Reporting and due diligence for family offices

Over 100 jurisdictions have committed to implementing CRS and FATCA.   

FATCA primarily aims to identify US persons. It requires financial institutions worldwide to report accounts held by US persons to the US tax authority, the Internal Revenue Service (IRS). Failure to comply with or participate in FATCA can result in a 30% withholding tax on investments in US financial income. Depending on the FATCA model, financial Institutions are required to report directly to the IRS or via the local tax administration.

CRS, on the other hand, serves as a global standard for the automatic and multilateral exchange of financial information among tax authorities in participating jurisdictions. This means that financial institutions in participating jurisdictions are mandated to collect information through CRS due diligence procedures and share it with the tax authority of the relevant resident reportable person, i.e. an individual and/or entity residing in a participating jurisdiction. Therefore, CRS could be described as “FATCA for the rest of the world”.

Compliance with CRS and FATCA requires financial institutions and taxpayers alike to navigate complex regulatory landscapes and establish robust systems for collecting information and reporting. As jurisdictions continue to embrace these initiatives, taxpayers must remain vigilant in meeting their obligations to ensure seamless compliance with the requirements.

Switzerland has implemented FATCA and CRS, and therefore Swiss financial institutions have a registration and a reporting obligation. Non-compliance can incur penalties of up to CHF 250,000.

CRS and FATCA regulations outline which entities are responsible for reporting financial information. Under both regimes, financial institutions (FIs under CRS and FFIs under FATCA) are considered to have a compliance and reporting obligation. Entities classified as non-financial foreign entities (NFFEs) under FATCA or non-financial entities (NFEs) under CRS do not have a FATCA/CRS reporting obligation, but the entity or the beneficiaries/investors can be reported by a bank or investment manager.  

The definition of a ‘reporting financial institution’ is complex and depends on factors such as residency and detailed activities, as well as the risk of being used for tax evasion. FIs comprise entities that meet specific criteria:

1. Custodial institutions: entities that mainly hold financial assets on behalf of others, such as custodial banks, brokers and central securities depositories (excluding insurance brokers). 
2. Depository institutions: entities that accept deposits, make loans, discount cheques, provide trust or fiduciary services, or finance foreign exchange transactions. Examples include savings and commercial banks or credit unions. 
3. Investment entities: entities that (a) primarily trade, invest or manage financial assets for customers, such as securities and swaps (excluding non-debt direct interests in real estate or commodities) or (b) any entity that trades or invests in financial assets and is managed by a FI. 
4. Specified insurance companies: companies used for investment purposes rather than to insure against death or injury. These include companies that issue or make payments with respect to cash-value insurance contracts or annuity contracts, such as life insurance companies (excluding non-life insurance companies or insurance brokers). 

In particular, family offices or entities used as investment vehicles of different structures are likely to fall under the definition of an investment entity and therefore qualify as a financial institution under FATCA and CRS. 

There are also certain exclusions from the reporting obligation as a financial institution. For instance, CRS explicitly refers to collective investment entities that are regulated, do not have bearer shares and whose interests are not held by reportable persons, as being exempt. Furthermore, in the trust world there could be set-ups where the trust itself would not have to issue a FATCA/CRS report. 

The next important step is to understand who is responsible for reporting. Reporting extends to individuals or entities considered to be ‘reportable persons’, including:

• residents of reportable jurisdictions 
• estates of decedents who were residents of reportable jurisdictions 
• controlling persons of passive NFEs residing in reportable jurisdictions 

If the account holder is a passive NFE, which does not qualify as an active entity due to its income or asset profiles, information will still have to be reported about its controlling persons who are resident in a reportable jurisdiction. Active NFEs, characterised by less than 50% of their passive income and assets being capable of generating passive income, are exempt from requirements to identify controlling persons. Special cases of active NFEs include holding NFEs within non-financial groups or non-profit entities. 

For reporting purposes, it is also important to understand the concept of a ‘controlling person’. Controlling persons are individuals who exercise control over entities through ownership interests or other means, such as senior managing officials. In trusts or similar legal arrangements, controlling persons include settlors, trustees, protectors, beneficiaries and individuals exerting ultimate effective control. For family structures, it is very important to identify who the controlling persons are as they fall within the scope of reportable persons. 

