It may be startling for a headquarters executive or regional sales director to be asked to provide photocopies of every page in their passports, their date of birth and their social security number in order to start up a new foreign subsidiary. It may be equally surprising for an executive to discover that she may be required to provide sensitive personal information as part of the CRS and FATCA regimes – even in situations where she is not a signatory on the financial account.
Under both the OECD’s Common Reporting Standard (CRS) and the U.S.A.’s FATCA, Financial Institutions (FIs) are responsible for the identification and reporting of Financial Accounts held by Specified Persons or by Passive Non- Financial Entities (NFEs) with one or more Controlling Persons.
The breakdown for the FI is to determine:
Whether the Account Holder is a Passive NFE;
Who the Controlling Persons of the Passive NFE are; and
Whether any of these Controlling Persons is a Reportable Person.
What Is a Passive NFE?
Under CRS, a Passive NFE is any:
NFE that is not an Active NFE; or
An Investment Entity that is not a Participating Jurisdiction FI (e.g., a U.S. Investment Entity).
A Participating Jurisdiction is a jurisdiction that has agreed to automatically exchange information on Reportable Accounts. Each participating jurisdiction publishes a list identifying those jurisdictions with which it has an information exchange agreement.
Who Is a Controlling Person?
Controlling Persons are the natural persons who exercise control over the Passive NFE. This includes the natural person on whose behalf a transaction is being conducted and those persons who exercise ultimate effective control through indirect means.
To determine who these natural persons are, the Passive NFE will look first to ownership interest. The general rule is that a person with 25% or more ownership in the Passive NFE will be a Controlling Person.
In the case of a partnership and similar arrangements, a Controlling Person is any natural person who exercises control through direct or indirect ownership of the capital or profits of the partnership, voting rights in the partnership, or who otherwise exercises control over the management of the partnership or similar arrangement.
For trusts this Controlling Person includes the settlors, the trustees, the protector, the identifiable beneficiaries or class of beneficiaries and any other natural person exercising ultimate effective control over the trust.
If there is no natural person who directly owns 25% or more of the Passive NFE, then CRS requires the Passive NFE to look through the ownership structure. The natural person may be exercising ultimate control through a chain of ownership. The intermediary entities in the chain of ownership will not be considered Controlling Persons because they are not natural persons.
It is possible that despite looking through the ownership chain, there is no natural person with the requisite ownership to be a Controlling Person. In this situation, the Passive NFE must determine if there is a natural person who exercises control of the Passive NFE through other means.
Finally, if there is no natural person identified as exercising control of the Passive NFE, the Controlling Person of the Entity will be the natural person who holds the position of senior managing official.
What Is the Impact on the Unsuspecting Executive?
Depending on the Passive NFE’s organizational structure, the senior managing official might have a number of titles. This person may have made a point of not being a signatory on specific Financial Accounts. And yet, she may be required to share her personal data not only with the Reporting FI requesting the information but, ultimately, with a foreign tax authority.
The first stage of personal information disclosure will be through a self-certification that an FI sends to the Passive NFE. The Passive NFE will indicate its Passive NFE status and list all Controlling Persons. It will include the following information about the senior managing official who has been deemed to be the Controlling Person:
Tax ID Number
Date of birth
Place of birth
After this confidential information is disseminated to the FI, the FI will assess whether the senior managing official is a Reportable Person. If the answer is yes, then the account must be treated as a Reportable Account and the senior managing official’s sensitive personal information will be reported to a foreign tax authority.
The definition of Controlling Persons under CRS is the same as the definition used in the Model 1 FATCA IGA. Ultimately, however, the definition of Controlling Person depends on the local legislative framework and implementation of CRS and FATCA.
To avoid blind siding senior managing officials, entities should determine their classification status. If they are Passive NFEs and must identify a senior managing official as the Controlling Person, it is best to prepare the individual as to the personal impact CRS will have on her.