Less than 5 shareholders? You may need to report for FATCA/CRS

12/07/21

This article was first published on 12 March 2021, but is still current.

The Common Reporting Standard (CRS) requires financial institutions to identify their customers and verify in what country they are subject to tax. This legislation has much in common with the earlier introduced Foreign Account Tax Compliance Act (FATCA). FATCA requires financial institutions worldwide to identify their US customers and report certain data to the local tax authorities.

Entities that are family-owned and only have a small number of shareholders or participants were exempt from the reporting requirements under FATCA and CRS. As of 23 June 2020, this exception has been withdrawn. Reporting to the Tax Authorities is required by 31 July 2021 to comply with the FATCA and CRS obligations.

The international guidelines for CRS were drafted by the Organisation for Economic Co-operation and Development (OECD) at the request of the G20 and subsequently CRS was included in a European Union directive (DAC2). The Dutch CRS legislation entered into force on 1 January 2016.

Entities with a small number of shareholders are no longer exempt

Since the introduction of FATCA and CRS, the Dutch government has made an exception to this reporting requirement for family-owned entities with only a small number of shareholders or participants. With this, the government stated that these entities can be treated as passive Non-Financial Entities (NFEs) for both FATCA and CRS purposes. This is beneficial because passive NFEs do not have to report themselves, though it did create obligations for financial institutions where a passive NFE is a customer. This exception was based on the business activities and the number of owners of an entity.

The OECD has made it clear that this interpretation is not in line with the implementation of CRS, the exception was subsequently removed from the FATCA/CRS guidance. As a result, if the assets of these entities consist of liquid assets or investments, they qualify as an investment entity and therefore as a financial institution. This may also apply to a holding company of such entities, with the exception of trusts. This is now also the case for family funds with a small number of shareholders or participants, even though they do not present themselves as investment entities and do not attract capital from third parties. The consequence of this qualification is that they have to register with the Dutch and US tax authorities (IRS) and build in customer due diligence and reporting procedures. In addition, they must inform their counterparties, such as banks, of their changed FATCA/CRS status.

What does this mean for your organisation?

If your company has a limited shareholder base and its assets consist of liquid assets or investments, it is no longer automatically a passive NFE. The entity may therefore qualify as a financial institution, with corresponding reporting requirements. If you are involved with such an entity and it made use of the exception, you should examine whether the entity now qualifies as a financial institution.

If the entity does indeed qualify as a financial institution, it will have to register with the Dutch Tax Authorities and identify its shareholders or participants in accordance with the CRS and FATCA rules with retroactive effect from 23 June 2020. If there are shareholders or participants in the entity, who are not resident in the Netherlands (for CRS) or have the US nationality (US person for FATCA), the entity will have to provide information regarding these persons to the Dutch Tax Authorities. As the qualification of these entities changes, they will also have to provide new self-certification forms to the financial institutions where they hold accounts.

How can PwC assist you?

We have an international network of experts who can support you according to your needs. They have already gained experience with FATCA and CRS projects in both the analysis and implementation phases. We can assist you in the following ways:

Evaluating the legal entities to determine which ones are affected by FATCA and CRS.
Determine the requirements under FATCA and CRS.
Analyse the current status of your processes and systems according to the FATCA / CRS requirements.
Conduct a gap analysis that identifies where you need to adjust your current processes and systems to meet the requirements of FATCA and CRS.
Develop and execute a strategic project plan to develop and deliver the desired changes.