Cayman Islands: Cayman Islands Financial Account Reporting For Investment Funds – Preparing For The CRS

On 29 October 2014, the government of the Cayman Islands signed the OECD sponsored Multilateral Competent Authority Agreement and made a commitment to implement the new common reporting standard on automatic exchange of information (CRS).

The CRS is the standard for automatic exchange of financial account information developed by the OECD which provides for systematic and periodic automatic exchange between governments of such information reported by financial institutions, such as Cayman Islands investment funds (Reporting FIs). As at the date of this alert, more than 90 countries (for the list click here) have committed to its implementation.

The Cayman Islands government recently enacted regulations to implement the CRS into Cayman Islands law (CRS Regulations) which will come into force on 1 January 2016 (click here for the full text of the CRS Regulations).

Under the CRS Regulations, Cayman Islands Reporting FIs must report information on the holders of 'Reportable Accounts' which are tax resident in 'Reportable Jurisdictions' to the Cayman Islands Department of International Tax Co-operation (the DITC) and that information will then be sent to the home tax jurisdiction of the account holders.

What should managers, operators and promoters of Cayman Islands investment funds be doing right now to comply with CRS?

Cayman Islands Reporting FIs should be adding compliance with the CRS Regulations to their existing compliance programs for FATCA and 'UK FATCA' (together, Cayman FATCA). For existing and new investment funds, this will include looking at subscription documentation to ensure that the account opening procedures for new investors allow the fund to harvest the information or obtain self-certifications necessary to identify subscribers' tax residency and report on an ongoing basis.

Fortunately, there are no other additional registration requirements provided that the Reporting FI is already compliant with Cayman FATCA and has obtained a GIIN and registered with the DITC on the Cayman Automatic Exchange of Information online portal (AEOI Portal).

It is important to note that some categories of Non-Reporting FIs under Cayman FATCA will be Reporting FIs under CRS and, as such, they will need to consider the impact of the CRS Regulations and may need to put in place compliance programs and register with the AEOI Portal.

During the course of 2016 and 2017, these procedures will need to be expanded to carry out due diligence on Pre-Existing Entity Accounts and Pre-Existing Individual Accounts.

What are the rules for Pre-Existing Accounts?

Pre-Existing Accounts are those that are in place as of 31 December 2015. In practice, for investment funds, this means that, generally speaking, if an investor is invested in the fund on 31 December 2015 and remains invested on 1 January 2016, that account is a Pre-Existing Account.

Unfortunately for investment funds, all Pre-Existing Individual Accounts must be reviewed irrespective of investment size. There is, however, a financial minimum threshold for Pre-Existing Entity Accounts (US$250,000) which means that accounts held by entities under that value need not be reviewed at all unless they later become higher value accounts. However, Reporting FIs can voluntarily elect to dispense with this threshold and review all accounts.

The importance of designating accounts as Pre-Existing or New is that FIs have a grace period within which they are able to carry out due diligence. The relevant timing deadlines are set out at the end of this note.

What about New Accounts?

Any account opened on or after 1 January 2016 will be a New Account under the CRS Regulations. In practice, this means any new subscriber to an investment fund admitted to the fund on or after 1 January 2016 will hold a New Account. As noted above, additional subscriptions to a Pre-Existing Account will not generally change the status of the account to a New Account.

CRS is similar to Cayman FATCA in that the Reporting FI must obtain self-certification forms regarding tax residence from the account holder at or around the time that the account is opened and confirm the reasonableness of the self-certification based on a review of the documentation provided by the investor, including any AML/KYC documentation. For example, if the self-certification form confirms that the individual is not an Austrian taxable person, but they provide a French contact address, this should be investigated before the account is classified.

For New Entity Accounts, the Reporting FI must do the following and then classify the account accordingly:

• determine the residence of the entity for tax purposes;
• determine if the entity is a Reportable Person (among the carve outs are any entities that themselves are Financial Institutions, so custodians which are Financial Institutions in the Reportable Jurisdictions are not Reportable Persons);
• if the entity is a Reportable Person, determine whether it is an Active or Passive NFE (non-financial entity) (the definitions are complex but broadly Active NFEs are operating entities and Passive NFEs are investment holding vehicles); and
• determine the residence of any natural person(s) exercising control over a Passive NFE.

In order to be able to classify New Accounts appropriately, investment managers and funds should now be updating subscription packages to make sure that in addition to any IRS Form W8 or W9 form that may already have been requested, the subscription package contains a self-certification form which covers both the UK FATCA and the CRS.

There is a Cayman Islands working group which is considering updates to the existing guidance notes issued by the DITC (Guidance Notes). However, it is unlikely that any new approved self-certification forms will be available soon. As a result, relevant questions must be included in the subscriber questionnaires that are contained in subscription packages to obtain the correct information or existing self-certification forms should be updated.

Until the Guidance Notes are updated, the industry is being advised to rely on all official publications by the OECD which can be found here.

What if a Pre-Existing Account is closed before the due diligence and reporting is complete?

If a Pre-Existing Reportable Account is closed after 1 January 2016 but before the due diligence work has been completed, it must be included in any subsequent filing with the DITC.

What if the FI has no Reportable Accounts?

If the Reporting FI has no Reportable Accounts, the CRS Regulations state that no return is required.

This is the same as the position under the remainder of Cayman FATCA. So-called 'nil returns' are not required.

When do filings with the DITC need to be made for the CRS?

2016 is the first reporting year for the CRS and, subject to the due diligence deadlines noted below, reports should be submitted to the DITC on or before 31 May 2017.

Are there any material differences between FATCA, UK FATCA and the CRS?

On the whole the manner in which the CRS operates is broadly similar to both FATCA and UK FATCA. In fact, since the UK is a signatory to the CRS, UK FATCA is likely to fall away eventually.

One key difference between FATCA on the one hand, and CRS and UK FATCA on the other, is that FATCA includes provisions requiring US withholding agents to withhold 30 per cent on certain US source payments made to FIs which are deemed non-compliant by the IRS whereas CRS and UK FATCA have no equivalent sanctions.

Another important difference is with regard to investment managers/advisers. Whereas under FATCA and UK FATCA, Cayman Islands investment managers/advisers were generally classified as Non-Reporting FIs, and therefore not required to make any filings with the IRS or the DITC, under the CRS an investment manager/adviser will be a Reporting FI. However, such a Reporting FI is not likely to have any 'Financial Accounts' and therefore no 'Reportable Accounts' in respect of which it must make a report. This will always depend on an analysis of the structure of the relevant investment manager/adviser.

As a result, this does technically require investment managers/advisers to appoint a principal point of contact and to make a registration on the AEOI Portal as a Reporting FI. The content of any report they make would depend on their structure, but generally there would be no reporting if there are no Reportable Accounts. This may change in practice when the updated DITC Guidance Notes are released, but this is the current situation.

What will happen to UK FATCA and FATCA now that the CRS is in place?

The UK is a part of the 'early adopter' group of countries, including the Cayman Islands, Bermuda and the British Virgin Islands, which has committed to the first exchanges of information under the CRS by 2017. As noted above, UK FATCA is likely to fall away eventually.

As for the US, although it is a member of the OECD, it is expected that it will retain FATCA and not become a signatory to the CRS, at least in the short to medium term.

Current Key Dates for Cayman Reporting FIs

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.