Early January 2021, the Swiss Federal Tax Administration published a revised version of its Common Reporting Standard Guidance (the "Revised Swiss CRS Guidance"), which includes a number of changes affecting the Swiss fiduciary industry.
This revision was undertaken following publication by the OECD in April 2018 of the Second Edition of its CRS Implementation Handbook (the "Implementation Handbook"). The primary objective of the Implementation Handbook is to assist stakeholders in the understanding and implementation of the CRS – it does not however aim at supplementing or expanding the CRS itself.
Compared to the First Edition, the Second Edition of the OECD's CRS Implementation Handbook provides additional clarifications in the trust section, most notably in relation to the identification of controlling persons. Following suit, the Swiss Federal Tax Administration included several relevant updates within the trust section of its CRS Guidance.
Of particular interest are the sections pertaining to (i) the identification of the equity interest holders of a trust qualifying as a reporting financial institution (FI); (ii) the so-called "look through" obligation of a reporting FI-trust when faced with an entity-account holder; and (iii) the notion of "indirect distributions" made by a trust.
1. Who Is An Equity Interest Holder Of A Trust Qualifying As A Reporting FI?
At the basis of the CRS system lies the obligation imposed upon reporting FIs, including trusts which qualify as such, to identify their financial accounts in order to determine whether or not they consist in reportable accounts.
The term "Financial Account" is defined in the CRS as an account maintained by an FI and includes, in the case of an Investment Entity, any equity or debt interest in the FI (Section VIII C. 1. CRS, p. 50). An "Equity Interest", in the case of a trust, is considered to be 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 (Section VIII C. 4. CRS, p. 51).
Altogether, the identification of financial accounts and reportable persons is an important process as it determines the extent of an FI's reporting obligations.
In its initial version of the CRS Guidance (the "Swiss CRS Guidance"), the Swiss Federal Tax Administration had remained true to the CRS as it had defined the equity interest holders of a trust that qualified as an FI as the settlor, beneficiary, or any other natural person exercising ultimate effective control over the trust. Although protectors were also mentioned as equity interest holders in Annex 3 to the Swiss CRS Guidance, it remained unclear whether protectors were to be systematically reported upon or if they were to be reported upon only under specific circumstances, i.e. when they exercised ultimate effective control over the trust.
The Swiss Federal Tax Administration has now changed its views on this point and adopted the approach set out in the Implementation Handbook. In the Revised Swiss CRS Guidance, the equity interest holders of a trust qualifying as an FI now consist of the settlor, trustee, beneficiary or protector of all or a portion of the trust, or any other natural person exercising ultimate effective control over the trust.
The OECD, through its Implementation Handbook, and, subsequently, the Swiss Federal Tax Administration in the Revised Swiss CRS Guidance, therefore seem to have somewhat expanded the circle of persons who qualify as equity interest holders in trusts.
2. What Is An FI-Trust's "Look Through" Obligation?
The second novelty introduced by the Revised Swiss CRS Guidance, which was also inspired by the contents of the Implementation Handbook, is the obligation imposed upon trusts to look through their entity-account holders.
While the CRS itself provides that an account holder which is an FI is a non-reportable person, the Implementation Handbook states that where an equity interest (such as the interest held by a settlor, beneficiary or any other natural person exercising ultimate effective control over the trust) is held by an entity, the equity interest holder will instead be the controlling persons of that entity. As such, a trust is required to look through a settlor, trustee, protector or beneficiary that is an entity to locate the relevant controlling persons.
This basically equates to treating the FI-equity interest holders of an FI-trust as passive non-financial entities rather than as true FIs. As per the contents of the Implementation Handbook, the FI status of an entity does not therefore serve as a "blocker" when it comes to FI-trusts' reporting obligations.
Here again, the Swiss Federal Tax Administration has adopted the views set out in the OECD's Implementation Handbook and included a section in the Revised Swiss CRS Guidance covering FI-trusts' obligation to look through any entity account holders and report on these entities' controlling persons.
