On October 16, 2015, the Cayman Islands Tax Information Authority (TIA) issued regulations implementing the OECD Common Reporting Standard (CRS) for the global automatic exchange of information for tax purposes (AEOI) in the Cayman Islands (CRS Regulations).1 The OECD intends for the CRS to establish a new global standard for information exchange.
The CRS Regulations enter into force January 1, 2016, and will require Cayman Islands resident Financial Institutions, including most Cayman Islands investment funds, to implement policies and procedures to identify reportable accounts, apply due diligence procedures to such accounts, and maintain the information obtained for the requisite time.2
Ninety-six jurisdictions have agreed to implement the CRS,3 with the Cayman Islands forming part of an initial group of participating jurisdictions that have agreed to the exchange of financial account information under the CRS by September 2017 (Participating Jurisdictions), including the United Kingdom, Ireland, Luxembourg, Jersey, Guernsey and the British Virgin Islands. The TIA has issued a list of these Participating Jurisdictions,4 and the CRS Regulations require the TIA to do so at least annually.
The United States will not be participating in the CRS, and will instead rely on its network of Intergovernmental Agreements under FATCA to exchange information for tax purposes with other jurisdictions. As noted below, this has some important practical consequences with respect to certain
U.S.-domiciled funds which invest in funds located in CRS jurisdictions.
The CRS Regulations require Cayman Islands resident entities that are "Reporting Financial Institutions," a term which includes most Cayman Islands domiciled investment funds, to: (i) identify and perform due diligence on their Account Holders, or in certain circumstances the Controlling Persons of their Account Holders, who are tax residents of Participating Jurisdictions, (ii) retain the information they obtain and a record of the due diligence procedures they adopt for at least six years, (iii) if they have reporting obligations, electronically notify the TIA of their name, reporting category and an authorized contact person no later than April 30, 2017 (and each year thereafter), and (iv) report to the TIA information on their reportable Account Holders no later than May 31, 2017 (and each year thereafter). To begin preparing to comply with the CRS Regulations, Cayman Islands domiciled investment funds should, promptly: (a) ensure that their account opening procedures are sufficient to identify Account Holders and their know your client information in each of the Participating Jurisdictions, (b) ensure that their subscription documents require Account Holders to provide all information which the investment fund may request that is required by, or related to, the CRS Regulations, and (c) consult with Cayman Islands counsel concerning compliance with the CRS Regulations.
The Ministry of Financial Services issued an Industry Advisory concerning the implementation of CRS in the Cayman Islands on December 8, 2015.5 The Ministry announced, among other things, that (i) Self Certification Form templates developed by the FATCA/CRS Working Group are now available for Cayman Islands Financial Institutions to use to elicit required information from individual and entity investors, (ii) it expects the TIA to release a second set of CRS regulations during the first quarter of 2016 which will contain enforcement powers and penalty provisions (The CRS Regulations focus primarily on the substantive provisions and procedural obligations of the CRS), and (iii) it anticipates that the TIA will publish CRS Guidance Notes during the first quarter of 2016, following consultation with the FATCA/CRS Working Group. However, TIA guidance is not expected to be extensive and will focus primarily on local questions. The CRS Regulations state that the CRS Commentary published by the OECD is an integral part of the CRS and applies under the CRS Regulations.6
The CRS Regulations take an approach similar to the Cayman Islands' U.S. and UK FATCA regulations the TIA has already issued, which impose due diligence and reporting obligations on most Cayman Islands domiciled investment funds with respect to account holders who are, or otherwise potentially connected with, citizens or tax residents of the United States or the United Kingdom. However, there are important differences between the three regimes (for example, the CRS (like UK FATCA) does not provide for a withholding obligation). The OECD has noted several in pages 87 to 101 of the CRS Implementation Handbook.7 Further, it is important to note that the Ministry of Financial Services has announced that UK FATCA will be subsumed into the CRS Regulations by 2017; thereafter relevant investment funds will only have to consider the operation of U.S. FATCA and the CRS.8
An important practical issue arises from the fact that the CRS Regulations will likely treat certain investment entities located outside a "Participating Jurisdiction" to be a "passive non-financial entity" (PNFE). Where an account is held by a PNFE, the investment fund will be required to identify the tax residency of any "controlling person" of that PNFE to determine the scope of any reporting obligations under the CRS. Importantly, due to the U.S. not being a "Participating Jurisdiction," many
U.S.-domiciled feeder funds are likely to be PNFEs.