Will less than 25% shares avoid the CRS?
|1.||Will less than 25% shares avoid the CRS and use of nominee director for a NFE underlying company? The answer is no....|
|2.||Neither CRS or FATF state a particular threshold threshold is compulsory. They use it as an example, so jurisdictions can choose a different thresholds.
CRS par commentary 133 - A ‘control ownership interest’ depends on the ownership structure of the legal person and is usually identified on the basis of a threshold applying a risk-based approach (e.g., any person(s) owning more than a certain percentage of the legal person, such as 25%.
FATF - Controlling shareholders as referred to in, paragraph 5(b)(i) of the interpretive note to Recommendation 10 may be based on a threshold, e.g. any persons owning more than a certain percentage of the company (e.g. 25%).
In Argentina, for example, not for CRS purposes but for money laundering, beneficial owner is anyone with more than 20%. The US FATCA regulations state 10% is the threshold.
The precise percentage ownership a jurisdiction decides is threshold is not very important. This is because the CRS says the 'controlling person' is anyone who owns more than the threshold or exercises control over the entity. This will invariably catch someone who splits the shares between say 5 or 11 family members but retains control over the entity. Remember the use of nominee directors must be looked through. So look at par 106 of the OECD Implementation Handbook
"106. The term Controlling Persons corresponds to the term ‘beneficial owner’ as described in the Financial Action Task Force (FATF) Recommendations. For an Entity that is a legal person, the term Controlling Persons means the natural person(s) who exercises control over the Entity, generally natural person(s) with a controlling ownership interest in the Entity. Determining a controlling ownership interest will depend on the ownership structure of the Entity and control over the Entity may be exercised by direct ownership (or shareholding) or through indirect ownership (or shareholding) of one or more intermediate Entities. For example, Controlling Persons include any natural person that holds directly or indirectly more than 25 percent of the shares or voting rights of an Entity as a beneficial owner. If no such person exists, then any natural person that otherwise exercises control over the management of the Entity (e.g., the senior managing official of the company). For example, an Individual A may own 20 percent interest in Entity B and, although held in the name of Individual C, pursuant to a contractual agreement, Individual A also controls 10 percent of the voting shares in Entity B. In such instance, Individual A should meet the definition of Controlling Person."
The problem with a structure using a nominee manager of a company is that this is looked through by banks using AML / KYC procedures. This is especially true where a director is a corporate service provider or professional manager of many offshore companies.
So assume you have a Active NFE owning a Passive NFE. The passive NFE has Financial Account with a Liechtenstein bank. The Liechtenstein bank will then try determine the controlling persons of the passive NFE. The answer provided to the bank is the Active NFE owns the shares. The bank will then use anti-money laundering and know-your-client to determine the controlling persons of the active NFE. As there is no shareholder owning more than 25% of the shares, then the bank will look at the effective management. This need not be the "managing director". You state the directors are resident in Liechtenstein. This is a red flag as this indicates the director is merely a nominee. It is implausible that shareholders of a private company would allow a nominee director to make all the key decisions. The bank will want to know who gives the key instructions to the director.
The CRS refers to FATF in identifying beneficial ownership. Use the find function to search for the term "nominee" and one will see many places where bank must look for the nominator of the nominee, e.g., see page 15(b) about indirect control.
In summary, this proposed structure is old fashioned and amateurish method to disguise effective control. Use of a nominee director and even nominee shareholders is a key target for the CRS and FATCA.