A trust is the legal relationship created when a person (the settlor) places assets under the legal ownership and control of another person (the trustee) for the benefit of other persons (the beneficiaries) or for a specific purpose, in accordance with the terms expressly stated in the Trust Deed.
The Common Reporting Standard (CRS) is a standard of Automatic Exchange of Financial Account Information on tax matters, developed by the Organization of Economic Cooperation and Development (OECD), which imposes reporting obligations and exchange of information standards between the tax authorities of the Participating Jurisdictions. It is important to note that the exchange of information under CRS is between tax authorities only and such information is not made available to any public registers.
In order to determine the reporting obligations applicable to a trust under CRS, one would firstly need to establish whether the trust is a Reporting Financial Institution (RFI) or a Non-Financial Entity (NFE) that maintains a Financial Account with a RFI.
The reporting obligations in the case of a trust that qualifies as a RFI differ from the disclosures that should be carried out for a trust that is a Passive NFE that maintains a Financial Account with a RFI. A thorough analysis of the Trust Deed, identification of the RFI, identification of the Reportable Accounts, review of the Financial Accounts and application of due diligence rules should, therefore, be made in order to reach an accurate classification of the trust and thereafter carry out the applicable CRS reporting obligations.
Classification of a trust as a Reporting Financial Institution (RFI):
If (a) the majority of the trust’s gross income is primarily attributable to investing or trading in Financial Assets and other passive investments (the Gross Income Test) and (b) the trust is managed by another Entity that is a Financial Institution (FI) such as a professional corporate trustee (the Managed By Test), the trust is classified as a FI.
A trust that is a FI will be a RFI if the trustee of the trust is resident in a Participating Jurisdiction.
The trust as a RFI is required to report Financial Information and Financial Activity relating to Financial Accounts that it maintains that are Reportable Accounts held by either (a) a Reportable Person (a person resident in a Participating Jurisdiction) or (b) a Passive NFE with a Controlling Person who is a Reportable Person.
According to CRS, a Financial Account includes, not just bank and brokerage accounts held with other institutions but also Equity Interests held by the settlor, the beneficiaries and any other natural person exercising ultimate effective control over the trust (the Account Holders). A discretionary beneficiary will only be treated as an Account Holder in the years during which it received discretionary distributions from the trust.
In the event an Account Holder is a legal entity, appropriate KYC procedures should be carried out in order to identify the natural person that is the ultimate Controlling Person of such entity.
The Financial Information to be reported by the RFI include the name of the trust and the name, address, tax residency, TIN, DOB, account number and account balance (the total value of trust property which would be nil for discretionary beneficiaries) of the Reportable Persons as well as any Financial Activity carried out during the year (value of payments or distributions made in the reporting period).
A trust that is a FI but its trustee undertakes to fulfil the trust’s reporting and due diligence obligations on behalf of the trust, is considered to be a non-reporting FI (NRFI).
Classification of a trust as a Non-Financial Entity (NFE):
If the trust is not managed by a FI, it would be classified as a NFE and be either Active or Passive. If the trust that is a NFE does not fall into the list of categories of Active NFEs, as per the CRS criteria, it is considered to be a Passive NFE.
A trust that is a Passive NFE and maintains a Financial Account with a RFI will be reportable if (a) the trust is a Reportable Person whereby the RFI is required to report the name and identification number of the RFI and information about each Reportable Person, namely name, address, tax residence, TIN, DOB and account number or (b) the trust has one or more Controlling Persons that are Reportable Persons for whom the RFI is required to report the information stated above as well as the total account balance or value and the gross payments made or credited to the account of each Controlling Person.
The definition of Controlling Person with respect to trusts covers any natural person exercising ultimate effective control over the trust. A settlor is always reported, irrespective of whether the trust is revocable or irrevocable. Unlike the case of a trust that is a FI, beneficiaries are also always reported, irrespective of whether they are mandatory or discretionary, however the Reporting FI may have the option to report discretionary beneficiaries in the year in which they receive distributions from the trust.
In the event a Controlling Person is a legal entity, appropriate KYC procedures should be carried out in order to identify the natural person that is the ultimate Controlling Person of such entity.