Amendments to the Dutch FATCA and Common Reporting Standard Guidance (Leidraad)

16/10/20

On 14 October 2020, the Dutch Ministry of Finance published several amendments to the Dutch FATCA and Common Reporting Standard (‘CRS’) guidance (‘Leidraad’ in Dutch). The FATCA/CRS guidance is amended with retroactive aspect to 23 June 2020. The amendments relate to non-profit organisations, STAKs and investment entities with a small shareholder group and are made based on recommendations made by OECDs Global Forum. The OECD is reviewing and supervising the implementation of CRS in local legislation for all of the CRS participating jurisdictions.

General observation

As the changes apply retroactively to 23 June 2020, banks that have non-profit organisations, STAKs and investment entities with a small shareholder group as a customer, need to determine if they are actively going to approach their customer base, or wait - as CRS dictates - for the customer to update their self-certification forms.

1.24 - Classification of non-profit organisations

Previously the Dutch government took the position that a non-profit organisation that classifies as an Active NFE based on CRS Section VIII.D.9.h does not qualify as an FI, even though its assets are managed by an FI.

In contrast to the above, it is decided on the basis of the guidance from the OECD that the above-mentioned type of entities do not qualify as Active NFEs, but as Professionally Managed Investment Entity FIs going forward.

Take away

Based on its activities, a non-profit organisation might classify as an Investment Entity FI. In the prior Leidraad, an Investment Entity FI that met either of the active NFE criteria of CRS Sections VIII.D.9.d-h was classified as an active NFE instead of an FI based on CRS Section VIII.A.6.b. However, this exception does not apply any more to non-profit organisations that classify as active NFE based on CRS Section VIII.D.9.h.

Non-profit organisations should review their entity classification to see if they require any adjustments with this new guidance. Financial Institutions should be prepared to receive updated self-certifications for some non-profits changing from active NFE to FI classification using this guidance.

Although we expect additional FIs based on this new guidance, we expect the additional reporting to be minimal. The Dutch non-profit organisations mostly have the legal form of a Dutch Stichting. As in principle a Stichting does not have account holders, we expect a limited impact on the reporting requirements for Non-profit organisations.

1.29 - Dual tax residency of an FI

As laid down in the prior Leidraad, in the scenario that an FI, other than a trust, is tax resident in two or more CRS participating jurisdictions, the identification and reporting requirements of the participation jurisdiction in which the financial account is held, apply.

Based on the guidance from the OECD, it was added that the jurisdiction in which the financial account is held may allow the rules of the resident participating jurisdiction of the FI to apply, to the extent that FI is resident in a jurisdiction that has implemented CRS.

Observation

We do not see the added value of this clarification, as we note that in practice most entities already apply the CRS legislation of its country of residence or have based their classification on the OECD CRS Model. As such, we do expect the impact to be limited to specific cases.

1.38 - Family funds

Since the implementation of FATCA and CRS, the Dutch government took the position that entities that are family owned and only have a small number of shareholders or participants, could potentially be treated as Passive NFEs for both FATCA and CRS. This classification was based on the business activities and the number of owners.

The OECD has made it clear that this interpretation is not in line with the implementation of CRS. Therefore, entities or a holding entity thereof, other than a trust, of which the assets consist of cash or investments, qualify as an investment entity in the sense of Section VIII.A.6 of the CRS and article 1, paragraph 1, sub j of the IGA. This is also the case for family owned entities with a small number of shareholders or participants, which do not present themselves as investment entities which did not (or will not) attract third party capital.

Take away

Family owned entities that were classified as Passive NFEs for both FATCA and CRS should review their entity classification to see if they require any adjustments with this new guidance. If they now classify as FI they should register themselves with the IRS and incorporate customer due diligence processes and reporting processes, next to updating counterparties on their FATCA/CRS status. Financial Institutions should be prepared to receive updated self-certifications for family owned entities from Passive NFE to FI using this guidance.

In our view, the reclassification from Passive NFE to FI results in an administrative burden for the family owned entities, whereby the question arises whether this constitutes to more complete and efficient reporting, as smaller parties might be less aware of the existence of FATCA/CRS obligations.

1.51 - STAKs

The Memorandum of Understanding to the Netherlands Intergovernmental Agreement in regard to FATCA states that a STAK established in the Netherlands will be treated as an NFE. Only if the certificates issued by the STAK are regularly traded on a recognised stock exchange is it an active NFE. In all other cases, the STAK is a passive NFE. In prior Leidraad, the same default classification of a STAK as NFE was substantiated for the application of CRS.

However, based on the new guidance of the OECD, STAKs resident in the Netherlands, do no longer qualify as a NFE by default for CRS purposes. Under circumstances they can also qualify as an Investment Entity FI if the STAK administers financial assets on behalf of the certificate holders. For purposes of this scenario the STAK must receive income and must execute the voting rights on behalf of the certificate holders.

Observation

The per se-NFE classification of a STAK could lead to (unintended) avoidance of FATCA/CRS-reporting. The change to look at the function of the STAK should lead to a better outcome from a consistent legal framework perspective.

STAKs that were classified as Passive NFEs for CRS should review their entity classification to see if they require any adjustments with this new guidance. If they now classify as FI for CRS they should incorporate customer due diligence processes and reporting processes, next to updating counterparties on their FATCA/CRS status. In addition, FIs could receive updated self-certifications for STAKs from Passive NFE to FI based on this guidance.