DAC6: Another regulatory headache for the trust and fiduciary industry? - Banking blog

Another regulatory headache for the trust and fiduciary industry
The latest amendment to the EU’s Directive on Administrative Cooperation (DAC6) requires EU intermediaries (and in some cases relevant EU taxpayers) to report to their domestic tax authorities on potentially aggressive or abusive cross-border tax arrangements (reportable cross-border arrangements or RCBAs). In parallel, certain jurisdictions are implementing the OECD’s mandatory disclosure rules (MDR), which essentially apply to arrangements coming within the hallmark D category of DAC6.

This blog discusses the impact of DAC6 and the OECD MDR on the trust and fiduciary sector and is part of a series designed to help our clients react to the new regulatory requirements.

What makes an arrangement through a trust service reportable?

To quickly recap, an RCBA means any arrangement that:

  • concerns either more than one EU member state or an EU member state and a third country, including Switzerland (a so-called ‘cross-border arrangement’); and
  • meets at least one of the characteristics or features, known as ‘hallmarks’, that are listed in Categories A to E in the Annex to DAC6. These are arrangements indicative of aggressive tax planning or tax avoidance.

Trustees will be involved in cross-border arrangements if they have an EU nexus and serve foreign clients, or in the case of non-EU trustees if they serve EU clients.

Additionally, reporting obligations may arise if a trustee is resident in a jurisdiction implementing MDR and makes available an arrangement, which has the intention or effect of circumventing or avoiding the OECD Common Reporting Standard (CRS) requirements, or makes available an opaque offshore structure that disguises the current beneficial ownership.

What are fiduciary services that could meet a DAC6/MDR hallmark?

It might seem that trust structures and trustees should not be affected by DAC6, as traditionally they are not resident in EU member states.

Trust companies provide services to clients concerning wealth, estate and succession, and relocation planning. Tax considerations are a key aspect of these services, and so could bring advice within the scope of the DAC6 or MDR hallmarks. Some illustrative examples are explained below.

  • Trust companies may provide a client with a standardised trust deed template, which is then finalised by the client’s external lawyer. In such cases, the trust company will likely know to what extent the deed has been customised and whether it meets the A.3 hallmark under DAC6 for standardised documentation.
  • Trustees may set up a trust structure that has the effect of converting income into capital, gifts or another category of income that is taxed at a lower rate or is tax-exempt. In such cases, the main benefit test is likely to be met and reporting is required under hallmark B.2 of DAC6.
  • Trust services may meet one of the Category D hallmarks under DAC6 or fall in scope of MDR if they lead to non-reporting under CRS. An example would be providing misleading information to a financial institution when an account is opened about the real discretionary beneficiaries of a trust. For instance, by appointing a charity as sole discretionary beneficiary on opening an account and subsequently replacing the charity with the intended discretionary beneficiaries without informing the financial institution.
  • Trustees may restructure by switching from a trust to a company as an investment vehicle in order to avoid reporting of the discretionary beneficiaries of the trust as controlling persons: this may fall within the scope of the Category D hallmark of DAC6 or the MDR.
  • Trustees may also meet one of the Category D (and MDR) hallmarks when they habitually act under the instructions of another person even though that person is not recognised as a trustee or protector under the trust deed (thereby obscuring the person’s identity).
  • In some instances, trust clients may ask the trustee to pay bills on behalf of the client or to credit the amount to a pre-paid debit or credit card. When such payments are not treated as a distribution and are not reported for CRS purposes, such services may potentially be caught by the Category D hallmarks under DAC6 or the MDR hallmarks.

Are trustees required to report?

Whether the reporting obligation for an RCBA lies with the trustee depends on whether the trustee has an EU nexus (e.g. residence in the EU) and its involvement in the arrangement. Furthermore, whether any of the hallmarks are met will depend on the type of advice or service provided.

Going forward, providers of trust and company administration services will need to scrutinise the hallmarks relating to the main benefit test and also those concerning the automatic exchange of information and beneficial ownership, (the so called ‘D’ hallmarks).

