By Denise M. Hintzke & Douglas Scott, Deloitte Tax LLP
While many of the world’s tax compliance professionals rightly focused on completing Cayman FATCA/CRS reporting before the reporting portal was temporarily taken offline on Friday, June 1, recent substantive changes to other aspects of the Cayman compliance regime slipped under the radar and will now require focused attention.
In March, the Cayman Islands Department for International Tax Cooperation made two significant updates to its CRS regulatory regime: it reduced the Cayman Islands CRS threshold for a controlling ownership interest and published a new Cayman self-certification template.
Controlling persons threshold
A Cayman financial institution is required to determine the residence of not only its direct account holders but also, in the case of passive non-financial entities (NFEs), the residence of the ‘controlling persons’ of the entity.
Traditionally, for purposes of the CRS in Cayman, a person was considered a controlling person if they were an individual who owned a 25% or greater interest in an entity that is treated as a legal person (e.g., a corporation). With effect from December 2017, that threshold has been reduced to 10% or greater. Note that for FATCA, the threshold remains 25%.
The new 10% figure represents a material reduction in the controlling person threshold for purposes of Cayman CRS and has the potential to significantly expand the pool of persons subject to Cayman CRS reporting.
As this new threshold takes effect from December 2017, it had no impact on the reports due in May. However, the new threshold will affect Cayman financial institutions’ CRS reporting for TY 2018 onwards and requires all Cayman FIs to complete all remediative due diligence activities prior to December 31 of this year.
Template entities, individual self-certification forms
Also in March, and related to the reduction of the controlling persons threshold, the Cayman authorities released a revised CRS entity self-certification form.
Cayman FIs must obtain an entity self-certification using the new Cayman template from any entity that opens a financial account on or after April 1. For financial accounts opened prior to that date, but on or after January 1, 2016, the Cayman FI will have until December 31, to obtain the new self-certification form for any financial account holder that is a legal person and was previously required to disclose its controlling persons pursuant to CRS.
If the Cayman FI is not able to obtain the necessary certifications from the entity and all of its controlling persons, it is required to close the account within 90 days.
Further, special rules apply to entities that are not financial institutions and that are passive (passive NFEs) that have an aggregate account balance of $1M or less and that were in existence prior to January 1, 2016. Such entities may rely on information collected for anti-money laundering and know your customer purposes to determine the tax residence of the entity or controlling persons or obtain a self-certification.
A self-certification should be obtained for a passive NFE that was open prior to January 1, 2016 with a balance in excess of $1M. If a self-certification is not obtained, the Cayman Islands Financial Institution (CFI) is also required to establish the residence of the entity and controlling persons based on indicia that they identify through an electronic and paper record search. If the CFI does not have the necessary information to identify all controlling persons of a passive NFE account holder and their tax residence, or the tax residence of any other type of entity account holder, they will be in breach of the CRS regulations.
The CFI will, therefore, need to determine how to remediate this situation by obtaining the self-certification or potentially closing the account.
After the release of the revised form, a debate occurred over whether Cayman FIs needed to use the new template self-cert or whether they could instead employ a customized self-certification form. This debate was driven, at least in part, by contradictory language in the latest version of the Cayman Islands CRS Guidance Notes.
Specifically, section III of the Cayman Islands Guidance Notes, titled ‘Key Dates under the CRS,’ provides that “[f]rom 1 April 2018 onwards Cayman Financial Institutions must use the self-certification template as revised in March 2018.”
By contrast, section VI(A)(7)(a) of the guidance provides that “Cayman Islands Financial Institutions may use these [self-certification templates] as a basis for self-certification and adapt or modify them as necessary to suit their own usage.”
Further guidance from the Cayman Islands Department for International Tax Cooperation (DITC) have confirmed that although Cayman FIs can develop their own custom forms they must adhere closely in substance to the template self-certification and include all of the required information and a specific reference to the 10% requirement.
According to a recent ‘Industry Advisory’ from the Cayman Islands, the DITC has also indicated that the Cayman FI only needs to remediate the delta between the 25% and the 10% in situations where they actually have a valid self-certification in place for the entity and the controlling persons with interests of 25% or more.
Based on the language in the Cayman guidance, FIs may consider distributing a self-certification form that closely adheres to the structure and substance of the latest Cayman template, so that a financial institution gathers all information required to be collected by the Cayman authorities.
As a final note, the drafting, distribution, and collection of new self-certification forms may be complex. As the Cayman May 31 reporting deadline has now passed, it is important to also give due attention to the forward-looking issues discussed in this article.
– Denise Hintzke is a managing director in the Financial Services Tax practice at Deloitte Tax LLP where she serves as a leader in their Global Information Reporting practice as well as their Foreign Account Tax Compliance and Common Reporting Standard Initiatives.
– Douglas Scott is a tax consultant with Deloitte’s Global Information Reporting Practice. In his role, Doug specializes in Qualified Intermediary, FATCA and CRS related consulting services.