Forward Swap Agreement

A forward swap agreement to try circumvent the CRS does not work

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:
    1. 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.;
    2. 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:

  1. 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
  2. .
  3. 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
  1. is managed by another Investment Entity (e.g. wealth manager manages its assets or administrates the entity); and
  2. it earns income from financial assets, including dividends from the underlying NFE company.
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.

Example illustration

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Is Person [A] reportable if the entity holding the shares is a NFE?

Invariable the NFE will become an Investment Entity because the assets will be managed by a Financial Institution and it earns income from financial assets. It will therefore report that Reportable Person [A} has Debt Interest in the investment Entity.