The Common Reporting Standard system will enter into force in Switzerland on 1 January 2017. Are you a Swiss asset or investment manager? Read our Q&A, get the ins and outs and you will be fully prepared.
1. What is the Common Reporting Standard?
The Common Reporting Standard (CRS) is a global standard regarding the automatic exchange of financial information between countries. Switzerland has committed to CRS and has concluded several bilateral and multilateral agreements in order to introduce CRS based automatic exchange of information with respect to various jurisdictions, including the European Union, Australia, Canada and South Korea.
2. What is the idea behind CRS?
The idea behind CRS is to fight tax evasion internationally.
3. Why is CRS relevant for Swiss investment/asset managers?
Many parties in the Swiss asset/investment management industry may fall within the scope of CRS, irrespective of the asset class concerned. The CRS system will enter into force in Switzerland on 1 January 2017, meaning that the first automatic exchange of information will occur in 2018 regarding data on 2017.
4. Will CRS only apply to FINMA regulated parties?
Also managers that are currently not subject to regulatory supervision by FINMA may potentially fall within the scope of CRS, depending on how Switzerland will elaborate the guidelines on what a ‘financial institution required to report’ (RFI) is. In line with CRS implementation in other jurisdictions, Switzerland’s current draft guidelines for instance exclude Swiss asset managers from the definition of RFI, provided that such an asset manager solely acts on the basis of a client’s proxy and manages accounts held in the name of the client at a Swiss or foreign financial institution.
5. When is my organisation a ‘financial institution required to report’?
Apart from (investment) banks, brokers, certain insurance companies and custodians, CRS will also include ‘investment entities’. This comprises all entities whose main business is to trade, invest or manage financial instruments, conduct individual or collective portfolio management or invest otherwise in financial assets for or on behalf of clients. Also a private investment entity managed by a third party manager is an ‘investment entity’ for CRS purposes. Accordingly, the definition is very broad and raises many questions in practice.
6. Are the classifications under CRS and FATCA identical?
No. Although CRS is based on FATCA, important differences between the two systems exist.
7. Can you give some examples of an ‘financial institution required to report’?
Examples for RFIs are fund managers, wealth managers, etc.. A party limiting itself to pure ‘advice’ should not be an RFI.
8. What if I am a financial institution required to report?
You will be required to implement a set of due diligence procedures aimed at identifying your clients’ financial accounts on which you must report (‘reportable accounts’) and register with the Federal Tax Administration (until the end of the year in which you have become an RFI and until 31 December 2017 for existing RFIs). Subsequently, financial account information relating to these reportable accounts must be reported to the Swiss federal tax authorities, starting in 2018 on information regarding 2017. Moreover, an RFI is required to inform a reportable person/entity about the fact that information is subject to automatic exchange and what rights the relevant reportable person/entity has. Such information has to be sent until 31 January of the first year in which information is transmitted, i.e. 31 January 2018 at the latest.
9. What is a ‘financial account’?
This is a very broad concept; not only bank accounts are included, but any ‘account’ holding financial assets, like options, derivatives, fund interests, shares in companies, etc. held by a client (account holder).
10. What is a ‘reportable account’?
A financial account that is held by a reportable person or by a so-called passive non-financial entity with controlling persons that are reportable persons. In many cases, it may well be that another RFI will have the reporting obligation with respect to financial accounts of your clients (see below).
11. What is a ‘reportable person’?
This is an individual or an entity that is resident for tax purposes outside Switzerland in a CRS participating jurisdiction. Also a controlling person of a so-called ‘passive non-financial entity’ is a reportable person if he is tax resident outside Switzerland in a CRS participating jurisdiction. So, CRS is about international exchange of information, not about reporting on Swiss tax residents.
12. What is a ‘controlling person’?
In general, a controlling person is an individual holding an interest of at least 25% in an entity. If there is no natural person holding directly or indirectly such interest, another person who exercises control over the entity will qualify as controlling person.
