Trusts update
Trust planning and administration update: FATCA/CRS and trusts - where are they now?
Emily Deane reviews practitioners’ responsibilities under the Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS).
About the author
Emily Deane TEP is Technical Counsel at STEP.
If you have reporting obligations under FATCA or CRS, they should really be underway by now; however, it may not be too late to get up to speed if you have been remiss to date.
Under the Intergovernmental Agreement (IGA), all professionals dealing with trusts, whether as a trustee, a legal adviser, an account holder, a bank or a trust company, will need to identify which trusts are caught by FATCA and which ones need to register. The starting point is to determine whether the trust is a financial institution (FI), which it will be if both of the following conditions apply:
- if it holds more than 50 per cent of ‘financial assets’ (broadly, stocks, shares, financial instruments etc, but not including cash); and
- either the trust or its assets are professionally managed by an entity which is itself a financial institution (for example, a professional trust company or discretionary investment manager).
The definition of ‘financial institution’ for the purposes of the FATCA rules is fairly broad, and it includes professional trustees (not individuals), trusts, family offices and nominees (not individuals).
The trust will be a Passive Non-Financial Foreign Entity (NFFE) if more than 50 per cent of its gross income is passive income. Rather than reporting directly, it will be reported on by any FI with which it interacts. As such, the individual trustees will have no reporting obligations under FATCA, but it will be necessary for the trust to identify whether it has any US reportable persons.
If the trust is a FI due to its professional management, then it will have a variety of reporting options in terms of fulfilling its registration and reporting obligations under the Model 1 IGA.
To date, all FIs should have registered with the US tax authority, the Internal Revenue Service (IRS), and obtained a Global Intermediary Identification Number (GIIN). The GIIN is issued, and then needs to be supplied to other institutions as evidence that you are compliant. FIs will ask for GIINs (where the entity is a FI) or confirmation (using a W-8 BEN form) that the entity is a NFFE. If an individual is going to submit a FATCA return, they will also need to register with HM Revenue and Customs using their online services. This service is available through the Government Gateway.1
Trusts that are FIs will need to register and report directly under the IGA, or they may have the option to appoint a third party to fulfil their IGA requirements. Where the trust has a reporting FI as a trustee (typically where the trust has a corporate trustee) and the trustee agrees to report all necessary information with respect to the trust, the trust can opt for a ‘trustee-documented trust status’. This will qualify the trust to become a ‘deemed compliant FI’. As such, the trust itself is a non-reporting UK financial institution and will not be required to register with the IRS or report under the IGA. The trustee will instead register and report on the trust. This is widely seen by practitioners as a relatively attractive option in terms of possible routes for the trust to fulfil its FATCA obligations.
A FI should have completed its registration by 25 October 2015, and the information to be submitted is listed on page 15 of the government’s guidance notes dated 14 September 2015.2
Are there any sanctions if this has not been done already?
If the reporting obligations for FATCA or CRS have been neglected, then the International Tax Compliance Regulations 2015 SI No 878 regs 13–22 may be applied. The individual who is responsible for reporting will be subject to a £300 fine if they fail to comply with these regulations. If the failure to comply continues after that individual has been notified of the penalty, there could be an additional fine of up to £60 a day payable.
If deliberately inaccurate information has been provided or reasonable steps have not been taken to notify HMRC when an error is discovered, then a fine of up to £3,000 may be issued. If you are concerned that you may have reporting obligations under FATCA, you should contact HMRC immediately to mitigate any potential financial (and reputational) penalties.
What will the trustees need to do in future?
To ensure that they will remain FATCA compliant, the trustees should review their practice systems and implement any necessary changes to the following:
- Engagement letters Ensure that your engagement letters set out any FATCA-compliance work that you are undertaking and whether the clients are responsible for advising you on their FATCA status.
- Client take-on process You will need to identify if your client has any US connections.
- Client identification procedure Identify whether a client is a US person by way of green card status, US birthplace/residence address.
- Financial institutions FIs should write to the account holders and notify them that they will be subject to automatic exchange of information.
- Establishing reportable transactions Identify the US persons and identify and record payments to them.
- Submitting the report Report the information to HMRC on an annual basis.
Setting up FATCA systems for new clients should be relatively easy; however, the more difficult task might be identifying existing clients and their trusts which are now caught within the scope of FATCA, who are unaware of or reluctant to adhere to their reporting duties.
The CRS is a much broader tax information reporting regime, which is similar but not identical to the FATCA regime. There are many commonalities between FATCA and CRS; however, there are some notable differences relating to the financial assets test and the treatment of cash, trust residence and the treatment of charities, protectors and discretionary beneficiaries, to name a few.
There are two main categories for reporting, and a trust will either be a FI or a Non-Financial Entity (NFE). To classify as a FI:
- at least 50 per cent of the trust’s gross income must be derived from investing, reinvesting or trading in financial assets; and
- the trust must be professionally managed by another financial institution or a discretionary fund manager
A trust will be a Passive NFE if it is not professionally managed and more than 50 per cent of its gross income is passive income; in addition, it will not be required to report. However, the FI that holds its account will need to report the name, address and date of birth of each of the Controlling Persons of the trust who are resident in a CRS jurisdiction.
Alternatively, trusts will be categorised as FIs if they are professionally managed.
Who does the reporting and what is reportable and when?
The trustees will be required to undertake due diligence on their account holders. An account holder is deemed to be anyone with an equity or a debt interest in the trust; for example, settlors, beneficiaries and protectors will have an equity interest, and anyone who has made a loan to the trust will have a debt interest.
The legislation also states that an account holder can be ‘any other natural person exercising ultimate effective control over the trust’. The term ‘ultimate effective control’ can be a bit misleading because protectors and settlors are deemed to be account holders regardless of how much effective control they have over the trust. Therefore, they will always need to be reported.
The information will need to be reported on an annual basis to HMRC, and the trustees must obtain self-certification forms from the account holders. These forms can be downloaded from the Organisation for Economic Co-operation and Development website,3 but they can also be in your own format provided they include the following information:
- The name, address, tax residence and Tax Information Number (TIN) of the account holders or an equivalent, such as a social security number, national insurance number or registration number. An account holder who is resident in more than one country will need to report all of their TINs.
- The account balance, the gross amount paid or credited to the account in the preceding year as well as the closure of any accounts.
Do the trustees need to report anything once the annual return has been submitted?
There are no mid-year returns, therefore once the annual return has been submitted to HMRC nothing further is required during that year.
As the author advised previously, if you are in any doubt as to your FATCA or CRS obligations, you should contact HMRC directly or seek professional advice immediately.
- Visit: www.gateway.gov.uk
- Automatic exchange of financial account information: guidance notes, 14 September 2015, available at: http://tinyurl.com/nmkrqc7
- Visit: www.oecd.org