A. INTRODUCTION
The Common Reporting Standard (CRS) has been initiated by the Organization for Economic Cooperation and Development (OECD) aiming at improving international tax compliance and preventing tax evasion, through the automatic exchange of information between the countries that implement CRS. The participating countries are listed in Appendix I.
Although the CRS was largely based on the FATCA Model 1 IGA, there are many differences between the two reporting regimes. Please refer to Appendix II.
The CRS is applied by all authorized credit institutions and other financial institutions, which are located in countries that participate in the CRS, and applies to all account (individuals and entities). It requires the financial institutions that are in countries which implement the CRS, to submit information on financial accounts that are held by account holders who are tax residents of countries which implement CRS.
B. THE PRACTICE
For the purpose of identifying tax residence, the financial institutions are required to obtain from the direct and indirect account holders, self-certifications which include the country of tax residence and tax identification number(s) as well as the Entity’s classification, if the account holder is an Entity.
If the information collected by the financial institutions indicates that the account holder (individual or Entity) is resident in a reportable jurisdiction, the reporting financial institution must treat the account as a reportable account and information will be shared with the country in which the individual or Entity is a tax resident. In some cases, depending on the classification given to the Entity, the standard requires to look through the Entity and report on the individuals that ultimately control the Entity (controlling persons). This is explained in more detail in section C of this report.
Without the self-certification, the financial institution cannot open any new account and in the case of pre-existing accounts, if no self-certification is provided the financial institutions are obliged to consider the account holders as reportable persons. As a consequence, financial institutions will report to the Tax Department the information they already have for the undocumented accounts and The Tax Department will in turn forward the information to the foreign tax authorities.
For the purpose of identifying tax residence, the financial institutions are required to obtain from the direct and indirect account holders, self-certifications which include the country of tax residence and tax identification number(s) as well as the Entity’s classification, if the account holder is an Entity.
If the information collected by the financial institutions indicates that the account holder (individual or Entity) is resident in a reportable jurisdiction, the reporting financial institution must treat the account as a reportable account and information will be shared with the country in which the individual or Entity is a tax resident. In some cases, depending on the classification given to the Entity, the standard requires to look through the Entity and report on the individuals that ultimately control the Entity (controlling persons). This is explained in more detail in section C of this report.
Without the self-certification, the financial institution cannot open any new account and in the case of pre-existing accounts, if no self-certification is provided the financial institutions are obliged to consider the account holders as reportable persons. As a consequence, financial institutions will report to the Tax Department the information they already have for the undocumented accounts and The Tax Department will in turn forward the information to the foreign tax authorities.
The first reporting in Cyprus will occur in 2017 and will cover the year 2016.
C. ENTITY CLASSIFICATION
The CRS provides a wide definition of the term “Entity” which includes all types of corporate vehicles, trusts, partnerships and other similar structures.
All Entities need to be classified under CRS and this classification will determine whether the controlling persons of the Entity would have to be identified and reporter or not. The first classification that needs to be made is whether the Entity is a Financial Institution (FI) or a Non-Financial Entity (NFE).
Financial Institutions (FI)
The term Financial Institution means a Custodial Institution, a Depository Institution, an Investment Entity, or a Specified Insurance Company.
Custodial Institution means any Entity that holds, as a substantial portion of its business, Financial Assets for the account of others. An Entity holds Financial Assets for the account of others as a substantial portion of its business if the Entity’s gross income attributable to the holding of Financial Assets and related financial services equals or exceeds 20% of the Entity’s gross income during the shorter of:
(i) the three-year period that ends on 31 December (or the final day of a non-calendar year accounting period) prior to the year in which the determination is being made; or
(ii) the period during which the Entity has been in existence.
Depository Institution means any Entity that accepts deposits in the ordinary course of a banking or similar business.
Investment Entity means any Entity:
a) That primarily conducts as a business one or more of the following activities or operations for or on behalf of a customer:
i) trading in money market instruments (cheques, bills, certificates of deposit, derivatives, etc.); foreign exchange; exchange, interest rate and index instruments; transferable securities; or commodity futures trading;
ii) individual and collective portfolio management; or
iii) otherwise investing, administering, or managing Financial Assets or money on behalf of other persons; or
b) The gross income of which is primarily attributable to investing, reinvesting, or trading in Financial Assets, if the Entity is managed by another Entity that is a Depository Institution, a Custodial Institution, a Specified Insurance Company, or an Investment Entity.
Investment Entity means any Entity:
a) That primarily conducts as a business one or more of the following activities or operations for or on behalf of a customer:
i) trading in money market instruments (cheques, bills, certificates of deposit, derivatives, etc.); foreign exchange; exchange, interest rate and index instruments; transferable securities; or commodity futures trading;
ii) individual and collective portfolio management; or
iii) otherwise investing, administering, or managing Financial Assets or money on behalf of other persons; or
b) The gross income of which is primarily attributable to investing, reinvesting, or trading in Financial Assets, if the Entity is managed by another Entity that is a Depository Institution, a Custodial Institution, a Specified Insurance Company, or an Investment Entity.