CRS: All you need to know

The Organisation for Economic Co-operation and development (OECD) developed a new global standard on automatic exchange of information on financial accounts, between jurisdictions across the world, in an attempt to monitor offshore tax evasion. For that purpose, in 2014, several countries (see table at https://thebanks.eu/articles/automatic-exchange-of-information-on-financial-accounts), including Cyprus, signed a multilateral agreement. The OECD released a model Competent Authority Agreement (CAA) and the Common Reporting Standard (CRS) which contains the reporting and due diligence standard maintaining the automatic exchange of financial account information between the tax authorities which signed the multilateral agreement.

The European Union in order to comply with the abovementioned international developments adopted the CRS in the Directive on the administrative cooperation in the field of taxation; therefore the Member States are obliged to implement reporting and due diligence rules. Cyprus, being a member of the European Union adopted the CRS on 1 January 2016 and the first reporting will take place in September 2017.

The procedure for the exchange of information

The tax authorities of each jurisdiction will collect information from the local Financial Institutions with regards to every financial account and automatically exchange the information with the jurisdiction (in case that jurisdiction is a party to the multilateral agreement) in which the owner of the account is a tax resident. To that end, the Financial Institutions will provide the personal details (Full name, address, tax identification number (TIN), date and place of birth (in case of an individual) of the account owner to their local Tax Authorities:

Information which will be exchanged

The Financial Institutions will specifically report to the tax authorities, information regarding a financial account’s income and capital on the following categories:

  • Income from employment
  • Director’s fees
  • Life insurance products
  • Pensions
  • Ownership of and income from immovable property
  • Dividends
  • Capital gains
  • Royalties

Financial Accounts of Legal Entities (Companies)

Pre-existing (before 1 January 2016) company accounts:
Accounts that will be excluded from a Financial Institutions’ reporting procedure: The Directive enables the Financial Institutions to deviate from the obligation of reporting pre-existing financial company accounts that did not exceed on 31 December 2015, an amount in the domestic currency of each country which is a party to the multilateral agreement, equivalent to 250,000 USD. Such account will not be reported in the future until the balance exceeds that amount as of the last day of any year that will follow.

So far, our Firm has been officially informed that all major banks will exercise their right not to report pre-existing company account/s to which this section applies. However, the banks will require the completion of a questionnaire for purposes of clarifying the tax residency of the company.
Accounts to be reported by the Financial Institutions:

  • Accounts that exceed on 31 December 2015 the 250,000 USD threshold provided that the company’s tax residence is in a country other than the one where the account is held, and that country is a party to the multilateral agreement

OR

  • The account is owned by a passive Non-Financial Entity (NFE) controlled by an Ultimate Beneficial Owner (UBO) who is a tax resident of a country other than the one where the account is held.

For example, if a citizen of Romania is a tax resident in Germany and owns a company in Seychelles with a corporate account in Cyprus his account information will be reported to German tax authorities by the tax authorities of Cyprus.

New (from 1 January 2016) company accounts:

The Financial Institutions will request the tax residence of the company and the UBO and the TIN of both the company and its UBO in order to determine whether either the company or the UBO is a tax resident in a jurisdiction which is a party to the multilateral agreement. If the company has no tax residence, the Financial Institution will rely on the registered address of the company. In case the company is a passive NFE and its UBO is a tax resident in a jurisdiction which is a party to the multilateral agreement, then information about the account will be reported to the tax authorities.

Financial Accounts of Individuals

Pre-existing (before 1 January 2016) individual accounts:

  • Lower Value Accounts (account balance that does not exceed on 31 December 2015 an amount in the domestic currency of each country which is a party to the multilateral agreement, equivalent to 1.000.000 USD): If the Financial Institution has in its possession evidence (i.e. utility bill) showing the current residential address of the account holder, it may use such address as an indicator of his tax residency. Alternatively, the bank may conduct an electronic record research on the database it maintains, based on:

  • The identification information of the account holder

  • His current mailing or residence address

  • Any of his telephone numbers, any standing instructions to transfer funds that he may had given

  • Any valid power of attorneys that the bank has in its possession or a “hold-mail” instruction or “in- care- of” address in a country.

