CRS audits of trustees CRS audits of trustees

For some time now, the Swiss Federal Tax Administration has been reviewing whether Swiss banks fully comply with the CRS obligations. Now the Swiss Federal Tax Administrationis also carrying out such CRS audits on trustees. Accordingly, trustees must ensure that they comply with all CRS regulations.

Article 28 of the AEoI Act provides for the Swiss Federal Tax Administration to audit Swiss financial institutions with regard to compliance with their CRS (Common Reporting Standard) obligations. In doing so, the Swiss Federal Tax Administration may inspect the books, records and other documents of the financial institution on-site or demand that they be handed over, and obtain written and oral information.

Not only trustee companies domiciled in Switzerland qualify as Swiss financial institutions for CRS purposes, but in particular also trusts with a Swiss trustee, provided the trust qualifies as an investment entity on the basis of fulfilling the gross income test and managed by test:

• The gross income test is met if at least 50% of the trust's income over the last three years has been derived from the investment of financial assets.
• The managed by test is met if a financial institution manages the assets of the trust on a discretionary basis. This requirement is usually met in particular if a corporate trustee has been appointed or a discretionary asset management mandate has been concluded with a bank or asset manager.

The CRS audits take place at the trustee company that must comply with the CRS obligations on behalf of the trusts that qualify as investment entities. 

The Swiss Federal Tax Administration can check the correct CRS implementation at the trustee's premises. This includes all aspects of the CRS, from the classification of all entities to the identification of the persons required to report to the correct reporting. For this purpose, the Swiss Federal Tax Administration may request the following documents/access in particular:

• List of all entities administered by the trustee with their CRS classification and a corresponding justification
• Process description concerning the trustee's CRS implementation
• Training documentation
• Access to the systems in which the information on the legal entities is located

In our experience, there are risks that the CRS requirements have not been fully complied with, particularly in the following areas:

• Classification of entities: each entity must be classified for CRS purposes (and thus also, for example, those that do not hold a bank account). In addition, it must be ensured that the classification is reviewed in the event of a change in circumstances and adjusted if necessary. For example, a trust may be classified as a passive NFE for lack of income in the first few years after its establishment. However, as soon as the trust receives the first dividends from the underlying company, it may qualify as an investment entity and as a result must be registered as a financial institution with the Swiss Federal Tax Administration by the end of the corresponding year. 
• Obtaining self-certification: the CRS stipulates that a self-certification must be obtained from all holders of a new account. With regard to trusts, this means that a self-certification must be obtained from all persons who have become equity or debt interest holders since 1 January 2017 (i.e. settlor, protector, beneficiary and persons who granted a loan). This, therefore, not only affects trusts established as of this date, but self-certifications must also be obtained, for example, from discretionary beneficiaries who have not received a distribution up to this date. 
• Correct CRS reporting: the trustee must ensure that all reportable persons, i.e. equity or debt interest holders (i.e. all lenders) are reported. In addition, it must be ensured that these persons are reported with the correct tax residence. Accordingly, processes must also be in place to identify changes in circumstances (e.g. change of residence). Further, not only cash distributions but also the granting of benefits (e.g. loans granted at non-arm's length conditions) may be subject to the reporting obligation.  

According to Article 32 AEoI Act, anyone who wilfully violates the due diligence, registration, information or reporting obligations can be fined up to CHF 250,000. A violation of CRS obligations can therefore entail hefty fines.

However, the AEoI Act also provides that no fine is levied in the event of a voluntary disclosure. However, a self-disclosure is only possible as long as it is made on one's own initiative. Thus, if any deficiencies are discovered by the Swiss Federal Tax Administration in the course of an audit, no penalty-free voluntary self-disclosure can be filed.

In view of the possible audit of trustees' CRS implementation by the Swiss Federal Tax Administration and the possible sanctions if deficiencies are discovered, all trustees should critically review their own CRS implementation. This enables trustees not only to correct any possible errors but also, if necessary, to file a penalty-free voluntary self-disclosure to avoid a fine.

More details on AEoI:

• AEoI / CRS - Continuing challenges for Swiss trustees (PDF)
• Tax Transparency (PDF)