What is the Common Reporting Standard “CRS”?
The adoption by the Verkhovna Rada of Law No. 2970-IX ”On Amendments to the Tax Code of Ukraine Regarding the Implementation of the International Standard for Automatic Exchange of Financial Account Information” (hereinafter – “Law), which was signed by the President on April 24, 2023, opens a new era in information transparency. This Law introduces the Common Standard on Reporting and Due Diligence for Financial Account Information (hereinafter “CRS”). CRS is a standard designed to ensure the automatic exchange of account information on an annual basis between partner jurisdictions within the framework of the Multilateral Competent Authorities Agreement on the Automatic Exchange of Financial Account Information (MCAA CRS). The introduction of CRS obliges financial institutions to collect and report to tax authorities certain information relating to the accounts and tax status of their customers. The procedure for collecting such information is provided for in the CRS. In particular, an obligation has been established to collect the necessary information regarding existing accounts, and when opening new accounts, if their owners are Reportable Persons. In turn, tax authorities exchange this information with tax authorities of partner jurisdictions annually.
Countries participating in automatic exchange
Automatic exchange of tax information will take place between countries that have implemented the CRS and are included in the list of participating jurisdictions. Currently, the list of jurisdictions participating in the CRS, as well as the dates when they will begin exchanging information, can be viewed on the OECD CRS portal. In addition, the list of participating jurisdictions from which information will be transmitted to Ukraine will be published on the official website of the State Tax Service of Ukraine. Financial institutions will report accounts related to residents of jurisdictions identified by the list on the official website of the State Tax Service of Ukraine.
Reportable Accounts, Reportable Persons, and Passive NFEs
What are Reportable Accounts?
A Reportable Account is an account held with a Reportable Financial Institution and which, in accordance with CRS Due Diligence procedures, has been determined to be an account held by a Reportable Person (or persons).
Virtually all accounts that we are familiar with are reportable, with some exceptions. Accounts opened in payment systems are also accountable.
We will discuss which persons are accountable later, and we will add that there are certain exceptions regarding organizations that own accounts – existing accounts with an aggregate balance of up to 250,000 US dollars at the end of the calendar year will not be subject to verification and reporting until the balance or value of the account exceeds the specified amount.
Who are recognized as Accountable Persons?
An Accountable Person means an individual or Organization that is a resident of a CRS participating jurisdiction, in accordance with the tax laws of such jurisdiction, or the legal successor of a deceased person who was a resident of such an Accountable Jurisdiction.
For these purposes, an Organization, such as a partnership, limited liability partnership or similar legal form, which is not resident for tax purposes, is considered to be resident in the jurisdiction in which its place of effective management is located.
CRS uses the term “Organization” rather than legal entity, as it also includes legal arrangements that operate without legal entity status.
CRS begins to apply to you when you, as a resident of Ukraine, open accounts with foreign financial institutions. If you have opened an account in a CRS member state and you are a tax resident of Ukraine, such an account will be accountable, and information about it will be transferred to the Ukrainian tax authorities accordingly.
For CRS purposes, there are two types of accountable persons:
- Non-resident individuals
- non-financial organizations (NFOs — i.e. organizations (legal entities, partnerships, etc.) that are not financial institutions, since the latter are not reporting entities).
For the purposes of the CRS Multilateral Agreement and the CRS Common Reporting Standard, a person who is simultaneously a resident of Ukraine and at least one other jurisdiction is considered a resident of the relevant other jurisdiction. Therefore, if a Ukrainian financial institution where you have accounts establishes that there are grounds to consider you a resident of another jurisdiction as well, then information about accounts in Ukraine will be transferred to the relevant state.
Passive non-financial organizations: what’s special?
Regarding NFOs, they are divided into “active” and “passive”. If the NFO is “passive”, then the tax status of the Controlling Person (i.e., the ultimate beneficial owner) must also be determined.
For example, the owner of an account opened in Poland is an organization resident in Poland. If it is a passive NFO, then the residency of the controlling persons of the organization must be established. If the controlling persons are residents of CRS participating jurisdictions, then such an account is accountable, and accordingly, information about it is transferred to the tax authorities of foreign countries.
An NFI is “passive” if it is not an investment organization and does not meet the characteristics of an “active” NFI.
Characteristics of an “active” NFI:
- Passive income less than 50% of gross income and assets that generate passive income, less than 50% of all NFI assets for the previous calendar year;
- Public companies and their affiliates;
- Non-profit organizations, government organizations, and international organizations;
- Newly established NFIs (within 24 months of registration) that are not yet conducting business and have no prior operating history, but are investing capital in assets with the intention of conducting a business other than that of a financial institution;
- NFOs that have not been Financial Institutions for the past 5 years and are in the process of reorganization (liquidation);
- Charitable organization;
- Other characteristics, in accordance with the Standard.
The value of the assets of an NFI is determined based on the fair market value or the value of the assets that are reflected on its balance sheet.
