The Effects of ‘Common Reporting System’ in the light of Maltese Trusts and Fiduciaries

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http://maltawinds.com/2017/09/06/effects-common-reporting-system-light-maltese-trusts-fiduciaries/

Introduction

It is a well-known fact that the world has become more globalised. This globalisation would then place people, companies, investors and other similar professionals, in a position where transnational communication and business is facilitated. Globalisation has created a world where money is transferred transnationally in a matter of seconds, sometimes, such being done in an unaccounted manner.

The Organisation for Economic Co-operation and Development[1], is a European Union organisation which is there “to promote policies that will improve the economic and social well-being of people around the world.[2] The OECD has been a for-runner in promoting mutual assistance, especially in tax matters. February 2014, saw the release of a document by the OECD on the Automatic Exchange of Information and hence a Common Reporting Standard. This document was subsequently endorsed by the EU commission and this eventually led to the current Directive 2014/107/EU amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation.

The Common Reporting System

The Common Reporting System was introduced for two main purposes; primarily, to combat cross-border tax fraud, and secondly, to increase protection on the proper functioning of tax systems. The idea behind this ‘Common Reporting System’ (CRS), is to have the tax authorities of each Member State, to communicate to the competent authority of any other member state, information relating to taxable periods as from 1st January 2014. This ‘Common Reporting System provides an extensive and exhaustive list of information which is to be gathered by the relevant competent authority, and such rules have to be enforced by the 1st January 2017.

[1] hereinafter referred to as ‘OECD’

[2] http://www.oecd.org/about/ accessed: 18/08/2017

The problem does not lie however in the duty to report, but rather on who has the duty to report via the CRS.

Reporting Malta Financial Institution (RMFI) vs Non-Reporting Malta Financial Institution (NRMFI)

Subsidiary Legislation 123.127, on ‘Cooperation with other Jurisdictions on Tax Matters Regulation’, in Annex I Section VIII ‘Defined Terms’, defines a RMFI as “any Malta Financial Institution that is not a Non-Reporting Malta Financial Institution.[1] The legislator then moves one step further and defines the term, ‘Malta Financial Institution’ as any Maltese Financial Institution which is resident in Malta, or any branch which is located in Malta of a Malta Financial Institution which is not resident in Malta.

Directive 107/2014/EU, Point 9, places the burden on each member state by binding them to have solely one list of domestically defined NRFIs and Excluded Accounts that such member state would use to implement this directive. Under Maltese Law, it is Subsidiary Legislation 123.127, Annex I, which gives the definition and the extensive list of what a Non-Reporting Malta Financial Institution is. An interesting point to note is that, a trust is considered to be a NRMFI if, and in so far as the trustee is a RMFI and reports all information required to be reported.

To further understand which entities or institutions have a duty to report under Maltese law, one has to ask the question, ‘What is a Financial Institution’? Under Maltese law, this is divided into: a Custodial Institution, a Depositary Institution, an Investment Entity, or a Specified Insurance Company.

Trusts and Fiduciaries: Should they fall within this Common Reporting System?

Trusts and Fiduciaries, if considered to be a financial institution, is definitely not an ordinary financial institution. Trusts and fiduciaries have a special and significant set-up, that it is rather inadequate to classify such as a financial institution. A Trust is neither an entity, a mandate, nor a deposit, but a Legal Relationship. Trusts and Fiduciaries are based on the Roman Law notion of ‘Fiducia’. The contract of fiducia or pactum fiduciae was the transferring

[1] Subsidiary Legislation 123.127, ‘Cooperation with other Jurisdictions on Tax Matters Regulation’, Annex I, Section VIII, ‘Defined Terms’, Pg.48

of property to another person, on condition that it would then be restored to him. This transferring of property used to be done upon having trust in a particular person, therefore the basis of fiducia is trust.

Therefore, one may clearly see and understand that a trust or a fiduciary should in no way be compared to a money making financial institution. Despite the fact that companies may be involved within this relationship, it remains a legal relationship and in no way does it transform to a commercial entity.

The trust relationship is defined in article 3 of the Trust and Trustees Act[1]. Article 3 states that, “A trust exists where a person (called a trustee) holds, as owner or has vested in him property under an obligation to deal with that property for the benefit of persons (called the beneficiaries), whether or not yet ascertained or in existence, which is not for the benefit only of the trustee, or for a charitable purpose,or for both such benefit and purpose aforesaid.[2] A trust relationship is a triparthide relationship between the Settlor, who settles the property on trust to the Trustee for the ultimate benefit of the Beneficiaries.

Whilst all trusts are considered to be fiduciaries, not all fiduciaries are trusts. In a trust there is the actual transfer of ownership from settlor to trustee, however, in a fiduciary relationship, there need not be a transfer of property. In a fiduciary relationship, the fiduciary is given the fiducia to administer the property of another, and it is the fiduciaries name which will be shown on the outside and not the actual owner’s name. Fiducaries are originally used for a number of various purposes and with a good intent, however one must not eclude the fact that all fiduciary relationships might be set-up for tax evasion purposes or with malicious intents.

