All BVI and Cayman investment funds are now subject to AEOI (the Automatic Exchange of Information). AEOI has been around for a while now but is still new to a lot of our clients, particularly US-based managers who are expanding their investor base and setting up an offshore structure for the first time (and also, a lot of lawyers). So what is it, what is it all about, what do you need to know and what can you leave to the experts?
What is it for?
The idea of the AEOI regimes is that they enable countries to collect information on where their tax residents (or citizens in the case of FATCA) have financial assets. This then enables those countries to crack down on tax evasion and ensure that their citizens or tax residents are paying all taxes that they are liable to pay in relation to financial assets held overseas.
What is it?
In the BVI and Cayman, AEOI falls within two regimes; one commonly referred to as “FATCA” and the other referred to as “CRS”.
FATCA refers to the US Foreign Account Tax Compliance Act and the inter-governmental agreements and implementing legislation which both the BVI and Cayman (and numerous other countries) have entered into with the US.
CRS or the Common Reporting Standard refers to the OECD’s standard for automatic exchange of financial account information. To date, more than 100 countries have agreed to automatically exchange information under CRS.
How does it work?
BVI and Cayman investment funds have to report information on the investments or “accounts” of their investors who are resident in reportable jurisdictions to the local tax authority (either the BVI International Tax Authority (known as the ITA) or the Cayman Tax Information Authority (known as the TIA)).
That tax authority then reports the information to the relevant tax authority in each relevant reportable jurisdiction (or, for FATCA, to the IRS). For example, information in relation to an investor in a BVI fund would be reported to the ITA. The ITA would then report the information on the account of an investor which is tax resident in Hong Kong to the Hong Kong Inland Revenue Department and information in relation to the account of an investor which is tax resident in the UK to HM Revenue and Customs.
Other types of financial institutions have reporting obligations too but for the purpose of this blog we are just looking at funds. It is worth mentioning that BVI and Cayman investment managers will fall within the AEOI regimes. They will have nothing to report but will need to register with the ITA or TIA.
Does it work both ways?
FATCA is one-way, in that participating jurisdictions report to the IRS but there is currently no reciprocal reporting. CRS is different in that it is reciprocal and there is two-way reporting (although some countries have elected not to receive information).
What do we have to do?
BVI and Cayman funds have to:
- appoint individuals to AEOI roles –
- FATCA Responsible Officer is required to register for a Global Intermediary Identification Number;
- Principal Point of Contact to liaise with the ITA or TIA, as applicable; and
- Authorising Person (for Cayman funds but not BVI funds);
- register with the IRS and obtain a GIIN for FATCA purposes;
- register for reporting on the online portal of the ITA or TIA, as applicable;
- implement AEOI policies and procedures;
- include relevant disclosures in their offering documents and self certification forms in their subscription agreements; and
- report on an annual basis.
What do we report?
Funds have to report details of their investors and the value of their investments and redemptions during the reporting period.
If the investor is a financial institution (like another fund or a bank), nothing has to be reported on that investor.
Things get a little more complicated where the investor is a passive entity that receives income from passive investments but is not a financial institution and has no reporting obligations itself. In those circumstances, the reporting fund will have to look through those entities and may have to report on some of their shareholders and controllers.
Are there deadlines?
Yes, when a fund launches, it needs to register with the IRS and apply for a Global Intermediary Identification Number (often referred to as a GIIN). It also needs to register with the ITA (for BVI funds) or TIA (for Cayman funds). Reports or nil returns must then be completed by 31 May each year.
Does this mean investors have to pay more tax?
It shouldn’t do. Investors have always been obligated to pay taxes on their income and capital gains in accordance with the tax rules of the countries in which they are tax resident. The rules in each country are different and nothing about CRS or FATCA changes them. AEOI just means that information about the financial assets held by investors is exchanged with their countries of tax residence and so there is no hiding them.
How do we know where our investors are tax resident or what type of entity they are?
Onboarding of investors has become a bit more complicated and subscription agreements are now longer. We now need to get an additional form (a self certification) from investors and combine that with a bit of due diligence. In practice, this is not much more onerous than the normal on-boarding that your administrator does for each investor.
This all sounds complicated, can someone do it for me?
Absolutely! Many administrators and auditors offer this service. Harneys also has an expert team who can do your AEOI reporting for you. Let us know if you need our help with this and we can provide a proposal.
The author of this post is no longer with Harneys. For more information on this topic, please reach out to the author listed above.