“Financial Institution” (FI) vs. “Non-Financial Entity”
One of the banks’ main topics in on-boarding is the plausibility of the “managed-by” requirement under the CRS (Common Reporting Standard), which is, among other things, decisive in the question of “Financial Institution” (FI) vs. “Non-Financial Entity” (NFE).
Under subparagraph A(6)(b) of Section VIII of the CRS, the term “Investment Entity” includes any entity, 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 Financial Institution under the CRS.
The question arises when an entity (FI) is considered to be “managed by” another entity (FI).
An entity is “managed by” another entity if the latter entity performs, either directly or through a service provider, one or more of the following activities or operations (as described in subparagraph A(6)(a)(i) to A(6)(a)(iii) of Section VIII of the CRS) on behalf of the first mentioned entity: a) trading in money market instruments; foreign exchange; exchange, interest rate and index instruments; transferable securities; or commodity futures trading; b) individual and collective portfolio management; or c) otherwise investing, administering, or managing Financial Assets or money on behalf of other persons.
However, an entity does not manage another entity if it does not have the discretionary authority to manage the latter entity’s assets (in whole or part). For more details see the commentary on Section VIII, paragraph 17; Swiss AIA Guidelines 2.1.3 “Investment Entity”.
Examples: A private trust company that acts as a registered office or registered agent of a trust or performs administrative services unrelated to the Financial Assets or money of the trust, does not conduct the activities and operations described in Section VIII, subparagraph (A)(6)(a) on behalf of the trust and thus the trust is not “managed by” the private trust company within the meaning of Section VIII, paragraph (A)(b)(6). Also, an Entity that invests all or a portion of its assets in a mutual fund, exchange traded fund, or similar vehicle will not be considered “managed by” the mutual fund, exchange traded fund, or similar vehicle. In both of these examples, a further determination needs to be made as to whether the entity is managed by another entity for the purpose of ascertaining whether the first mentioned entity falls within the definition of Investment entity, as set out in Section VIII, paragraph (A)(6)(b); Handbook page 113.
Another Example: The FAQ on CRS for Singapore contains the questions of whether a reserved investment power trust, where investment powers over the trust’s assets are reserved solely to an individual who is not the trustee, would be considered to be an Investment Entity as defined under paragraph A(6)(b) of Section VIII of the CRS? The answer is “No”. Such a reserved investment power trust would not be an Investment Entity as defined under paragraph A(6)(b) of Section VIII of the CRS, given that the individual who has discretionary authority to manage the assets of the trust is not a Financial Institution. However, the trust may still be an investment entity as defined under paragraph A(6)(a) of Section VIII of the CRS if it primarily conducts as a business, one or more of the relevant activities or operations for or on behalf of a customer and fulfils the gross income test; IRAS FAQs on the Common Reporting Standard (B.5).
Note: In practice this means that e.g. a pNFE trust with a US bank as custodian that grants a natural person a “reserved investment power“ would not be reported.
Still: There are always “anti-avoidance and anti-frustration clauses” that must also be taken into account.
In Switzerland there is no definition for “managed by”, but there are examples for this: The topic is dealt with in connection with trusts: In order for a trust to qualify as a FI, it must be professionally managed. There is professional management when assets are managed based on discretionary decision-making powers by a FI (e.g. Corporate Trustee or asset manager). The trustee is the legal proprietor (legal owner) of the assets in the trust. Due to this position as legal owner, the trustee is ipso facto the administrator of the assets of the trust. A trust is therefore professionally managed if the trust itself is managed by a FI, e.g. a corporate trustee, qualified as a FI. A trust is also considered to be professionally managed when the trust has granted a bank discretionary powers for the administration of the assets. A trust, whose financial assets are managed by an individual, e.g. by an individual as trustee or managed with a consultancy mandate (advisory) by a bank, therefore is not considered as being professionally-managed, Swiss AIA Guidelines 188.8.131.52 “Trust”; and e.g. 184.108.40.206.1 “Asset Managers and Investment Consultants”.