Why Custodial Institutions Are Not Look-Through Entities
CRS/FATCA is highly structured and tiered, with a strict hierarchy of reporting obligations and no duplicate reporting by financial institutions (FIs). This is often misunderstood by those misinterpreting AEOI.
The OECD CRS FAQ states that when dealing with a Passive NFE, all parent entities must be looked through to identify controlling persons, regardless of the status of entities in the ownership chain. Confusion arises when this principle is incorrectly applied to require a new trust to look through an old custodial institution (CI), even where that CI is a Reporting FI. This conflates the look-through rules for Passive NFEs with those for trusts.
CRS guidance on trusts states that controlling persons of entity equity holders should be identified. However, two paragraphs earlier it clarifies that entities are only looked through where they are reportable persons. This key condition—that non-reportable entities (e.g., FIs) are not looked through—is often overlooked, leading to the erroneous conclusion that a custodial institution settlor must be looked through.
Further clarity is provided in the CRS Implementation Handbook, whose purpose is to assist understanding and implementation of the Standard, not to amend or expand it. “Clarity” does not equate to modification.
While the CRS provides that an FI account holder is a non-reportable person, the Handbook states that where an equity interest is held by an entity, the controlling persons of that entity are treated as the equity interest holders. Accordingly, a trust must look through entity settlors, trustees, protectors, or beneficiaries to identify controlling persons.
This approach effectively treats FI equity holders in FI-trusts similarly to Passive NFEs, shifting the reporting obligation rather than blocking it. However, nowhere does the Handbook state that the entities to be looked through include non-reportable entities such as FIs, regularly traded corporations, government entities, international organizations, or central banks.
Other jurisdictions adopt the same approach. For example, Hong Kong IRD CRS guidance (Chapter 17, page 4, paragraph 20) confirms that where a settlor, beneficiary, or controlling person is an entity, that entity must be looked through to identify the ultimate natural controlling persons.
TIMESTAMPS:
00:00 – INTRO
01:00 – New Trust Lookthrough Issues
02:03 – Defining Non Reportable Persons
03:09 – Public Companies Settlers Example
05:14 – Second CRS Test Explained
06:48 – Passive NFE Core Principle
08:02 – IRD Chapter Seventeen
09:15 – Non Reportable Entity List
10:48 – Entity As Settler Strategy
11:54 – outro
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