Equity forward swap agreement
A commonly proposed structure to avoid the CRS is an Equity Swap combined with a Forward Contract.
Reportable person [A] gives their equity to a non Reportable person [B], under a forward arrangement to have those shares returned in the future.
A simultaneous swap agreement is executed whereby:
- in exchange for receiving the shares, non Reportable person [B] gives Reportable person [A] an interest payment flow. This interest will be accumulated until return of shares.;
- non Reportable person [B] receives from Reportable person [A] a payment flow reflecting a change in the value of the equity. This can be structured that there is no change in the value of the privately listed entity so that reportable person [A] does not have to make any payments to non-reportable person [B]
Proponents of this structure advocate that:
- Person [A] is not reportable because he has neither equity interest, nor a controlling person of the entity as he has given his shares away.
- Interest payments being accrued to Reportable person [A] is not linked to having equity interest in the entity, and thus the capital value of the entity is not reported.
The problem is this structure is invariably reportable:
The entity to which the shares were given, will invariably be categorised as an Investment Entity because it
The provider of shares for the swap agreement has a 'Debt Interest' in the entity to which the shares were given. All reportable persons with a Debt Interest in the Investment Entity along with Equity Interest are reportable. A 'Debt Interest' can be regarded where a person holds a lien on an assets and is entitled to payments whilst holding that lien, or upon release of the lien. The forward contract means Person [A] has a lien on the shares and will get a reportable payment (accrued interest and / or capital gains on shares) hence has 'Debt Interest' in the Investment Entity.
is managed by another Investment Entity (e.g. wealth manager manages its assets or administrates the entity); and
it earns income from financial assets, including dividends from the underlying NFE company.