CRS reporting active NFE unclear. Help needed!

Natasja

Member
I'm currently investigating the CRS and trying to identify certain 'loopholes'. Personally, I have a really hard time trying to grasp certain rules since they lack a logical and clear structure. One of them is the reporting of active and passive NFE's.

If your business classifies as an Active NFE the account will be 'a reportable account by virtue of the account holder'. To clarify: passive NFE's are 'reportable accounts by virtue of the account holders' controlling persons'.

So it seems the UBO will not be reported if your business is an active NFE. However the tax residency of an NFE is based on its CMC regardless of its passive/active status. So how does the reporting work for an active NFE which is incorporated in country X with a private UBO register and is tax resident in country Y?
It seems useless to me to report the account on the entity level to country Y without disclosing the UBO...?

@Martin Everson @xzars
 

Natasja

Member
Upon further analysis of my question, I might made a mistake. Maybe CMC rules only apply to passive NFE's and therefore an active NFE will automatically be resident in the country of incorporation (exception is when the active NFE is incorporated in a 0% tax jurisdiction).

it would help if someone with extensive knowledge on this subject could clarify this a bit :).
 

xzars

Trusted Member
Business Angel
CRS AEOI has the overt public goal and a covert private goal.

- Publicly, CRS AEOI is about tax justice. It's about helping all those poor low income people who suffer because of tax evaders.
- Privately, and in legislative substance, CRS AEOI is about ensuring tax evasion is seamless for the political donors while making tax optimization for unrelated parties risky and cumbersome.

PS! Why do you think the corporate tax laws in US and most EU states are 10K+ pages? Is it better to hide the golden needle in a small hay stack or big one? If the corporate tax rule books were reduced to 100 pages, the unrelated common folk would find the needle.

---

Keep your Active NFE status by fulfilling the classification requirements and avoid condition-less 0% corporate income tax jurisdictions. Obtain a Tax ID number for your offshore business, pay 1 dollar of corporate income tax where the business is incorporated. You've successfully made CRS AEOI irrelevant for your offshore business.

As you may have read in my other replies elsewhere, consider some risk mitigation steps, especially proxy residency and citizenship.

xzars said:
Even if we are clever and outplay CRS, it's possible an accident will happen.

- Your offshore agent could tip off the government in exchange for a fee
- He might even tip you off for free to avoid prosecution
- Your data could leak (Panama Papers, Paradise papers)
- And lastly, the bank could make a mistake CRS report whereby your business account not subject to reporting under CRS rules gets reported anyhow due to human-or-computer error
 

xzars

Trusted Member
Business Angel
More reasons to use proxy residency/citizenship:

- TIEAs
Although your Active NFE account report is sent to an offshore jurisdiction, the information could be in reach for your true country of residence via TIEA. Whether they know where to look is another discussion, but just a few suspicious payments from your name could give the tax man a good lead.
- Seamless Exit
If you want to exit your structure, you can do so at any time without a consequence. If your true country of residence is known to an offshore jurisdiction, they have a degree of leverage over you. They may grief when you exit, and they may extort more fees as they see fit. Why wouldn't they exchange sensitive information of a non-paying tax evader for some international reputation and pats on the shoulder?

Not that they will screw you, but they could. And could is bad enough.
 

Martin Everson

Offshore Consultant
Business Angel
So how does the reporting work for an active NFE which is incorporated in country X with a private UBO register and is tax resident in country Y?
It seems useless to me to report the account on the entity level to country Y without disclosing the UBO...?
Follow below link and skip to point 3 and see example.


I discussed similar question here.

 

Natasja

Member
Follow below link and skip to point 3 and see example.

Coincidentally that's the source I used for formulating my question but didn't read the explanation given at point 3. Thanks.
So the use of nominees would be semi-useful when operating an active NFE, although it's not a guarantee. Just an extra layer.

Even if we are clever and outplay CRS, it's possible an accident will happen.

- Your offshore agent could tip off the government in exchange for a fee
- He might even tip you off for free to avoid prosecution
- Your data could leak (Panama Papers, Paradise papers)
- And lastly, the bank could make a mistake CRS report whereby your business account not subject to reporting under CRS rules gets reported anyhow due to human-or-computer error
These were indeed the scenarios I was thinking about. And for those residing in some banana republic with 0% tax, it's extremely plausible that your information will be shared by mistake due to their 'incompetence' and the simple fact that the CRS is an extreme mess.
 

