I cooperate with a UK based company that acts exclusively as trustee; therefore, 100% of its revenues are coming from fees paid by trusts (administration, responsibility or acceptance fees).
I understand that, according to the CRS Standard, “Financial institutions” also include “Investment entities”, which, in turn, include companies that are “otherwise investing, administering, or managing Financial Assets or money on behalf of other persons”.
In our specific case, the Trustee remains in full control of the investment decision and has full discretion on it. The bank, where the securities are deposited, only provides us with a non-binding advice, but it has no decision-making power on the investment strategy.
Financial assets, in particular are shares, bonds, debentures (corporate and government).
In light of the above, I would like to know if the Trustee can be considered a Financial Institution under CRS, in so far as it administers financial assets and money on behalf of third parties.
My understanding is that even if assets are vested in a Financial Institution, CRS only applies if in addition they are “managed by” that Financial Institution. In this case you are describing advisory management, not discretionary management, and therefore CRS does not apply.
Thank you very much for your reply and confirmation.
Since the trust has not appointed a discretionary fund manager to manage its portfolio, but it is the trustee who may use its discretion to manage the trust’s investments, or its strategy for how it invests its assets, then the trustee passes the “managed by” test and takes the status of Investment Entity.
Ultimately, the trustee becomes Financial Institution subject to the CRS report.
Even if the trust has not appointed a discretionary fund manager, unless it has appointed the bank to manage the investments the bank cannot be said to manage them and therefore CRS does not apply.
If the Trustee themselves is a Reporting Financial Institution (e.g. a corporate trustee that meets the definitions under the CRS) then along with a requirement for the Trustee itself to report under CRS this can also cause the trust it manages to be considered a Financial Institution if it meets the income tests. This would typically be the case where a professional trustee corporation is appointed as a trustee and where the trust derives its income from financial assets, irrespective of whether the underlying mandate with the investment manager was advisory or discretionary in nature. The “management” by a FI is by the trustee.
However, even if the underlying trust doesn’t then meet the income tests and is considered a passive NFE, this doesn’t absolve the trustee company itself from its own reporting obligations under CRS to report on the controlling persons of the trust it manages.
Thank you for your comprehensive explanation and I agree with you. However, you say “If the Trustee themselves is a Reporting Financial Institution (e.g. a corporate trustee that meets the definitions under the CRS)”: the crux is right here.
The trustee company is NOT a trust corporation under rule 30 of the Public Trustee Rules 1912, but nevertheless it administers financial assets and money on behalf of third parties.
Can this trustee company be considered a Financial Institution or not?
The UK trust certainly is an F.I., however if it does not pass the “Managed By” test, then we should not report it.
Without this constituting formal advice, I would suggest that if the trustee company (which you note is not a formal trust corporation) is administering financial assets and is getting paid for this service, then it’s going to meet the definitions as an Investment Entity and be considered a Reporting Financial Institution in its own right, which then brings the rest of the above in to play.
The Trust will be an investment entity if it is managed by the Financial Institution and meets the income test. The “managed” part focuses on who actually manages the financial assets of the Trust/Entity and does so with discretionary authority. What if this is a settlor-directed trust with the investment powers reserved by the settlor or protector and the Trustee merely acting on his directions? For this reason, it is important to review what powers have been granted to Trustee concerning the management of the assets of the Trust. I trust, in your specific case, you have determined that already.
In addition, the entity or trustee that manages the assets on the discretionary basis must be a Financial Institution. Otherwise, the managed test fails. Hence, to apply the managed by test you need to know the Trustee’s status. A professional trust company would typically be classified as an Investment Entity. However, I believe it is not for you to assume or identify Trustee’s CRS/FATCA classification but for the Trustee itself. The Trustee (UK based company) should have known their status by now. Aren’t they?