Reporting under FATCA and CRS by Trust and related issues

1. In the case of trust, two situations may arise

a. when a trust is itself a Reporting Financial Institution, or

b. when a trust is a NFE that maintains a Financial Account with a Reporting Financial Institution.

The most likely scenario in which a trust will be a Financial Institution is if it falls within the definition of Investment Entity as described in para B of 2.3.3 of Guidance Note on FATCA and CRS as updated on 30th November 2016. This is the case when a trust has gross income primarily attributable to investing, reinvesting, or trading in Financial Assets and is managed by another Entity that is a Financial Institution. This would also include trusts that are collective investment vehicles or other similar investment vehicle established with an investment strategy of investing, reinvesting, or trading in Financial Assets.

If a trust is not a Financial Institution, it will be a non-financial Entity. NFEs are either Active NFEs or Passive NFEs depending on their activities.

2. The treatment of a trust that is a RFI

2.1. The five steps set out in para 1.5 apply to a trust:(i) Reporting Financial Institutions (ii) review their Financial Accounts (iii) to identify their Reportable Accounts (iv) by applying the due diligence rules and (v) then report the relevant information.

2.2. Determining if the trust is a RFI

If a trust is financial institution resident in India and it is not a Non-Reporting Financial Institution (NRFI), then trust will be Reporting Financial Institution.

A trust could also be a Non-Reporting Financial Institution where the trustee itself is a Reporting Financial Institution (RFI), and that trustee undertakes all information reporting in respect of all Reportable Accounts of the trust (and all such reports are exchanged with the relevant jurisdictions concerned).

A trust will be considered to be resident where the trustee(s) is resident. If there is more than one trustee, the trust will be a Reporting Financial Institution in all such countries in which a trustee is resident.

2.3. Identifying the Financial Accounts of a trust

Where a trust is a RFI, it must identify its Financial Accounts. If the trust is an Investment Entity, its Financial Accounts will be debt and Equity Interests in the Entity also.

The Equity Interests are held by any person treated as a settlor or beneficiary of all or a portion of the trust, or any other natural person exercising ultimate effective control over the trust.

The reference to any other natural person exercising ultimate effective control over the trust, at a minimum, will include the trustee as an Equity Interest Holder.

If a settlor, beneficiary or other person exercising ultimate effective control over the trust is itself an Entity, that Entity must be looked through, and the ultimate natural controlling person(s) behind that Entity must be treated as the Equity interest holder. The term “Controlling Persons”has already been defined earlier in the guidance note.

2.4. Identifying the Reportable Accounts of a trust

The debt and Equity Interests of the trust are Reportable Accounts if they are held by a Reportable Person.

For example, if a settlor or beneficiary is resident in a country outside India, their Equity Interest is a Reportable Account.

2.5. Applying the due diligence rules

The trust will apply the due diligence rules in order to determine the identity and residence of its Account Holders. The due diligence procedure would be same as of a preexisting entity account or new entity account, as the case be.

2.6. Reporting the relevant information

A trust that is a RFI will report the account information and the financial activity for the calendar year in respect of each Reportable Account.

The account information includes the identifying information for each Reportable Person (such as name, address, residence, Taxpayer Identification Number, date of birth and Account Number), and the identifying information of the trust (name and identifying number of the trust).

It is possible that a trust as FI may not have an account number for each of the Equity Interest holders. The trust should in that case use a unique identifying number that will enable the trust to identify the subject of the report in the future.

The financial activity includes the account balance or value, as well as gross payments paid or credited during the year.

The account balance is the value calculated by the Reporting Financial Institution (the trust) for the purpose that requires the most frequent determination of value.

For settlors and beneficiaries, for example, this may be the value that is used for reporting to the Account Holder on the investment results for a given period. If the Financial Institution has not otherwise recalculated the balance or value for other reasons, the account balance for settlors and beneficiaries may be the value of the interest upon acquisition or the total value of all trust property.

The financial information to be reported will depend on the nature of the interest held by each Account Holder. Where the trust does not otherwise calculate the account value held by each Account Holder, or does not report the acquisition value, the account balance or value to be reported is as shown in the following Table . Note that where a settlor or beneficiary is an Entity, the Account Holder will be the Controlling Persons of that Entity.

The financial activity to be reported where a trust is a Financial Institution that does not otherwise calculate the account value

3. The treatment of a trust that is a NFE

3.1. In the second situation, the trust is a NFE and holds a financial account with a RFI.

The same five steps will apply: (i) Reporting Financial Institutions (ii) review their Financial Accounts (iii) to identify their Reportable Accounts (iv) by applying the due diligence rules and (v) then report the relevant information.

Assuming here that the first two steps are met (a trust has a Financial Account with a Reporting Financial Institution). Now remaining three steps would be applied.

3.2. Identifying whether the account held by the trust is a Reportable Account

The account held by a trust that is a Passive NFE is a Reportable Account if:

a) the trust is a Reportable Person; or

b) the trust has one or more Controlling Persons that are Reportable Persons.

The trust will be a Reportable Person only if it is resident for tax purposes in a country outside India.

The account held by a trust will also be reportable if it the trusts has one or more Controlling Persons that are Reportable Persons.

As such, the Controlling Persons of a trust are the settlor(s), trustee(s), beneficiary/ies, protector(s) and any other natural person exercising ultimate effective control over the trust. This definition of Controlling Person excludes the need to inquire as to whether any of these persons can exercise practical control over the trust.

If the settlor or beneficiaries are themselves Entities, the Reporting Financial Institution must identify the natural person(s) exercising control of that Entity. Although the natural person may be exercising ultimate control through a chain of ownership, only the ultimate natural controlling person(s) would be treated as a Controlling Person, and not the intermediary Entities in the chain of ownership.

3.3. Applying the due diligence rules

The Reporting Financial Institution must apply the due diligence rules as described for preexisting entity account or new entity account.

3.4. Reporting the relevant information

Where a trust is a Reportable Person, the Reporting Financial Institution will report the account information and the financial activity for the year with respect to the account of the trust. The account information includes the

identifying information for each Reportable Person (such as name, address, residence, Taxpayer Identification Number, date of birth and account number), and the identifying information of the Reporting Financial Institution (name and identifying number).

In respect of a trust that is a Passive NFE, the Reporting Financial Institution must report the Controlling Persons of the trust, if they are reportable persons.

The financial information to be reported will be the account balance or value of the account held by the trust and payments made or credited to such account. Each Controlling Person is attributed the entire value of the account, as well as the entire amounts paid or credited to the account, as shown below in the following Table:

The financial activity to be reported where a trust is a Passive NFE

4. Treatment of partnership

Like in the case of trust, two situations may arise in case of Partnership

a. when a Partnership is itself a Reporting Financial Institution, or

b. when a Partnership is a NFE that maintains a Financial Account with a Reporting Financial Institution.

The same procedure may be followed as in the case of trust. The controlling person will be different for partnership and has already been defined in the guidance note.

Source- Guidance Note on FATCA and CRS as updated on 30th November 2016