Automatic Information Exchange: threat to foreign investors
Automatic Information Exchange at international level will allow tax authorities in foreign investor’s country of residency getting detailed information about all bank accounts and other financial assets, which are owned or controlled by individuals and companies in foreign country. In addition, many holding structures in foreign jurisdictions like trusts and foundations, which were used to conceal the identity of their final beneficiaries, must open their files and provide this information to the investor’s tax office.
By the new OECD Automatic Information Exchange, tax authorities of a country will be able to get detailed information about foreign bank accounts of its citizens without much effort. And this information will not be limited by account number and amount of money on it! New rules will affect very wide range of small and large foreign investors that previously were able to keep information about their foreign investments in confidentiality. In this article we will see how serious things can get and what hidden pitfalls new rules contain.
Since many years, the large industrialized nations, organized in the so-called Group G20, and also the international Organization of Economic Cooperation and Development (OECD), had been pressing for an international agreement to exchange information on bank accounts and similar financial assets, which residents of their nation hold in a foreign country.
As a result, so far more than 90 member states of the OECD signed an agreement on a global standard of information exchange of financial accounts, the so-called "Multilateral Competent Authority Agreement" (MCAA), and the OECD "Common Reporting Standard" (CRS). These agreements rules in which case, when and what kind of information will be sent to the tax authorities of an investor's jurisdiction of residence, when he or she holds a bank account or any other kind of financial investments in a foreign country.
Undoubtedly, the new rules will affect foreign investors, who own financial assets or other types of investments in European countries, as well. This is why any practicing or potential investor shall understand how Automatic Information Exchange (AIE) works in reality and what the consequences for using in other countries will be.
The main goal of AIE and CRS is to prevent illegal tax evasion. This is why within this system detailed information not only about a taxpayers’ bank accounts in foreign jurisdictions, but also on a large variety of other financial investments and holding structures is provided to his/her homeland tax offices. The special point of the new procedure is, that the investor's homeland tax office will not only get information that he/she simply has a bank account in a foreign country, but also how much money is on it and what amounts of income it got over the year! And all this automatically, every year, without any action by the tax office...
Although it is comprehensible that a sovereign state wants to fight illegal tax evasion, critics argue that in countries with somewhat unreliable data privacy standards, sensible information sent to the local tax authorities could easily leak into the wrong hands and might be used by political opponents, business competitors or other persons to do harm to the investor, his business or his family.
To see what all this means to a foreign investor, we will now look at the details and how this works in the Principality of Liechtenstein, a favorite jurisdiction in Central Europe for establishing bank accounts and cross-border holding structures. Although there are minor differences, the same rules apply for Switzerland, Austria, Germany and any other nation of the European Union.
Who will be affected?
Every foreign investor, either natural person or legal entity, that means company, trust, foundation or else (with a few exceptions explained further) as well as incorporated association, even if it is non-profit or charitable, which owns in Liechtenstein a bank account, a custody account with stock market shares, bonds etc., a share of a trust or a limited company or another legal entity under Liechtenstein law. It must be noted that the new rules on AIE/CRS especially affect the Liechtenstein legal entities of "Stiftung" (Foundation) and Trust, if they are not designed very carefully.
Exempt from these rules are only financial institutions (banks, insurance companies and so on), if they are incorporated in a state which fully applies AIE/CRS, international organizations like UNO or the Red Cross, corporate bodies under public law and large joint-stock companies, if their shares are traded regularly on a major international stock exchange.
If a person owns a bank account, what data will be exchanged?
In case of a normal bank account (and also a savings account or something similar), which holds only cash, the following information will be send to the foreign investor’s tax authorities in a country of residency:
• Full name, residence address, taxpayer identification number, date of birth
• Name of the bank and the account number
• Total value (account balance) of the bank account at the end of the year
• Total gross value of any interest earned on the account during the year
In case of a custody account, which also holds stock-market shares, fixed-income instruments like bonds and/or is used for active stock-market trading with derivates, additional data will be send:
• Total gross value of dividend earnings
• Total gross value of capital gains due to stock-market transactions
• Total gross value of financial earnings like fees for lending shares or option money
The reason for this is because in some jurisdictions, income from interest is taxed with a different tax rate than dividend income or capital gains.
In case the account is owned by a legal entity, the same information will be sent, with the foundation date of the entity instead of the birth date of the natural person.
Similar rules exist, if the person holds a cash-value life insurance, a pension insurance or some type of capital-fund based insurance through a Liechtenstein insurance company. Pure risk insurances, like medical insurance, term life insurances etc. are not affected, as they don't have a capital value.
If the person holds the bank account not directly, but through a Liechtenstein legal entity like a Foundation, a Trust or a Limited Liability Company, things become a little bit more complicated, and more interesting... We'll see this later.
How is the information sent?
Under the new Liechtenstein law ("AIA-Gesetz" of November 5th, 2015) all Liechtenstein banks, and also insurance companies and other financial institutes, are obliged to collect the information according to the Common Reporting Standard and send them to Liechtenstein central tax authority. This must be done for every calendar year and within the first 6 months of the following year.
The fines for banks which do not fulfill their reporting duties can be draconic: Up to 250.000,- CHF for every client missed, and in extreme situations the bank can even lose its license.
The Liechtenstein tax administration then forwards all these data to the foreign Ministry of Finance, which finally distributes the data to local tax authorities all across the country of investor’s residency.
When will be the first information exchange?
Although AIE/CRS is based on a set of international treaties, which had been signed by almost every state in the world (including classical off-shore jurisdictions like the Channel Islands, the Seychelles, Panama, the British Virgin Islands and many other), it is necessary that an additional bilateral agreement is signed between the two jurisdictions which want to exchange tax-relevant data. Only after this has been done, information will flow in both directions.
In case of Liechtenstein, such an agreement exists only with the European Union (EU) and its member states for now. This agreement is in effect since the 1st of January 2016, so the first data with EU member states started to be exchanged at the beginning of 2017.
The situation in Switzerland and Austria is similar. For Switzerland, on January 1st, 2017, bilateral information exchange began with the EU, the Channel Islands, Japan, Canada, Australia and some other states. Austria exchanges data with the same countries like Switzerland, plus the Seychelles, Mauritius and all off-shore locations in the Caribbean from 2017 on.
Automatic Information Exchange at international level will allow tax authorities in foreign investor’s country of residency getting detailed information about all bank accounts and other financial assets, which are owned or controlled by individuals and companies in foreign country. In addition, many holding structures in foreign jurisdictions like trusts and foundations, which were used to conceal the identity of their final beneficiaries, must open their files and provide this information to the investor’s tax office. For investors with clean money, there are still possibilities to keep their privacy even under the new rules. It takes putting assets into holding structure that is an exception for these rules. The real example is Stiftung of Liechtenstein, which qualifies as so called “active NFE (Non-Financial Entity)”. In this case, there is no requirement to give any information about its controlling persons, beneficiaries etc. to anybody outside of the bank. We will study this example it in more details in our next article.
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Acknowledgement: Glagoliza News thanks Benesteem Executive Consulting Service, Switzerland for providing expert information on this issue.
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