Natasja

Member
Keep your Active NFE status by fulfilling the classification requirements and avoid condition-less 0% corporate income tax jurisdictions. Obtain a Tax ID number for your offshore business, pay 1 dollar of corporate income tax where the business is incorporated. You've successfully made CRS AEOI irrelevant for your offshore business.

As you may have read in my other replies elsewhere, consider some risk mitigation steps, especially proxy residency and citizenship.
Do you know a smart way to trigger a taxable event in a 0% tax jurisdiction to become an active NFE? If a 0% country only has VAT, can you just import a box of bananas in name of the company, pay your VAT and become an active NFE?
 

xzars

Trusted Member
Business Angel
Here I don't fully agree with Martin. The person who wrote his analysis at the-best-of-both-worlds.com is just a source of opinion not a definitive legal conclusion. He seems to have put in a lot of research, but I do not agree with him on that point. Anyhow, I'm ready to be corrected.

If the corporation is classified as Active NFE, and is not classified as "an effectively untaxed entity" (more than 0 tax is effectively paid and a Tax ID exists):

- The entity's account information is not reportable in benefit of jurisdiction(s) where the account holders, ultimate beneficiaries or managing directors are tax resident. No look-through is mandatory - that would be more stringent opinion-based/country-specific CRS implementation, not as per minimum global requirements of the CRS protocol.

---

There is one more vulnerability I'd like to mention. There are sub-categories to Active NFE classification. The most interesting is "Active Start-Up NFE".

- If an entity is less than 24 months old, one could qualify. There is less burden of proof with this classification in CRS self-certification. Account holder must only have a plausible business description or an idea, instead of having to prove that more than 50% of income is or will be derived from active business activities, among other hassle.
- As an obvious downside to this sub-category, CRS re-certification is mandatory once the company becomes 2 years old. Without successfully doing so, the CRS protocol requires the corporation be treated as "Passive NFE".

Where and how to benefit from it?

- Imagine a tiny micro business lacking a long-term growth plan. Or perhaps a business you do not know will yield returns - something you want to test on the market.
- Pair this business with the "Active Start-Up NFE" classification you maintain by incorporating a new throw-away company every 2 years to avoid CRS. In some places, i.e. the UK, it costs next to nothing to incorporate a new company. Of course, use a nominee for a degree of privacy on the public record.
 

xzars

Trusted Member
Business Angel
Do you know a smart way to trigger a taxable event in a 0% tax jurisdiction to become an active NFE? If a 0% country only has VAT, can you just import a box of bananas in name of the company, pay your VAT and become an active NFE?
You would most likely have to sell those bananas to a local entity or consumer. You want to pay CIT, do not rely solely on VAT-paid. Imho, the best trick is to make a false tax declaration if you lack local customers. Say you had a bit of local income so you can pay some CIT. If not CIT exists in that jurisdiction (not even on local income), I would re-incorporate elsewhere. Depending on the jurisdiction, you may or may not have to declare who did business with you. This option works best if you do not have to declare who bought that box of bananas from you :D
 

Natasja

Member
There is one more vulnerability I'd like to mention. There are sub-categories to Active NFE classification. The most interesting is "Active Start-Up NFE".

- If an entity is less than 24 months old, one could qualify. There is less burden of proof with this classification in CRS self-certification. Account holder must only have a plausible business description or an idea, instead of having to prove that more than 50% of income is or will be derived from active business activities, among other hassle.
Upon reading I discovered this vulnerability as well. The thing however is that CRS is subject to change and these solutions could be only temporary. The solutions you gave about 2nd residency/proxy are much better solutions eventually.

You would most likely have to sell those bananas to a local entity or consumer. You want to pay CIT, do not rely solely on VAT-paid. Imho, the best trick is to make a false tax declaration if you lack local customers. Say you had a bit of local income so you can pay some CIT. If not CIT exists in that jurisdiction (not even on local income), I would re-incorporate elsewhere. Depending on the jurisdiction, you may or may not have to declare who did business with you. This option works best if you do not have to declare who bought that box of bananas from you :D
CIT is absent, company already incorporated. I already figured out I made some indicia mistakes, which will probably prevent me to benefit from maximum tax planning efficiency.. This company exist for almost a year now, so hopefully I'm still able to make some changes during the 'start-up phase' to avoid CRS reporting. TBH i don't care much about paying taxes in my home country, but I wonder if the exchange of information might lead to countries taking measures which are more political such as: demanding that certain business activities will be terminated.

