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Trustees and the Common Reporting Standard (CRS)

As if FATCA wasn’t enough, UK trustees will have to get to grips with two new reporting regimes next year – the CRS and the European Directive on Administrative Cooperation, or DAC.  The DAC is how the OECD’s Common Reporting Standard (CRS) will be implemented by the EU. 

There are many similarities between the approach and the terms used in the FATCA and the CRS/DAC reporting regimes.  However, they are quite different in the sense that the purpose of FATCA is to help the IRS identify US persons with interests in accounts outside the US – the flow of information is into the US only.  The scope of the CRS/DAC is multilateral and involves reciprocal exchange of information between jurisdictions.  The CRS/DAC are designed to enable accounts held in any of the jurisdictions that have opted into the CRS (of which there are now over 95) by an individual or entity resident in one or more of these jurisdictions to be identified and information about it and the account holder reported.  The intention is that information about a UK account held by a person resident in a CRS jurisdiction will be reportable to HMRC for onward transmission to the jurisdiction of residency and vice versa.  As a result, many UK trusts that are classed as Financial Institutions (FIs) under FATCA, and have not had to submit a report to HMRC yet because of a lack of US persons, will now have to do so annually. 

Trustees will need to go through the process of classifying their trusts for CRS/DAC purposes.  Trusts that are both managed by an FI (which can simply be a corporate trustee) and whose income is mostly (i.e. 50% plus) derived from investing, reinvesting or trading in financial assets are likely to be FIs.  FIs must assess whether they have any reportable accounts and whether each account is held by a reportable person.  Existing trusts will need to look at their asset composition as at 31 December 2015 to assess their CRS/DAC obligations, with a view to reporting to HMRC, if necessary, by 31 May 2017. 

If the trust is not an FI, the trustees will still need to assess whether the trust is an active or passive Non-Financial Entity (NFE).  Even a passive NFE will have to provide details of its controlling persons to any FI it deals with. 

For those trustees affected, complying with CRS/DAC is likely to involve much more collecting and safekeeping of trust information, particularly concerning the beneficiaries and their tax residence, and keeping the information collected under regular review.  It will inevitably increase the costs associated with administering trusts.  

The introduction of the CRS/DAC may also mean that only beneficiaries that have a real prospect of benefiting from the trust remain named as potential objects in discretionary trusts.  The days of naming a wide class of beneficiaries ‘just in case’ may be rapidly drawing to a close.