"It should be noted that the US has not committed to CRS reporting and, thus, there will be no transition from FATCA reporting to CRS reporting for US tax payers."

Common Reporting Standard ("CRS") and the Impact on Real Estate Investment Structures

14 Dec 2016

CRS is the result of the drive by G20 nations to develop a global standard for the automatic exchange of financial account information. This follows the approach taken to implement United States ("US") FATCA. A Financial Institution ("FI") in a participating jurisdiction will be required to report certain financial information on reportable clients to its local tax authority, who in turn may exchange that information with any jurisdiction where the client or Controlling Persons are known to be tax resident.

At present 101 countries will implement CRS. The United Kingdom, Luxembourg, Guernsey, Cayman Islands and Jersey are all early adopters of CRS with first reporting to be completed in 2017 for the year ending 31 December 2016. This covers reportable accounts in participating jurisdictions. Reportable accounts for late adopting jurisdictions will be reported in 2018. A full list of jurisdictions is available from the OECD website, please click here to review the current list.

It should be noted that the US has not committed to CRS reporting and, thus, there will be no transition from FATCA reporting to CRS reporting for US tax payers. Therefore, all entities in early adopting jurisdictions with reportable accounts will be required to comply with CRS in addition to US FATCA.

Whilst there are similarities between each regime and they follow the same processes, there are technical differences that affect certain structures. For this briefing, we focus on the significant difference for Real Estate investment structures.

For example, under US FATCA, in accordance with definition 3.9.2 of the Jersey FATCA guidance notes, an entity within a structure is able to look through the structure to the source of income and nature of the underlying asset to determine the classification of the entity and subsequent compliance obligations. Where the underlying asset is "real estate" and the majority of the entities income is derived from "rental income" each entity is able to apply the classification of a Passive Non-Financial Foreign Entity (Passive "NFFE").

If an entity does not apply the look-through principle it can apply the 'managed by' test in 3.9.1 of the Jersey FATCA guidance notes. When an entity is professionally managed by another entity, which has been classified as a Financial Institution ("FI"), the entity itself will be an Investment Entity and will be classified as an FI.

However for CRS, this look-through provision is not available. Instead, the shares or loan instrument connecting the two entities will be treated as a Financial Asset, and (in accordance with OECD guidance below) the relevant entity will be classified as an FI. Only the entity that directly owns the property will be able to apply the classification of a Passive Non Financial Entity ("Passive NFE"). This was clarified in the OECD's June 2016 FAQs as follows:

"An Entity the gross income of which is primarily attributable to investing, reinvesting, or trading real property is not an Investment Entity (irrespective of whether it is professionally managed) because real property is not a Financial Asset…... If, instead, an Entity is holding an interest in another Entity that directly holds real property, the interest held by the first-mentioned Entity is a Financial Asset, and the gross income derived from that interest is to be taken into account to determine whether the Entity will meet the definition of Investment Entity" Please click here to access the OECD FAQs.

A Passive NFE does not have the reporting obligation and instead this obligation is passed to the intermediary that maintains a Financial Account, such as a bank. The intermediary reports the value of Controlling Persons, a natural person who exercises control of the entity, with 25% or more ownership for low and medium risk, and 10% or more for high risk. The value reported is the value of the bank account rather than the value of the entity's investment.
An FI must report all investors and there is no percentage threshold of ownership to determine who is reportable. The entity is required to review its due-diligence records and ascertain the tax residence and/or CRS classification of its investors.

When US FATCA was introduced, Ocorian anticipated CRS requirements and designed processes that could be followed when implementing CRS.

The OECD has issued an implementation handbook to guide in-scope jurisdictions and participating organisations within these jurisdictions. Ocorian has undertaken an in-depth review of the handbook and refined procedures in consultation with our appointed advisors, (one of the "big four" accounting firms).

All entities that are in a participating jurisdiction are required to apply a CRS classification in accordance with the regulations. This is to ascertain what compliance obligations the entity may have to meet.

CRS is a wide reaching regulation and Ocorian recommends that advice is sought from a recognised professional tax adviser in relation to the position of any entities that may be in scope of the regulation.

Whether the entity is a Passive NFE or an FI under US FATCA and CRS, Ocorian can help by contacting investors to request a self-certification, collate the information and then ascertain whether the investor is reportable or not. If preferred, this exercise can be undertaken by our clients or an external provider. If this exercise is outsourced and Ocorian provide directors to the in-scope entity, we will still need to review the details collated to ensure the structure is compliant.

Entities in an early adopting jurisdiction for CRS, are already in a reporting period and an FI is required to file a report by 30 June 2017. Ocorian has deployed bespoke software to generate reports in the specialist required XML format and we also have significant reporting experience, having undertaken reporting for over 7,500 FATCA Reportable Accounts for 2015.

If you would like to discuss the details of this briefing, we would be happy to arrange a meeting with your usual Ocorian point of contact and our Head of Tax Compliance and Reporting, who is responsible for ensuring Ocorian, our clients and structures remain compliant with both US FATCA and CRS.