The Common Reporting Standard (CRS) is a global information gathering and reporting mechanism developed by the Organisation for Economic Co-Operation and Development (OECD), and requires the automatic exchange of financial accounts information between tax authorities of the participating country members. The CRS aims to combat tax evasion and promote transparency on an international scale. The Republic of Cyprus is a participating member of the CRS since 2014.
The Law on Administrative Cooperation in the Field of Taxation (Law 205(I) of 2012) Article 22C and the Law on the Assessment and Collection of Taxes (No. 4/1978) Article 27, as amended, empower the Tax Commissioner to request and obtain information from individuals or entities in order to verify compliance with tax reporting obligations.
The laws on the automatic exchange of financial accounts information creates reporting obligations for Cyprus Financial Institutions (CFI) that are held directly or indirectly by account holders that appear to be tax residents outside the Republic of Cyprus. Reporting obligations exist for all financial institutions registered in Cyprus including branches of foreign financial institutions. For the CRS purposes, there are four main categories of financial institutions:
- Custodial Institutions: Entities holding financial assets for others (e.g., brokerages).
- Depository Institutions: Banks or entities accepting deposits in the ordinary course of business.
- Investment Entities: Entities managing or administering financial assets on behalf of clients, including trusts and funds.
- Specified Insurance Companies: Entities issuing or obligated to make payments under cash value insurance contracts or annuities.
When an entity falls under one of the aforementioned categories, they are required to collect and report information relating to each account holder's tax residency CRS status and specified account information to the relevant tax authorities. For instance, in the case of a financial institution (e.g. an investment company) in Cyprus that holds and/or manages an account of an individual that appears to be a UK tax resident, it is required to report this under the CRS to the competent authorities in Cyprus, so that the information about this account and the account holder are communicated to the relevant tax authorities in the UK. It is important to note that for reporting purposes what matters is the tax residency status. Therefore, where the account holder is a tax resident of the same jurisdiction in which the account is held, there are no reporting obligations by the financial institution. But where the tax residency defers, then reporting obligations arise.
The recent announcement of the Tax Commissioner, issued on the 19 December 2024, clarifies that all Trusts are treated as entities for the purposes of automatic exchange of information under the CRS. Where one or more of the Trustees are residents in Cyprus for tax purposes, then the Trust is considered a Cyprus resident, unless the Trust classifies as a resident for tax purposes in another jurisdiction with which Cyprus automatically exchanges financial account information under the CRS, and the Trust will need to report the details of any reportable accounts to that jurisdiction.
Trusts are not inherently exempt from CRS obligations. Their reporting responsibilities depend on how they are classified under the CRS framework. Under the CRS, trusts are treated as "financial institutions" or "non-financial entities" depending on their specific activities and structure.
Financial Institution Trusts:
Where a Trust is considered a financial institution, in most cases it will be classified as an investment entity and its financial accounts would usually be the equity and debt interests in the trust itself. A Trust will also be considered as a financial institution where either one or more of the Trustees is a financial institution or the Trustees have appointed a discretionary fund manager who is a financial institution to manage the Trust's assets.
In cases where, the shares held in trust are in a custodial account maintained by the Trust, then the Trust will be subject to reporting obligations as the Custodial Institution that maintains the account.
Trusts that are classified as Financial Institutions must report information about account holders or controlling persons to the tax authorities of the relevant jurisdiction. They must identify the settlor, beneficiaries, trustees, and other persons exercising effective control over the trust.
Non-Reporting Financial Institution Trusts:
Finally, a Trust can be considered as a non-reporting financial institution – 'trustee documented trust', where the Trustee of a Trust is itself a reporting financial institution and reports all the information required in respect of the reportable accounts of the Trust. While the Trust is not responsible for the reporting, it is not exempt of it. The trustee will have the responsibility to report the information of the 'trustee documented trust' for its status as a non-reporting financial institution such as the 'controlling persons' of the trust, including associated settlors, beneficiaries, and trustees.
The Tax Commissioner requires that financial institutions managing Trusts, evaluate if the Trust meets the CRS definition of an Investment Entity and submit the required information by 31/01/2025 via the following link: TAX DEPARTMENT
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