There might be instances where the trustee is not obligated to report, for example because it is resident in a non-EU jurisdiction, or because its knowledge is not sufficient to determine that the main benefit of the arrangement is obtaining a tax advantage. In such cases, reporting may still be required by other involved EU intermediaries or by the EU client benefitting from the arrangement.

Trustees should also consider the application of the OECD MDR and its effect on their reporting obligations. Implementation of the MDR has already started and several jurisdictions have made progress. For instance, Guernsey and Jersey have initiated consultations on the implementation of the rules and legislation is expected to be published by 31 December 2019; and South Africa has already published a draft MDR law.

What should trustees do now?

Due to the high complexity involved in the set-up of trust structures, we believe trustees should conduct a case-by-case analysis for each of their trust arrangements.

The examples above illustrate the importance of an impact assessment that should enable trustees to identify focus areas and to structure their DAC6/MDR implementation procedures accordingly. Trustees should put in place processes and controls to identify RCBAs. When the trustee assesses an RCBA is not reportable, for audit purposes, it should nevertheless document the arrangement’s non-reportable status, giving reasons for this assessment.  

Despite Switzerland at this time not having published any disclosure rules for intermediaries, Swiss service providers should be aware of the DAC6/MDR implications for their clients. If a Swiss trustee provides a service to an EU taxpayer and the service qualifies as an RCBA, an obligation to report will fall on the EU taxpayer. In this case, Swiss trustees should consider whether they have a fiduciary duty to inform their EU clients about DAC6 and whether/how they are allowed or intend to assist clients in meeting their obligations under DAC6.

By: Olga-Vasiliki Plousiou, Manager Financial Services Tax; Atila Demiraj, Senior Consultant Financial Services Tax.

 

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Brandi Caruso - Partner, Financial Services Tax 

Brandi heads the Tax Transparency offering within the Financial Services Tax practice across Switzerland, responsible for services related to QI, FATCA, CRS, and 871(m). She is a technical advisor and a subject matter expert to a number of Swiss-based trust companies and banks and leads the Deloitte Trust Forum. She has more than 15 years of experience with Deloitte in the US, UK, and in Switzerland.

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Michael Grebe - Director, Financial Services Tax

Michael is a Director in the Financial Services Tax practice. He advises banks, trust companies, and insurers in relation to the interpretation and implementation of the global transparency related regimes. He has over ten years of experience in the financial industry covering a broad spectrum ranging from Process- over Project- to Product- Management. Prior to joining Deloitte, he led the FATCA and CRS implementation project for a global financial institution.

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Karim Schubiger – Director, Financial Services Tax & Legal

Karim leads the Tax Transparency team in the Suisse Romande and Ticino markets within the Financial Services Tax & Legal practice, responsible for services related to QI, FATCA, CRS, and 871(m). He is a technical advisor and subject matter expert to financial institutions in the banking, trust, and insurance sectors. Prior to joining Deloitte, Karim worked for eight years in support teams of Swiss banks, in particular in areas such as operations, project and change management as well as operational taxes.

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Olga-Vasiliki Plousiou - Manager, Financial Services Tax

Olga-Vasiliki is a Manager in the Financial Services Tax team. She is a Greek attorney-at-law and holds an LL.M in International and European, Economic and Commercial Law from the University of Lausanne. She is advising banking institutions and fiduciaries as a QI, FATCA and CRS specialist. Prior to joining Deloitte Switzerland, she worked at a Greek law firm and as an external collaborator for the permanent mission of Greece, within the World Trade Organisation.

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Atila Demiraj - Consultant, Financial Services Tax 

Atila is working in the Financial Services Tax team in Zürich, where she advises a variety of leading financial institutions and trusts on the implementation of FATCA and CRS. Prior to joining Deloitte, Atila obtained a Master of Arts in Business Administration from the University of Zurich.

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