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ADGM recently levied Dh170,000 fines on six financial institutions for non-compliance with FATCA/CRS obligations. This regulatory action shows the importance of all stakeholders ensuring that UAE meets its treaty obligations for cross border tax cooperation.
Against this backdrop this article shares a high-level recap of the FATCA/CRS reporting obligations scope for investment entities (IEs) and associated investment vehicles.
For both FATCA and CRS there are two types of IEs that are the focus for reporting, typically distinguished as Investment Entity Type A (IEA) and Investment Entity Type B (IEB).
While there may appear to be some nuanced differences between the UAE/USA FATCA IGA and CRS definitions, the definitions are in fact consistent and compatible. For example, the FATCA IGA definition does not include a threshold amount on income generated for the prescribed activity or operations. However, the definition of IE in both the US Treasury Regulations and the MOFUAE FATCA Guidance Notes of 06.07.2015 conforms to the definition used in CRS with respect to thresholds.
Which UAE IEs are in scope ?
IEA is an entity that primarily offers any of the following services on a commercial basis:
Trading in money market instruments, exchange (including foreign exchange), interest rate and index instruments, transferable securities, or commodity futures.
Portfolio management (individual or collective).
Investing, administering or managing financial assets or money on behalf of other persons.
Typically, an IEA would be regulated via a license/permission/authorization to operate as a financial institution
IEB is an entity (generally some form of investment vehicle) for which the gross income is primarily attributable to investing, reinvesting or trading in financial assets, AND which is managed by another financial institution (i.e., Depository Institution, Custodial Institution, Specified Insurance Company or IEA).
An IEB is “managed by” another financial institution where the managing entity has discretionary authority over all or part of IEB’s assets.
An IEA “primarily” conducts the prescribed services, and the gross income of an IEB is “primarily” attributable to the prescribed activities, in circumstances where 50% or more of the gross income is attributable to the services or activities (as the case may be) during the shorter of:
the 3-year period ending 31 December of the year preceding the year in which the determination is made; or
the period during which the IEB has been in existence.
Important Exceptions to the definition of an IE
Non-binding investment advice. The definition of an IE does not include giving non-binding investment advice to a customer.
Certain Active NFEs. The following Active NFEs are excluded from the definition of IE: holding NFEs, treasury centres which are members of a non-financial group, start-ups, and NFEs that are liquidating or emerging from bankruptcy. Additionally, FATCA also excludes an entity primarily engaged in financing and hedging transactions only with/for related entities that are not FIs, and which are part of a non-financial group.
Real Estate Investment Entities. IEs that primarily conduct business involving investment/administration/management of non-debt, direct interests in real property.
Exemptions from Reporting for Certain UAE Investment Entities
Trustee Documented Trusts and Exempt UAE Regulated Collective Investment Vehicles. Both FATCA and CRS exempt Trustee Documented Trusts and certain low-risk Collective Investment Vehicles (CIVs) from reporting obligations, designating these IEs as Non-Reporting Financial Institutions.
The Trustee for the Trustee Documented Trust must be a Reporting Financial Institution.
Under CRS, the exemption for CIVs applies generally to CIVs in which all of the interests are held by or through individuals or entities that are not Reportable persons (except an IE through which interests in the CIV are held), or one which is a Passive NFE with Controlling Persons that are reportable. For FATCA, the exemption is included (see below) amongst the FATCA deemed compliant IEs.
FATCA Deemed Compliant IEs. In addition to the above, FATCA provides a category of IEs that are exempt from reporting for FATCA purposes in specified circumstances. The circumstances broadly fall into two categories, either reporting is being satisfied by some other duly recognized person; or all the accounts of the IE are held by non-reportable persons. The list of FATCA deemed compliant IEs consists of:
An IE that is wholly owned by Exempt Beneficial Owners, and each debt holder is a Depository Institution (in relation to any loan to the Entity) or an Exempt Beneficial Owner.
An Investment Advisor and/or Investment Manager that provides investment advice, manage portfolios, or otherwise acts for customers for purposes of investing, managing or administering funds deposited in the customer’s name at another Financial Institution that is not a Nonparticipating FI.
A Sponsored Entity established in UAE. This is either an IE, US Controlled Foreign Corporation or Closely Held Investment Vehicle for which the reporting obligations are satisfied by an IRS approved and registered Sponsoring Entity.
An IE that is a Regulated Partner Jurisdiction CIV in which non-reportable persons hold all interests.
A Qualified CIV under relevant US Treasury Regulations.
Any other Investment Entity, in circumstances where its customer is another Investment Entity that satisfies the reporting obligations either by itself, or through some other person besides the Deemed Compliant IE.
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Disclaimer: Content posted is for informational and knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. The view/interpretation of the publisher is based on the available Law, guidelines and information. Each reader should take due professional care before you act after reading the contents of that article/post. No warranty whatsoever is made that any of the articles are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.
Contributor
Rowena Bethel is a Consultant/Advisor on FATCA and CRS compliance with
Ryja Consulting, Dubai, UAE. She is former head of the International Tax
Cooperation Unit in a Caribbean IFC and former country representative at the
OECD Global Forum on Transparency and Exchange of Tax Information. She
was a peer review assessor for the OECD Global Forum EOIR round of
assessments and also served as a member and rapporteur on the UN Committee
of Experts on International Cooperation in Tax Matters.