However, at this point I think the CRS causes more damage in theory than in practice since I guess it lacks the proper implementation ATM which will probably lead to countries targeting only high value accounts for the time being. Unfortunately there is no transparency rapport available which gives us insight on how many accounts were reported. Thanks for the answer though, I will def. keep analysing the CRS to see if I can discover some interesting loopholes which I can 'exploit'.
 

BTCNG

Building Trust
Entrepreneur
Here I don't fully agree with Martin. The person who wrote his analysis at the-best-of-both-worlds.com is just a source of opinion not a definitive legal conclusion. He seems to have put in a lot of research, but I do not agree with him on that point. Anyhow, I'm ready to be corrected.

If the corporation is classified as Active NFE, and is not classified as "an effectively untaxed entity" (more than 0 tax is effectively paid and a Tax ID exists):

- The entity's account information is not reportable in benefit of jurisdiction(s) where the account holders, ultimate beneficiaries or managing directors are tax resident. No look-through is mandatory - that would be more stringent opinion-based/country-specific CRS implementation, not as per minimum global requirements of the CRS protocol.

---

There is one more vulnerability I'd like to mention. There are sub-categories to Active NFE classification. The most interesting is "Active Start-Up NFE".

- If an entity is less than 24 months old, one could qualify. There is less burden of proof with this classification in CRS self-certification. Account holder must only have a plausible business description or an idea, instead of having to prove that more than 50% of income is or will be derived from active business activities, among other hassle.
- As an obvious downside to this sub-category, CRS re-certification is mandatory once the company becomes 2 years old. Without successfully doing so, the CRS protocol requires the corporation be treated as "Passive NFE".

Where and how to benefit from it?

- Imagine a tiny micro business lacking a long-term growth plan. Or perhaps a business you do not know will yield returns - something you want to test on the market.
- Pair this business with the "Active Start-Up NFE" classification you maintain by incorporating a new throw-away company every 2 years to avoid CRS. In some places, i.e. the UK, it costs next to nothing to incorporate a new company. Of course, use a nominee for a degree of privacy on the public record.
Hello

About the first item you spoke about the topic - "an effectively untaxed entity" - is there a rule/clause in the CRS guidelines that say that for if there is no tax in the country’s jurisdiction then the UBO himself will be also reported to his place of living? I couldn’t find such clause. Is it true??? Where is it written?

And what about a business that it’s set up is the following - UBO that lives in a reportable jurisdiction (let’s say in Europe for example) is holding a company in a tax haven and is giving services to country X. The clients of the company (in the registered in the tax haven) which are located in country X are deducting tax at source and pay to the UBO's company the net amount after the withholding tax deduction. So, effectively the company paid tax in a way of the deduction of the withholding tax by the client in country X (the tax deducted however was not paid to the tax haven but to the country X tax authorities). In case your answer to my first question is positive, does it still apply on him in this case where in the country of incorporation there is no tax but the client are actually deduct taxes from the payments?
 

xzars

Trusted Member
Business Angel
Hello

About the first item you spoke about the topic - "an effectively untaxed entity" - is there a rule/clause in the CRS guidelines that say that for if there is no tax in the country’s jurisdiction then the UBO himself will be also reported to his place of living? I couldn’t find such clause. Is it true??? Where is it written?
Those were the most stringent conditions I gave to increase the odds of my following statement holding true. In practice, the categorization of "effectively untaxed entity" as Passive NFE seems to be pending or discarded - i.e. not in force.

Upon further investigation, it seems the author of http://www.the-best-of-both-worlds.com/, mr. Morris was fearmongering when he wrote Embedding investments within an Active NFE as a strategy to circumvent CRS. My mistake was to give him too much benefit of the doubt. He's correct that there was an OECD panel followed by a report written in 2016 about the intent to close real and perceived CRS loopholes by the end of 2017, but there has been no legislative follow-up to close "Embedding investments within a untaxed Active NFE", as he describes it. He then proceeded to write several misleading articles on his website and LinkedIn in 2017 and 2018, suggesting that OECD closed this loophole which is not true. The OECD has not even defined "effectively untaxed entity" in CRS guidelines/CRS FAQ/CRS Source at this point.

