportable person only if it is tax resident in Malta; in many cases a trust may have no residence for tax purposes and in that case it is not considered to be a reportable person so would not be subject to CRS.
Where a trust is a reportable person the trustee will be required to report the account information and financial activity for the year. The account information includes the identifying information for each reportable person (such as name, address, resident, TIN, date of birth and account number), and the information of the RMFI.
Where a trust is a passive NFE, the trustee, as RMFI, must report the controlling persons of the Trust (i.e. the settlor, trustee, protector or beneficiary).
The financial information to be reported will include the account balance or value of the account held by the trust and payments made or credited to such account.
Trustees that are licensed under the Malta Financial Services Authority are required to provide the Commissioner for Revenue in Malta with an annual summary of their Trusts starting from 2016 onwards. The information which a licensed Trustee must provide includes:
- A list of Trusts as at 31 December each year;
- A list of Trusts created during the year;
- A list of terminated Trusts and Trusts in relation to which the Trustee submitting this list was no longer Trustee during the year.
For each Trust listed as above, the Trustee has to also provide the following information:
- The name of the Trust;
- The date of the creation of the Trust;
- The date when it first had a Trustee resident in Malta;
- The date of termination (if applicable)
For the purposes of CRS any reference to a trust shall equally apply to a foundation. Consequently, any reference to:
- A settlor of a trust shall be construed as a reference to a founder of a foundation;
- A trustee of a trust shall be construed as a reference to the administrator of a foundation;
- A beneficiary of a trust shall be construed as a reference to a beneficiary of a foundation.
Written by Samantha Snow, Client Services Manager – Abacus Malta