In case the results of the electronic record research show that the account holder is a resident in more than one country and he does not provide any valid documentation proving otherwise, then the Financial Institution will treat the account holder as a tax resident in all such countries.

  • High Value Accounts (account balance that exceeds on 31 December 2015 an amount in the domestic currency of each country which is a party to the multilateral agreement, equivalent to 1.000.000 USD): It is compulsory for the Financial Institutions to conduct an electronic record research on the database it maintains as described above.

If not all the information is captured through the electronic record research, the bank must review the paper record contained in the file of the account and any of the following documents associated with blue spruce maids for the last five years:

  • The most recent Documentary Evidence collected with respect to the account

  • The most recent account opening contract or documentation

  • The most recent documentation obtained by the bank pursuant to Know Your Client (KYC) procedures or for other regulatory purposes.

  • Any power of attorney or signature authority forms currently in effect

  • Any standing instructions to transfer funds currently in effect.

Furthermore, the Financial Institution must report to the tax authorities any account assigned to a relationship manager if he has knowledge that the account owner is a tax resident of a country which is a party to the multilateral agreement.

Review of lower value accounts must be completed by 31 December 2017 whereas review of high value accounts must be completed by 31 December 2016.

New (from 1 January 2016 Individual Accounts): The Financial Institutions will request the tax residence of the account holder and his TIN along with the account opening documentation in order to determine whether he is a tax resident of a country which is a party to the multilateral agreement.

For instance, If a citizen of Greece is a tax resident of Italy and has an account in Cyprus his account will be reported to Italian authorities by the authorities of Cyprus.

The term Financial Institutions include registered banks, certain insurance companies, funds, certain non-supervised investment entities and certain corporate service providers

A NFE is considered passive if less than 50% of its income is passive income and less than 50% of its assets are held for the production of passive income. (OECD handbook p. 118)

  • The identification information of the account holder

  • His current mailing or residence address

  • Any of his telephone numbers, any standing instructions to transfer funds that he may had given

  • Any valid power of attorneys that the bank has in its possession or a “hold-mail” instruction or “in- care- of” address in a country.

In case the results of the electronic record research show that the account holder is a resident in more than one country and he does not provide any valid documentation proving otherwise, then the Financial Institution will treat the account holder as a tax resident in all such countries.

  • High Value Accounts (account balance that exceeds on 31 December 2015 an amount in the domestic currency of each country which is a party to the multilateral agreement, equivalent to 1.000.000 USD): It is compulsory for the Financial Institutions to conduct an electronic record research on the database it maintains as described above.

If not all the information is captured through the electronic record research, the bank must review the paper record contained in the file of the account and any of the following documents associated with the account and received by the bank within the last five years:

  • The most recent Documentary Evidence collected with respect to the account

  • The most recent account opening contract or documentation

  • The most recent documentation obtained by the bank pursuant to Know Your Client (KYC) procedures or for other regulatory purposes.

  • Any power of attorney or signature authority forms currently in effect

  • Any standing instructions to transfer funds currently in effect.

Furthermore, the Financial Institution must report to the tax authorities any account assigned to a relationship manager if he has knowledge that the account owner is a tax resident of a country which is a party to the multilateral agreement.

Review of lower value accounts must be completed by 31 December 2017 whereas review of high value accounts must be completed by 31 December 2016.

New (from 1 January 2016 Individual Accounts): The Financial Institutions will request the tax residence of the account holder and his TIN along with the account opening documentation in order to determine whether he is a tax resident of a country which is a party to the multilateral agreement.

For instance, If a citizen of Greece is a tax resident of Italy and has an account in Cyprus his account will be reported to Italian authorities by the authorities of Cyprus.

                                                                                           Marian A. Chronides
Corporate Lawyer-Associate