3. How Are Indirect Distributions Made By Trusts Treated Under The Revised Swiss CRS Guidance?
The third relevant amendment made by the Swiss Federal Tax Administration in the Revised Swiss CRS Guidance consists more in a clarification than in an actual change as it pertains to "indirect distributions" made by trusts.
Indirect distributions by a trust may arise when the trust makes payments to a third party for the benefit of another person. For example, instances where a trust pays the tuition fees or repays a loan taken up by another person are to be considered indirect distributions by the trust. Indirect distributions also include cases where the trust grants a loan free of interest or at an interest rate lower than the market interest rate or at other non-arm’s length conditions. In addition, the write-off of a loan granted by a trust to its beneficiary constitutes an indirect distribution in the year the loan is written-off.
Therefore, any person who has borrowed money from a trust at below-market conditions or who has benefited from a loan which was ultimately written-off will qualify as a beneficiary of the trust and will therefore be reported upon if the trust qualifies as an FI.
This clarification was also borrowed from the Implementation Handbook and evidences the fact that the CRS' focus lies in identifying the persons who benefit, on an economic level, from trust distributions and therefore qualify as beneficiaries of a trust without regard to the means by which the benefit arises to the beneficiaries or of whether or not these persons are effectively identified as beneficiaries in the trust instrument.
Under the Revised Swiss CRS Guidance, when a trust makes an indirect distribution it will be under the obligation to report on the value of the distribution made to the beneficiary during the year (equivalent, for instance, to the difference between a market rate interest and the amount of interest effectively paid to the trust by the borrower or, in instances where a loan is written-off, the amount of the loan) and, depending on the circumstances, on the total value of the trust's assets.
Can They Really Do That?
As previously mentioned, the purpose of the Implementation Handbook is to assist stakeholders in the understanding and implementation of the CRS, not to supplement or expand it.
This naturally begs the following question: do the various novelties reviewed above effectively clarify the contents of the CRS, or do they consist in an expansion thereof?
When it comes to identifying the circle of equity interest holders in a trust, the CRS provides that it includes the settlor, beneficiaries, or any other natural person exercising ultimate effective control over the trust (Section VIII C. 4. CRS, p. 51). The Implementation Handbook then goes on to "specify" that the reference to any other natural person exercising ultimate effective control over the trust, at a minimum, will include the trustee and the protector as an equity interest holder (Section 253 Implementation Handbook, p. 108).
However, if one compares the definition of equity interest holders under the CRS with that of controlling persons of a trust, which include the settlor(s), trustee(s), protector(s), beneficiary(ies) or class(es) of beneficiaries, and any other natural person(s) exercising ultimate effective control over the trust (Section VIII D. 6. CRS, p. 57), serious doubts are permitted as to the non-expanding nature of the contents of the Implementation Handbook.
Indeed, if trustees and protectors were to systematically be considered as equity interest holders in trusts, why not state it directly in the CRS as was done for the circle of controlling persons of a trust?
Similar doubts may further be expressed as regards trusts' look through obligation with respect to FI-account holders. Indeed, although the CRS does speak of a look through obligation, it only does so with respect to non-financial entities, not FIs, which are clearly identified as non-reportable persons (Section VIII D. 2. CRS, p. 57).
When Should You Start Worrying About All These Changes?
If you are a Swiss FI, ideally as soon as possible.
That being said, insofar as the Revised Swiss CRS Guidance was adopted by the Swiss Federal Tax Administration on 8 January 2021, it should not apply to reports to be filed this year, only to those for the period 1 January to 31 December 2021 (to be filed in 2022) and onwards, thus leaving everyone enough time to happily flip through its 176 pages.
We understand that the Swiss Federal Tax Administration has unofficially confirmed the above temporal scope of application for the Revised Swiss CRS Guidance.
Fabianne de Vos Burchart