Understanding the data collection and reporting process is also crucial for ensuring smooth and effective compliance. Generally, data collection and reporting under CRS and FATCA involves five phases:

1. Determination of reporting status 
2. Identification of reportable accounts 
3. Client identification 
4. Information gathering 
5. Submission to tax authorities 

As illustrated, understanding the roles and responsibilities of reporting institutions is essential for ensuring compliance with CRS and FATCA regulations and facilitating the global exchange of financial information between tax authorities. Family wealth structures should first understand who is responsible for reporting obligations and then ascertain what needs to be reported. 

Family office structures can take various forms, each with distinct features that impact their classification and reporting obligations under CRS and FATCA. A family office may be structured as a single family office (serving one family), a multi-family office (serving multiple, unrelated families, closed or open), or as an embedded family office, which functions as an internal department within a broader family business rather than as a standalone entity. 

The classification of these structures under CRS and FATCA determines the applicable reporting rules based on their activities and financial characteristics. In particular, reporting obligations may differ depending on whether a family office is categorised as: 

• an active non-financial entity (active NFE), 
• a passive non-financial entity (passive NFE) or 
• a reporting financial institution (reporting FI). 

If a family office is considered a reporting FI (e.g. if it manages investments or provides financial services similar to a bank or investment entity), it must comply with full due diligence and reporting requirements under CRS and FATCA. Conversely, a family office categorised as a passive NFE would not itself report, but could be required to do so at the level of financial institutions where it holds accounts, based on the residency and classification of its controlling persons (e.g. family members). 

Importantly, family offices that primarily hold or manage non-financial assets – such as direct interests in real estate, private operating businesses or art collections – and that do not maintain financial accounts with financial institutions, may fall outside the scope of CRS and FATCA reporting obligations altogether. Therefore, correctly identifying the nature of the family office and the type of assets it manages is crucial for compliance. Misclassification can lead to reporting failures and unintended exposure to tax authorities.

Understanding the classification of family office structures is not only essential for ensuring compliance with CRS and FATCA, but also for properly advising the beneficiaries and stakeholders involved. It is crucial to assess the reporting consequences at the outset when setting up or restructuring family offices in order to mitigate risks and optimise confidentiality and efficiency. 

The implementation of CRS and FATCA regulations has significant implications for family offices, affecting operational procedures, resource allocation and investment strategies.  

Navigating the intricacies of CRS and FATCA compliance is paramount, and it requires vigilance and expertise to avoid inaccuracies or duplicative reporting. Accurate reporting at the entity level by family offices or designated trustees is essential for ensuring compliance with international tax transparency standards and mitigating the risk of audit inquiries or penalties. 

The impact of CRS and FATCA on family offices highlights the importance of understanding reporting obligations, maintaining accurate records and implementing robust compliance measures to navigate the evolving regulatory landscape effectively. 

Here are some questions for family office structures to consider:  

• Are you aware of the reporting requirements specific to each jurisdiction where your family has financial interests? 
• Have you considered what information about family members and entities will be reported under CRS and FATCA, and to whom? 
• How well documented are the structures within your family office? 
• Have you established a method for completing, collecting and validating self-certification documentation?  
• Are you familiar with the classification of each entity within your family structure (e.g. financial institution, passive non-financial entity, active NFE)? 
• Do you understand the resulting obligations based on these classifications? 
• Have you considered the potential disclosure of account values and controlling persons’ information to various governments? 
• Are you aware of all registration and reporting requirements? 
• Have you developed a clear approach to managing global transparency, in view of these requirements? 
• What steps have you taken to align your family office practices? 
• Have you discussed your reporting strategy with relevant stakeholders, including family members and advisors? 
• How well informed are you about the impact of reporting on family office operations? 
• Have you identified any non-compliant persons or entities within your family office structure? 

Family offices should undertake the following actions to ensure compliance and mitigate risks: 

• Perform a FATCA/CRS analysis of your family office structures.  
• Identify all potential registration and reporting obligations. 
• Understand the options for structuring the family office in the right way to ensure proper and correct reporting. 
• Prepare for reporting requirements under CRS and FATCA. 
• Identify relevant disclosures and fulfil obligations promptly. 
• Use tools and technology to streamline compliance efforts. 
• Conduct routine compliance checks to ensure accuracy and consistency.