Author: Dominik Stuiber
The Common Reporting Standard (CRS) and Automatic Exchange of Financial Account Information (AEOI) subject overseas tax residents to the periodical exchange of financial account information to the jurisdiction of their tax residence.
The burden and identification of such accounts is passed down to the financial institutions. It is likely that the identification of reportable accounts will prove to be a challenge due to differences in domestic tax laws that may apply in determining whether an account holder is a tax resident of that jurisdiction, particularly in the case of corporate accounts.
In order to determine whether a corporate account holder is resident in a Reportable Jurisdiction, a Reporting Financial Institution must review information maintained for regulatory or customer relationship purposes, including information collected for AML/KYC purposes and for new accounts a self-certification form. This specifically includes the place of incorporation, registered address and principal office. However, most jurisdictions define a tax resident also by its place of central management and control, which may be different from the place of incorporation or business operations.
CRS suggests in its commentary to Financial Institutions to apply a 2-step test:
Step 1: Is the Account Holder a Reportable Jurisdiction Person?
A Reportable Jurisdiction Person is an individual or Entity resident in a Reportable Jurisdiction for tax purposes under the laws of that jurisdiction.
Step 2: Is the Account Holder a Reportable Person?
The Reportable Jurisdiction Person will then be a Reportable Person unless specifically excluded from being so. The specific exclusions are: a corporation the stock of which is regularly traded on one or more established securities markets and a Related Entity of theirs; a Governmental Entity; an International Organisation; a Central Bank; or a Financial Institution.
If the information indicates that the Account Holder is resident in a Reportable Jurisdiction, then the Reporting Financial Institution must treat the account as a Reportable Account.
Exceptions occur if it obtains a self-certification from the Account Holder, or reasonably determines based on information in its possession or what is publicly available that the Account Holder is not a Reportable Person. Notwithstanding whether the account has been found to be a Reportable Account following the above test, the Financial Institution must carry out a similar test in relation to Controlling Persons to identify whether additional information must also be reported or whether an account now becomes a Reportable Account.
Now, herein lies the problem and the risk of false reporting. Bankers are generally not tax experts, let alone in foreign tax laws, but are increasingly being tasked with the identification of any reportable accounts based on the tax residency of an account holder.
Tax residency based on control and management often brings even tax authorities and seasoned tax experts to their limits, resulting in lengthy court cases. The common law rule on tax residency by management and control was enunciated by Lord Loreburn in De Beers Consolidated Mines, Limited v Howe 5 TC 198 at page 213: “[…] a company resides, for purposes of Income Tax, where its real business is carried on. […] I regard that as the true rule; and the real business is carried on where the central management and control actually abides.”
In general, if the central management and control of a company is exercised by the directors in board meetings or by the partners in partners meetings, the relevant locality is where those meetings are held. This may be any or neither of the directors’ residence(s), the place of incorporation or operation. All these localities are usually records available to a financial institution for AML/KYC purpose.
The risk is that overseas tax authorities, via the exchange of financial account information, suddenly come into possession of information that is not subject to their jurisdiction. It is therefore in the interest of the account holder to ensure that the financial institution has updated and correct information on record.