A trust or fiduciary is not a depositary institution, there are no elements of the contract of deposit, likewise it is neither an investment entity, nor a specified insurance company. Therefore, the only reason for it to be classified as a Financial Institution under the Maltese law, for all intents and purposes, is to ask the question, is it a Custodial Institution?

[1] Chapter 331 of the Laws of Malta, Trusts and Trustees Act

[2] Chapter 331 of the Laws of Malta, Trusts and Trustees Act, A.3

Custodial Institutions: do Trust and Fiduciaries fall within this criteria?

“The term “Custodial Institution” means any entity that holds, as a substantial portion of its revenue from a business, Financial Assets for the account of others.”[1] Therefore, primarily the custodial institution has to be an entity, and such entity is to manage financial assets for the benefit of others and such has to be quite a substantial portion of the custodial instutions business.

L.N. 289 of 2015 of the Accountancy Professions Act[2], entitled, ‘Accountancy Profession (General Accounting Principles for Small and Medium-Sized Entities) Regulations, 2015’, defines an ‘entity’ or ‘reporting entity’ as “a commercial partnership as defined  in  the  Companies  Act  and  any  other  body,  corporate  or unincorporate,  which  carries  on  a  trade  or  business  and  which  is required to prepare financial statements in terms of the laws of Malta.[3]

A trust or fiduciary relationship does not classify as a commercial partnership under the Companies Act, and likewise does not carry on a trade or business as referred to within the Companies Act. Although the holding of property of another person by trustee is considered to be the trustees trade, it still does not classify as a trade or business referred to under the Companies Act. Therefore one may at the outset already question whether trusts and fiduciaries are entities, since they do not fit in perfectly within the definition of entity provided.

Now to be considered as a custodial institution, the entity must hold financial assets for the account of others as a substantial portion of its business. For an entity to hold financial assets for the account of others as a substantial portion of its business, the entity’s gross income attributable to the holding of Financial Assets and related financial services equals or exceeds 20% of the entity’s gross income during the shorter of iether the three-year period that ends on 31 December (or the final day of a non-calendar year accounting period) prior to the year in which the determination is being made; or the period during which the entity has been in existence.

[1] Subsidiary Legislation 123.127, on ‘Cooperation with other Jurisdictions on Tax Matters Regulation’, in Annex I Section VIII ‘Defined Terms

[2] Chapter 281 of the Laws of Malta, Accountancy Professions Act

[3] L.N. 289 of 2015 of the Accountancy Professions Act[3], entitled, ‘Accountancy Profession (General Accounting Principles for Small and Medium-Sized Entities) Regulations, 2015’, A.3

Primarily, we can see that a custodial institution may only hold financial assets on account of others, and no other assets. A trustee may hold as trust not only financial assets, but various other assets which are capable of being held under trust.

Secondly, the holding of such financial assets is to be 20% or more of the business of the holder. Therefore, a distinction would have to be made between those trustees who carry out trusteeships as their principal line of business, and trustees which act as such for a family member or friend. In the latter scenario, such trusteeship would most definitely not amount to 20% or more of the business of the holder.

Introducing the ‘Duty to Report’ rather than ‘Sharing of Information’ in the case of Trusts and Fiduciaries

As seen through the above arguments, the Common Reporting System should not apply to trusts and fiduciary relationships. The sole purpose of a trustee and fiducarian is not that of a custodial relationship, here we are not speaking about guardianship, tutorship or curatorship. A trustee and fiducarian has the duty, through alternative laws to refuse to disclose certain information to third parties, this is the sole reason why people place things or financial assets under trusts or fiduciary relationships, because they know that third parties would not know about them.

This however does not give the trustee or fiducarian a ‘free ticket’ to set-up sham trusts or malicious fiduciary relationships. The trustee or fiducarian has the primary duty to conduct a customer due diligence according to local laws, and if such due diligence turns out to be on the negative side, they have a duty to refuse and report to the relevant authorities. Therefore, it should be this duty to report any companies, entities or people who intend on using these legal relationships in an illicit manner which should be reported and kept in an international register for facilitating this Common Reporting System. Hence, there should be the promotion of the duty to report rather than the duty to share information when it comes to trusts and fiducaries, and this simply because of the special legal persona that the trusts and fiducaries have.

In Conclusion

European and International institutions should constantly strive to ensure that tax evasion, money laundering and any other illicit practices are kept through a minimum, though mutual assistance between the various international states. This should not however, strip in any way certain characteristics off from a particular legal set-up. The common reporting system is a good system which works and should be promoted for the benefit of companies, however the same should not be said for trusts and fiduciaries.

Trusts and Fiduciaries, through other laws, both locally and internationally, have a duty to draw up accounts and financial statements on a regular basis, apart from the preliminary customer due diligence before the trust or fiduciary is set up. This does not and will not exclude these legal relationships to be used in an illicit way, but rather than imposing upon these relationships the duty to share information, impose that regular screening of the trustee or fiducarian is done on a regular basis through accounts and audits, and that if such are not done, hefty fines and other ulterior punishments be imposed.

Such then, would safeguard the special nature of trusts and fiducaries and protect the whole purpose for which they where created.