Whether the entity is effectively taxed or untaxed is not a relevant factor when it comes to Active/Passive NFE categorization as per CRS requirements in 2019. Individual CRS member states and reporting FIs may do their solo and use "CRS certification reasonableness" (opinion) test and other input as they see fit. But it's certainly not a global requirement to categorize zero tax entities as Passive NFE where they would otherwise qualify for the Active NFE status.

Would be nice to hear from mr. Morris himself here. There's one more thread where I made comments about this "2017 CRS amendment" in belief that Morris is an expert on the topic.
 

Natasja

Member
Whether the entity is effectively taxed or untaxed is not a relevant factor when it comes to Active/Passive NFE categorization as per CRS requirements in 2019. Individual CRS member states and reporting FIs may do their solo and use "CRS certification reasonableness" (opinion) test and other input as they see fit. But it's certainly not a global requirement to categorize zero tax entities as Passive NFE where they would otherwise qualify for the Active NFE status.

Would be nice to hear from mr. Morris himself here. There's one more thread where I made comments about this "2017 CRS amendment" in belief that Morris is an expert on the topic.
Really interesting info.
Imo the most dangerous thing about the CRS is the semantic ambiguity ; i.e the unclear meaning of words and phrases they use and what they mean in reality. The CRS is written with a LOT of phrases with no exact meaning such as: regularly traded, significant control, reasonable evidence, reasonable compensation etc. It therefore feels like it will be a hit or miss. When indicia X,Y & Z are present, FI A might report you on Monday but might not feel like reporting you on Tuesday. There are no clear rules and probably with good reason: so you cannot defend yourself when the tax men drags you through court and strips you from your money.
 

BTCNG

Building Trust
Entrepreneur
Those were the most stringent conditions I gave to increase the odds of my following statement holding true. In practice, the categorization of "effectively untaxed entity" as Passive NFE seems to be pending or discarded - i.e. not in force.

Upon further investigation, it seems the author of http://www.the-best-of-both-worlds.com/, mr. Morris was fearmongering when he wrote Embedding investments within an Active NFE as a strategy to circumvent CRS. My mistake was to give him too much benefit of the doubt. He's correct that there was an OECD panel followed by a report written in 2016 about the intent to close real and perceived CRS loopholes by the end of 2017, but there has been no legislative follow-up to close "Embedding investments within a untaxed Active NFE", as he describes it. He then proceeded to write several misleading articles on his website and LinkedIn in 2017 and 2018, suggesting that OECD closed this loophole which is not true. The OECD has not even defined "effectively untaxed entity" in CRS guidelines/CRS FAQ/CRS Source at this point.

Whether the entity is effectively taxed or untaxed is not a relevant factor when it comes to Active/Passive NFE categorization as per CRS requirements in 2019. Individual CRS member states and reporting FIs may do their solo and use "CRS certification reasonableness" (opinion) test and other input as they see fit. But it's certainly not a global requirement to categorize zero tax entities as Passive NFE where they would otherwise qualify for the Active NFE status.

Would be nice to hear from mr. Morris himself here. There's one more thread where I made comments about this "2017 CRS amendment" in belief that Morris is an expert on the topic.
Thats Exactely what I thought.
Couldnt write it better.
 

BTCNG

Building Trust
Entrepreneur
CRS AEOI has the overt public goal and a covert private goal.

- Publicly, CRS AEOI is about tax justice. It's about helping all those poor low income people who suffer because of tax evaders.
- Privately, and in legislative substance, CRS AEOI is about ensuring tax evasion is seamless for the political donors while making tax optimization for unrelated parties risky and cumbersome.

PS! Why do you think the corporate tax laws in US and most EU states are 10K+ pages? Is it better to hide the golden needle in a small hay stack or big one? If the corporate tax rule books were reduced to 100 pages, the unrelated common folk would find the needle.

---

Keep your Active NFE status by fulfilling the classification requirements and avoid condition-less 0% corporate income tax jurisdictions. Obtain a Tax ID number for your offshore business, pay 1 dollar of corporate income tax where the business is incorporated. You've successfully made CRS AEOI irrelevant for your offshore business.

As you may have read in my other replies elsewhere, consider some risk mitigation steps, especially proxy residency and citizenship.
Hi
About this : "Keep your Active NFE status by fulfilling the classification requirements and avoid condition-less 0% corporate income tax jurisdictions "
Which jurisdictions you would suggest? If you can give a couple it would be great....
 
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