The term “Investment Entity” means any entity:
- a) that primarily conducts business as one or more of the following activities or transactions for, or on behalf of, a client:
- trading in money market instruments (checks, bills of exchange, certificates of deposit, derivatives, etc.); trading in stock, interest and index instruments; transferable securities; or futures trading in commodities;
- individual and collective portfolio management; or
- otherwise investing, administering or managing financial assets or money on behalf of others; or
- b) the gross income of which is primarily attributable to investing, reinvesting, or trading in Financial Assets, if that Entity is managed by another Entity that is a depository institution, custodian institution, insurance company, or investment entity described in subparagraph a.
Therefore, Reportable Accounts also include accounts that are residents of the same jurisdictions as the Reporting Financial Institution if the Entity is a Passive NFE with one or more Controlling Persons that are Reporting Persons.
Account Information to be Reported
Financial Institutions in CRS Jurisdictions Must report the following information with respect to each Reportable Account:
- Reportable Person Details:
- Name (title);
- Address (in the case of an account held by an Entity identified as having one or more Controlling Persons who are Reportable Persons, the address to be reported is the address of the Entity and the address of each Controlling Person of such Entity who is a Reportable Person);
- jurisdiction(s) of residence;
- TIN (or corresponding company registration number);
- date and place of birth of the individual account holder or controlling persons;
- controlling persons (UBO).
- account number;
- account balance or value (as of the end of the relevant calendar year or at the time of account closure);
- gross income (including from dividends, royalties, interest, etc.);
- currency in which each amount is expressed;
- name and identification number (if available) of the Reporting Financial Institution;
The first exchange of tax information is expected to take place in the fall of 2024.
Implications of CRS Implementation for Business Owners
Additional Verifications When Opening Accounts
Since the Law came into force, financial institutions are required to conduct verification of existing accounts and establish the residency of clients when opening new accounts.
This also applies to financial institutions in CRS participating jurisdictions that will report on accounts held by residents of Ukraine. Information on the residency of existing account holders in such jurisdictions has already been collected. When opening new accounts, due diligence will be applied to establish residency status.
During the review, organizations will be required to provide a self-assessment document regarding themselves, and in some cases, regarding controlling persons, and upon request of financial institutions, other additional information and/or documents.
Reporting Accounts
As we have previously noted, company accounts opened abroad with an aggregate balance of up to $250,000 at the end of the calendar year will not be subject to reporting until the balance or value of the account exceeds the specified amount.
Financial accounts of companies resident in CRS participating jurisdictions will not be subject to reporting, even if such companies are established in the relevant jurisdictions by residents of Ukraine (but provided that they meet the requirements of an active NFI and their value does not exceed 250,000 USD at the end of the calendar year).
If you have established a company, for example, in Cyprus, then information about such an account will not be transferred to Ukraine, but provided that the company meets the requirements of an “active” NFI. The reporting financial institution (for example, a bank) establishes such status based on its own assessment of the owner of such an account. However, the information provided by the financial institution is verified, if it cannot determine the status of the account owner as an active NFI, then it will consider such a client to be a passive NFI.
If more than 50% of the company’s income is from passive income, then the account of such a company will be reported 24 months after its creation. Accordingly, information about such an account will be submitted to the tax authorities of Ukraine.
Also, if more than 50% of the assets are earned or held for passive income, the account is reportable. CRS does not require that passive income be actually generated in the relevant period. Instead, the asset must be of a type that earns or may earn passive income (interest, dividends, royalties, etc.).
For example, cash should be considered as earning or held for passive income (interest), even if it does not actually earn such income. That is, if more than 50% of the company’s assets are money in accounts, then the account of such an organization is reportable.
This is due to the fact that residents do not use foreign legal entities as a place to store funds for the purpose of tax avoidance, when income is transferred to the relevant company located in a low-tax jurisdiction, and the person’s expenses are debited from such accounts of the legal entity. Accordingly, states do not have information about the income of their resident and, as a result, do not receive taxes.
CRS & tax authorities
If the account holder is a single individual — a citizen of Ukraine, and the balance on such an account does not exceed the equivalent of 250 000 US dollars as of December 31 of the calendar year that falls during the period of martial law in Ukraine, the data received by the tax authority about such an account will not be used to determine the taxpayer’s tax obligations.
Automatic exchange of information will allow tax authorities to identify “unreported” controlled foreign companies (CFCs). In particular, if your company is a passive NFE, it is necessary to analyze whether it falls under the concept of CFC and whether it is necessary to file reports on it.
CRS is just one of the tools that will be available to tax authorities. If suspicious information is revealed during the verification of the information received, tax authorities will be able to use a request to the tax authorities of the jurisdiction in which the account is opened. This, in turn, creates risks of additional tax assessments for account holders.
CRS requirements apply to financial institutions that are residents of participating jurisdictions. However, if the account is opened in a financial institution registered in another jurisdiction, then tax information will not be transferred in any case in accordance with the CRS.
Conclusions
Therefore, the implementation of the CRS standard by Ukraine will allow tax authorities to detect cases of non-declaration of foreign income and, as a result, non-payment of taxes.
However, if a resident of Ukraine has a legal entity in a CRS participating jurisdiction, and such a legal entity conducts real active economic activities, then data on such an account will not be transferred to Ukraine until the balance on the account of such a legal entity exceeds the equivalent of 250,000 US dollars.
If the business of a resident of Ukraine falls under the definition of a passive NFO, then you should contact lawyers who will help you avoid the worst-case scenario.
