Trusts as Active holding NFEs


Trusts owning Active Holding NFEs are themselves Active Holding NFEs
Premise: A trust owning an Active Holding NFE Company is itself an active Holding NFE Company

Background: The CRS excludes four types of Active NFEs from the definition of Investment Entity, namely (i) Holding Company, (ii) New Company, (iii) Reorganising entities, and (iv) Financing & hedging of related non-financial institutions.

Why trust whose sole owning is a Active holding NFE is itself an Active holding NFE: At least 80% of the trust's activities (by income or valuation) is indirectly, through the holding company it owns, holding stock in subsidiaries that engage in trades or businesses other than a Financial Institution. Therefore the trust meets the definition of 9(d) Active Holding NFE.

Consequence: An Active Holding NFE company is specifically excluded from the definition of an Investment Entity. Therefore, even if the trust is administered by an Investment Entity corporate trustee, and the trust earns dividends from the holding company, it is exempt from the definition of an Investment Entity because it is one of the four Active NFEs which have an exclusion from the definition of Investment Entity.

Contention: The CRS FAQ states that these four Active NFEs could still be a Financial Institution, but not an Investment Entity if it does the activities of a Financial Institution, such as Depository or Custodial Institution.

1. The term “Investment Entity”

CRS page 45 par 6(a)

Reason for the exclusion of certain Active NFEs from being Investment Entities:

The CRS wanted to ensure certain types of entities are not subject to reporting. Therefore the CRS establishes a categorisation of entities as non reportable Active NFEs. However, these entities could be reporting Investment Entities if they are professionally managed and earn certain income. Therefore the CRS excludes several Active NFEs from being reporting Investment Entities. But why did the CRS not exclude all Active NFEs from being Investment Entities?

Four types of Active NFEs do not qualify for exclusion from the definition of Investment Entity are because :
  1. Entities with less than 50% Financial Assets - this is because they could be Investment Entities in years when they earn more than 50% from Financial assets
  2. Government, international entities or central banks - these are specifically mentioned as non reportable persons, and therefore do not need the specific carve out from being an Investment Entity.
  3. Regularly traded - these are specifically mentioned as non reportable persons, and therefore do not need the specific carve out from being an Investment Entity.
  4. Exclusively public charities - these are specifically mentioned as non reportable persons, and therefore do not need the specific carve out from being an Investment Entity.
The term “Investment Entity” does not include an Entity that is an Active NFE because it meets any of the criteria in subparagraphs D(9)(d) through (g).
2. Definition of terms: “Active NFE”

CRS page 58 par 9

The term “Active NFE” means any NFE that meets any of the following criteria:

(d) substantially all of the activities of the NFE consist of holding (in whole or in part) the outstanding stock of, or providing financing and services to, one or more subsidiaries that engage in trades or businesses other than the business of a Financial Institution, except that an Entity does not qualify for this status if the Entity functions (or holds itself out) as an investment fund, such as a private equity fund, venture capital fund, leveraged buyout fund, or any investment vehicle whose purpose is to acquire or fund companies and then hold interests in those companies as capital assets for investment purposes

(e) the NFE is not yet operating a business and has no prior history, but is investing capital into assets with the intent to operate a business other than that of a Financial Institution, provided that the NFE does not qualify for this exception after the date that is 24 months after the date of the initial organisation of the NFE

(f) the NFE was not a Financial Institution in the past five years, and is in the process of liquidating its assets or is reorganising with the intent to continue or recommence operations in a business other than that of a Financial Institution

(g)the NFE primarily engages in financing and hedging transactions with, or for, Related Entities that are not Financial Institutions, and does not provide financing or hedging services to any Entity that is not a Related Entity, provided that the group of any such Related Entities is primarily engaged in a business other than that of a Financial Institution
3. OECD FAQ Section VIII page 9

What is the CRS status of an Entity that regularly manages working capital by pooling the cash balances, including both positive and deficit cash balances, (i.e., cash pooling) of one or more Related Entities that are primarily engaged in a business other than that of a Financial Institution and does not provide such cash pooling services to any Entity that is not a Related Entity?

To determine the CRS status of an Entity that engages in cash pooling it is necessary to consider whether the Entity is a Financial Institution, or more specifically a Depository Institution or an Investment Entity, or an NFE. The Standard defines a Depository Institution as an Entity that accepts deposits in the ordinary course of a banking or similar business. See Section VIII, subparagraph (A)(5) and Commentary on Section VIII, paragraph 12-14. For purposes of determining whether an Entity is a Depository Institution, an Entity that engages in cash pooling exclusively on behalf of one or more Related Entities will not be engaged in a banking or similar business by virtue of such activity. If the Entity is not a Depository Institution, the Entity may still be a Financial Institution if it meets the definition of an Investment Entity as set forth in Section VIII, subparagraph (A)(6), except such section specifically provides that an Investment Entity does not include an Entity that is an Active NFE because it meets any of the criteria in subparagraph (D)(9)(d) through (g).

An Active NFE described in Section VIII, subparagraph (D)(9)(g) includes an NFE that primarily engages in financing and hedging transactions with, or for, Related Entities that are not Financial Institutions, and does not provide financing or hedging services to any $Entity that is not a Related Entity, provided that the group of any such Related Entities is primarily engaged in a business other than that of a Financial Institution. See Section VIII, subparagraph (D)(9)(g). Since cash pooling is typically performed to reduce external debt and increase the available liquidity on behalf of Related Entities, cash pooling will be considered a financing transaction for purposes of the Active NFE definition.

Therefore, an Entity that engages in cash pooling on behalf of one or more Related Entities that are not Financial Institutions and does not provide such cash pooling services to any Entity that is not a Related Entity, provided that the group of any such Related Entities is primarily engaged in a business other than that of a Financial Institution, will have the CRS status of Active NFE
4. OECD FAQ Section VIII page 9

The CRS specifically states a Collective Investment is an Investment Entity. Therefore a Collective Investment cannot qualify for a non reportable Active NFE, whether it is a holding company, new company or reorganising entity it will be an Investment Entity.

However, there is no specific statement in the CRS that a trust is an Investment Entity. Therefore a trust that is a holding comany is not exempted from the exclusion of the Investment Entity definition.

Q2. 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. Thus, whether a holding company or treasury centre has the status of Financial Institution depends of the facts and circumstances, and in particular on whether it engages in the specified activities or operations of a Financial Institution (as defined in Section VIII, paragraph A.) even if those activities or operations are engaged in solely on behalf of Related Entities or its shareholders. An Entity that, for example, enters into foreign exchange hedges on behalf of the Entity’s Related Entity financial group to eliminate the foreign exchange risk of such group, will meet the definition of Financial Institution provided that the other requirements of Investment Entity definition are met.

A holding company will also meet the definition of Financial Institution, specifically, Investment Entity, if it functions as or hold itself out as an investment fund, private equity fund, venture capital fund, and similar investment vehicles if investors participate (either through debt or equity) in investment schemes through the holding company. See Commentary to Section VIII, paragraph 20.