With regard to wealth management structures, the CRS obligations differ significantly depending on the classification as a passive NFE or Investment Entity. Liechtenstein entities that have opted for the status as Investment Entity must review their status.
Investment Entity or passive NFE
While trusts, foundations, and companies that qualify as Investment Entities must themselves comply with the CRS (Common Reporting Standard) obligations, the account-holding banks are responsible for the CRS reporting if they qualify as passive NFE.
An entity qualifies as an Investment Entity if it cumulatively meets the so-called gross income test and managed by test.
- The gross income test is met if at least 50% of the entity's income during the last three years is derived from the investment in financial assets.
- The managed by test is met if a financial institution manages the assets of the entity on a discretionary basis. In particular, this requirement is usually met if a discretionary asset management mandate has been concluded with a bank or asset manager or a corporate trustee/director has been appointed.
If these requirements are not met, the entity is deemed to be a passive NFE unless it meets the conditions for qualification as an active NFE (e.g. as an operating company or as a holding company).
Abolishment of the opt-in
Since the CRS entered into force in Liechtenstein, legal entities that qualify as passive NFE according to the above rules had the option of voluntarily classifying themselves as Investment Entity with the opt-in. Since such an opt-in is not provided for in the CRS itself, Liechtenstein had to abolish the opt-in as of 1 January 2021.
As a result, passive NFE in Liechtenstein, as in all other countries, can no longer voluntarily classify themselves as Investment Entity.
Accordingly, all entities that have made use of this opt-in must review their CRS status by 31 December 2021 and adjust if necessary. In the event of an adjustment of the status, this status must also be communicated to the account-holding banks. However, it is also possible that such an entity now fulfils the requirements for the classification as an Investment Entity and can therefore retain its status despite the opt-in's abolition.
If an entity still does not meet the aforementioned requirements for the qualification as an Investment Entity, the entity can retain this status only if it meets these requirements in the future, e.g. by concluding a discretionary asset management mandate with a bank, if the managed by test is not yet met.
Reporting obligations of Investment Entities and account-holding banks respectively
The reporting obligations differ significantly depending on whether the trust, foundation or company qualifies as Investment Entity and reports by itself or whether the account-holding banks have the reporting obligation, as the entity qualifies as passive NFE. The following differences should be noted in particular:
- Banks must always report a settlor with the entire value of the account. In contrast, Liechtenstein Investment Entities may report a non-controlling settlor with a value of zero.
- Discretionary beneficiaries of trusts and foundations must be reported by the Investment Entity only with the amount of the distributions. In contrast, banks must also report the total value of the account and income as well as proceeds from disposals for such beneficiaries who receive a distribution.
- In contrast, only Investment Entities must report those persons who have only granted a loan to the entity (debt interest holders).
Entities must therefore grapple with the reporting obligations in detail irrespective if they are an Investment Entity or passive NFE.
Need for action
According to the above, significantly different CRS reporting obligations may arise if trusts or foundations qualify as passive NFE's in the future due to the abolishment of the opt-in. Accordingly, it is crucial that all persons involved in wealth management structures deal in detail with the CRS reporting obligations. This also applies to Investment Entities that already meet the gross income test and managed by test and can therefore retain their status. They must critically examine which persons with which values must be reported in each case. In particular, indirect distributions, e.g. a loan granted at preferential conditions or the free use of real estate of the trust or foundation, must also be taken into account.
More details on AEoI: Tax Transparency (PDF)