13. What if my clients’ assets are held by another financial institution?
The current Swiss draft ordinance is explicitly providing that Swiss asset managers are non-reporting financial institutions, provided that they act on the basis of a power of attorney of the clients and manage clients assets booked in a bank account with a Swiss or non-Swiss financial institution in the name of the client. In these cases, the relevant financial institution holding the reportable accounts will be required to report, but not the Swiss asset manager.
14. What about Swiss investment funds?
Investment funds are in principle RFIs that should report on reportable persons, and the interests in a fund are ‘reportable accounts’. However, Swiss collective investment schemes pursuant to the Collective Schemes Act (contractual investment funds, SICAV, SICAF, LPs) are non-reporting financial institutions, provided the interests in these funds are solely held by persons that are themselves non-reporting persons (e.g., an investment fund held by Swiss resident individuals, pension funds, etc.). Nevertheless, these ‘exempt’ financial institutions have a reporting obligation in as far as they are held by passive non-financial entities with foreign resident controlling persons as investors.
15. And what about Swiss alternative investment managers?
Swiss based managers of alternative investment funds will also be RFIs. As the assets of alternative investment funds are often not deposited with another financial institution, the obligation to report in connection with investors will generally be with the manager. In practise, however, the actual fund vehicles are in most cases outside of Switzerland (e.g., in Guernsey or Luxembourg fund structure), meaning that the actual CRS reporting takes place in the country where the fund vehicle is located. All investors that are not resident in the country where the fund vehicle is located but resident in a CRS jurisdiction are reportable persons and financial account information must be reported to the local authorities.
16. What financial information must be reported on?
Reports must include investment income like dividends, interest, but also account balances and capital gains, together with information of the accountholder.
17. How do I identify my clients (‘account holders’)?
Identification is done by way of self-certification: your clients need to provide you with the information allowing you to determine the client’s residence for tax purposes. In most EU countries a standard form is developed for this purpose. The same may happen in Switzerland. Relaxed rules will be implemented for accounts that have already existed before introduction of CRS. Additional requirements arise for clients being ‘entities’.
18. What about clients being entities?
Also in connection with clients being entities (e.g., corporations, single purpose entities, investment vehicles, etc.) an RFI will need to identify and report on reportable accounts just like for individuals. No reporting is required if such entity is an RFI itself. Therefore, reporting will only be required on so-called ‘non-financial entities’.
19. Are there any additional requirements in relation to entities?
Yes. With respect to non-financial entities that can be classified as ‘passive’, there is an additional due diligence obligation: you will need to determine who the ‘controlling persons’ of such passive entity are (see question 12 above). The financial account information must be reported to the authorities of the participating CRS jurisdictions in which the controlling persons have their tax residence. This obligation does not exist with respect to entities conducting an active business (active non-financial entity). To the extent that an entity is resident in a non-participating CRS jurisdiction, the obligation exists to exchange information with the country where the beneficial owners are residing (‘look through’). Please note that the US is currently treated as a ‘participating jurisdiction’ by Switzerland, while it is clear that the US will not adhere to the CRS system.
20. Can an RFI always rely on a self-certification?
No. An RFI may not rely on a self-certification if it knows or has reason to know that the self-certification of a client / investor is incorrect or unreliable.
21. Will CRS replace FATCA?
No, FATCA will remain applicable in relation to the US.
22. What if I do not meet the CRS obligations?
In Switzerland, an RFI in breach of its CRS obligations is subject to a financial penalty of up to CHF 50,000 (as the case maybe). Further, a false self-certification or any false amendment of such certification vis-à-vis a Swiss RFI is subject to a fine of up to CHF 10,000.
23. What are the next steps?
The hearing on the ordinance regarding CRS ended on 9 September 2016. The publication of the final version of the ordinance is expected for any time soon. An update of this Q&A will be provided by then. Additionally, the Federal Tax administration publish a draft guidance on the CRS implementation. The whole package of legislation will enter into force on 1 January 2017. The first exchange of information will take place in 2018 regarding information gathered in 2017.