Investment entity trust cannot be Active NFE


Investment Entity Trust Cannot be an Active NFE

Critical to understand only an NFE can be an Active NFE. There is no carve-out or exemption of an investment entity to be an Active NFE if it meets the criteria of Active NFE type[D]..[G].
An NFE will be an Active NFE if it meets any of the criteria:

  1. Asset and income below thresholds for both (a) passive income, and (b) assets that potentially or actually produce passive income.
  2. Government entity, international organisation, central bank or subsidiary of foregoing
  3. Regularly Traded
  4. At least 80% activities are direct or indirect holding subsidiary stock (or providing finance services) to entities that engage in business or trades other than a FI
  5. New entity less than 2 years old with intent of operating business other than FI
  6. Liquidating and wasn't a FI within past 5 years
  7. Engages in financing and hedging transactions for related entities that are not FI
  8. Exclusively a public charity

This page will concentrate on type (d) above, the holding company.






Trustees manically but incorrectly believe that an FI trust can bypass the investment entity definition to be recategorized an Active NFE and hence no reporting on controlling persons
Trustees pervert a moot clause for their client’s benefit to create a fictional carve-out rule for investment entities if it meets the criteria of a holding companyy. This is the most defended misapplication of the CRS. There is no investment entity carve-out rule!
As Clint Eastwood said, opinions, everyone has one. It does not matter if the big four or lawyer opinions claim there is a carve-out of investment entity trusts to be an Active NFE if the trust holds subsidiaries that do business or trade. They are dead wrong. Firstly, understand that the CRS has a sequential flow of determining the category of an entity. The first test is for a FI (which may be reporting or non-reporting or may have accounts that are non-reportable or account holders that are non-reportable, but that is totally irrelevant for this discussion).

Once an entity is a managed investment entity there is no deviation route to be an Active NFE. CRS Page 58 par (9) The term “Active NFE” means any NFE that meets any of the following criteria [a] … [h]. Also, Active NFE type[D] says all the activities of the NFE consist of holding. Understand that only an NFE can be an Active NFE. No ifs, ands or buts about it. The problem clause. Now let’s look at the moot clause causing all this perversion. CRS page 45 par (6)(b) The definition of investment entity Investment Entity does not include an Entity that is an Active NFE because it meets the criteria in paragraphs (9)[d] Holding (through [g]).

So, get this folks, only an Active NFE holding cannot be an investment entity, and only an NFE can be an Active NFE. It is impossible for an investment entity to magically become an NFE and hence become an Active NFE

If an entity qualifies as an investment entity, it cannot deviate its categorisation (except *) and become Active NFE, even if it does the same activities as a holding Active NFE.
* The only deviation allowed is if a non-participating investment entity, it is treated as a Passive NFE.

Twisting the moot clause. The common weak defence of the magic deviation is why did the OECD put that clause in, if there is no deviation? The OECD makes many mistakes such as saying a protector has control over trust even if he has no control. What trustees are doing is perverting that moot clause which says a real Active NFE cannot be an investment entity (moot and obvious). But trustees assisting non-reporting of their clients misinterpret the moot clause to mean an investment entity which holds subsidiaries doing business or trade is not a FI. That is completely different to the OECD moot clause. This moot clause is never mentioned again in the Commentary, implementation handbook or FAQ. If there was a deviation of an FI, it would be clearly shown in the implementation handbook flow chart of what is an FI.

Finally, to knock this silly fictitious carve-out fairy tale out of the game, note the CRS FAQ clearly states

In what circumstances, if any, will a holding company or treasury centre of a financial group have the status of Financial Institution under CRS?

A holding company or treasury centre of a financial group will have the status of a Financial Institution if it meets the definition of Financial Institution provided in Section VIII, paragraph A.

Some trusts will make distributions from the subsidiary holding company to ensure trust is an NFE. However, distributions from underlying companies is same as trust earning income and is then an investment entity.
Invalidating the fallacious carve-out rule using kindergarten language Countering the strong belief in this carve out rule requires simple word analysis that a toddler can understand. So, let’s translate CRS into infantile language…

Definition of Financial Institution is a human:
If you are a human you will be either a Caucasian (depositary), Bushman (custodian), Negroid (insurer) or an Asian (Investment Entity). A moot carve-out rule states a non-human mammal cannot be an Asian.

If you are not a human, you are a nonhuman (NFE). A non-human can be an animal (Active NFE) viz. bird(business), mammal (holding co), fish (new), reptile (reorganising) or amphibian (charity). If the nonhuman is not an animal, you are an insect (Passive NFE)

Many trustees pervert the moot carve-out rule that an Asian can escape being categorised as a human if it has the attributes of a non-human mammal.
No! Only a nonhuman can be a nonhuman mammal, even if a human has some traits of a mammal.