05.1 OECD CRS

OECD CRS

Automatic Exchange of Financial Account Information

With the introduction of the OECD Common Reporting Standard, “CRS”, several things have changed for the owners of private and business bank accounts at foreign financial institutions.

The Provisions of the OECD CRS

The agreement regarding the automatic exchange of financial informations affects the bank accounts of legal persons, such as offshore companies and other companies registered abroad. Particularly those accounts opened after 31/12/2015. It also affects private bank accounts. The following are extracts of the OECD CRS:

(…) Reportable accounts include accounts held by individuals and entities (which includes trusts and foundations), and the standard includes a requirement to look through passive entities to report on the relevant controlling persons (…)

OECD CRS(…) For Preexisting Entity Accounts a Reporting Financial Institution determine whether the account is held by, (a) one or more Reportable Persons, which can be determined by reviewing information maintained for regulatory or customer relationship purposes (including information collected pursuant to AML/KYC Procedures), or (b) a Passive NFE with one or more Controlling Persons who are Reportable Persons (according to subparagraphs D(2)(a) through (c)) (…)

CRS: the exception proves the rule

Private Bank Accounts Abroad

If the country where the financial institution in question is based has adopted the standard Private Accounts at foreign financial institutions are reported to the tax office in the country of residence of the account holder. Usually exceptions do not apply to Private Accounts!

Business Accounts

Business accounts of companies based abroad, or rather whose owners are based abroad, are seen to be reportable, if the state where the account is held has adopted the CRS, if the controlling person owns more than 25% of the shares of the foreign company and if none of the following exceptions apply.

Non-Reportable Accounts

Business Accounts (and/or the holders) are seen to be non-reportable, if the company in question does not generate an active income from regular business operations, as defined by the OECD (see exceptions).

The term „regular business operations“ particularly points towards commercial business with a fixed base of operations (offices).

Furthermore…

Furthermore, the following must not be emphasised. The decision to assess that a company is generating an „active income“ rests with the financial institutions itself.

Exceptions – Criteria for the Active Company according to the OECD

The OECD criteria to assess whether a company generates active income and therefore qualifies as an Active Company – and thus is not subject to the automatic information exchange – are as follows:

  • < 50% of the turnover must be passive income (rent, licensing revenue, etc).
  • The company must be listed on the stock exchange.
  • The company is a governmental organisation.
  • The company is a non-profit organisation.
  • The company is a holding company.
  • The company is a start-up, which is younger than 2 years and which has not yet acquired any clients.
  • The company is not a financial service provider, nor has it been one in the last 5 years.
  • The company is an intra-group financing company.

Important: only one of these criteria needs to be met, in order for a company to qualify as an „Active Company“!

The Party Pooper of the OECD Common Reporting Standard

And then there is the group of Party Poopers (from the OECD’s point of view). These are states who did not even adopt the standard in the first place. Among these are: Armenia, Azerbaijan, Puerto Rico, Belarus, Bosnia Herzegovina, Georgia, Macedonia, Moldova, Montenegro, Serbia, Ukraine and several others.

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The First Take Away from the OECD CRS

Neither discrete foreign bank accounts, nor offshore bank and company accounts, suffer from the OECD CRS. These types of foreign companies remain a legal and adequate international measure and even some european countries can remian discrete tax havens. Nonetheless, the Standard requires business owners to put more thought and research into the selection of the most advantageous financial institutions, and the parameter of their business operations.

A Second Take Away with a Perfect Alternative

If you are freelancer or an entrepreneur without a fixed base of operations, all of these provisions and exceptions of the OECD CRS and the EU-FATCA can be put completely out of your mind. For you the solution is the easiest of all, because relocating abroad provides you with an uncomplicated pathway to completely forego high taxes legally and effectively.