When is a Non-billing Trust Corporation an Investment Entity for FATCA? [IWOV-HJDOCS1.FID4022485]

I’m trying to find authority for the following statement from HMRC’s internal manual IEIM400780:

“The ABC family trust’s gross income is primarily attributable to investing, reinvesting or trading in financial assets. The trust was set up on the advice of a law firm and that firm’s own corporate trustee is the trustee of the trust. The corporate trustee acts for the law firm’s clients without itself charging any fees to the clients. Even though the corporate trustee does not charge, it is a Financial Institution by virtue of being an Investment Entity. Its Related Entity (the law firm) is charging the clients for the corporate trustee’s services of managing assets, the corporate trustee therefore primarily conducts as a business, for or on behalf of a customer, the prescribed activities.”

I take it, from the capitalisation, that “Related Entity” means a Related Entity as defined in Article 1, 1(kk) of the “Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the United States of America to Improve International Tax Compliance and to Implement FATCA” dated 12 September 2012 (“the Agreement”), not just some related entity in a looser sense.

My understanding of the manual is that where two entities are Related Entities and one of them (“entity A”) submits bills on behalf of, or in consequence of the existence of, the other (“entity B”) then if those bills are wholly or mainly in respect of investment activity, entity B is an Investment Entity. And this is so irrespective of the nature of the bulk of the business conducted by entity A.

This is not an illogical conclusion. But I cannot find any authority for this anywhere except on this page of HMRC’s manual. Text searches against the word “related” in the Agreement, and in the subsequent HMRC guidance document, and in the 2015 Regulations and (indeed) elsewhere in IEIM, only seem to produce hits for related entities in other completely different contexts.

Can anyone point me to some legal authority, or to some commentary, on this?

Andrew Jones
Hugh James Solicitors

My understanding is that a corporate trustee of a trust that has mostly investment income from a discretionary managed fund, such as an externally managed investment portfolio is an investment entity financial institution for the purposes of FATCA regardless of whether it charges fees or not. If however most of the income is not investment income e.g. rental income (?) or trading income or the investments producing income are not subject to discretionary management then that corporate trustee might not be an investment entity financial institution. This was included in the original flowchart produced by STEP in conjunction with HMRC/IRS at the original introduction of FATCA.

Maxine Higgins
Citroen Wells

Thank you. I’m not sure I agree that is correct. In the situation you describe I believe the TRUST would be a an investment entity FI (because “managed” by its discretionary fund manager), although I don’t think it follows that the TRUSTEE is one, necessarily.

My concern in asking this question was more to do with authority. I cannot find any authority for the statement in HMRC’s manual. And HMRC’s manual, of course, is not law. In the absence of authority I cannot work out what the limits of the rule are.

For example, imagine the same facts as the Revenue’s example (as I have quoted it in my initial posting, above) except that I am one of three equity partners in a law firm, but I own 100% of the trust company myself. Are the law firm and the trust company then NOT Related Entities? Apparently not. Is the trust company therefore not an FI? I cannot tell.

Can anyone tell me where HMRC derive this part of their manual from? Is it even correct?

Andrew Jones
Hugh James Solicitors