Guernsey clarifies “Investment Entity” definition
15 August 2016
The Income Tax Department of the States of Guernsey recently issued a bulletin (2016/6), clarifying its interpretation of the definition of an “investment entity” under the Common Reporting Standard (“CRS”).
This clarification will impact on all entities that are “professionally managed” by financial institutions. This may include:
It will also impact on financial institutions who are in the process of reviewing their pre-existing entity accounts (i.e. those that were open as at 31 December 2016).
The definition of investment entity differs between the US Foreign Account Tax Compliance Act (“FATCA”), the UK’s Agreements with the Crown Dependencies and Overseas Territories (“CDOT”) and CRS.
Under both FATCA and CDOT, the definition is much wider, covering all instances where an entity is managed by a financial institution, irrespective of its sources of income. Therefore, a trust which derives all of its income from property (which is not a financial asset) would be regarded as a professionally managed investment entity (and hence an FI) where some or all of its assets are discretionally managed by an FI.
However, under CRS an entity would only be regarded as a professionally managed investment entity in the event that:
some or all of the investments are managed by an FI; and
at least 50% of its income is derived from investing, reinvesting or trading in financial assets.
Accordingly, a trust which derives the majority of its income from direct property holdings would not be regarded as an FI under CRS.
Under FATCA and CDOT, it was possible for trust companies to bulk-classify all of the entities where they were responsible for the discretionary management of some of the investments where the trust company was itself an FI.
However, under CRS, such entities will need to be tested on an annual basis in order to ascertain whether there is any change to their classification. This may require an annual declaration from the trustees, especially where only some of the assets are under management.
What this means for you
In the event of the entity being regarded as a professionally managed investment entity, it is necessary to test on an annual basis whether the threshold is still met. Where a trust is regarded as an investment entity, it will be legally responsible for ensuring that due diligence is undertaken in respect of anyone holding an equity interest. Even if the trustees appoint another firm to make the returns on their behalf (for example, a professional trustee company), the trust itself would be deemed responsible for any errors by the Revenue authorities.
However, in the event that the trust becomes a passive Non-Financial Entity (“NFE”), the trust would merely be required to classify itself to FIs with which it is maintaining a financial account.
There are also some differences in the persons who would be regarded as reportable persons.
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As highlighted above, procedures will need to be in place to monitor the classification on an annual basis based on the sources of income and assets. Where changes in status are identified, counterparties will need to be notified of this. Any such changes may introduce due diligence and reporting obligations in relation to the persons identified above.
This publication has been written in general terms and therefore cannot be relied on to cover specific situations; application of the principles set out will depend upon the particular circumstances involved and we recommend that you obtain professional advice before acting or refraining from acting on any of the contents of this publication. Hansuke Consulting Limited would be pleased to advise readers on how to apply the principles set out in this publication to their specific circumstances. Hansuke Consulting Limited accepts no duty of care or liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication.