When a beneficiary must step out of the shadows | In Principle

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When a beneficiary must step out of the shadows

Introduction of the OECD’s common standard for automatic exchange of financial information, as well as worldwide enforcement of FATCA by the United States, means that structures previously offering confidentiality will now be affected by the mandatory international system of exchange of tax information. This applies in particular to trusts and foundations.

Trusts and foundations in international practice

In the past, persons seeking confidentiality or greater privacy surrounding their capital holdings often decided to create trustee/beneficiary structures, specifically a trust or a private foundation. These constructions were based on the assumption that the formal owner of the assets, acting externally, is the trust or foundation, and the income generated under this structure will subsequently be distributed among the beneficiaries under the rules set forth in the founding instrument.

Regulations existing for years ensured the confidentiality of such structures. This meant that the only entity visible to the outside world—whether in dealings with investors, financial institutions, or tax authorities—was the trustee or the private foundation. Over the years, such structures—often registered in tax havens—could accumulate significant amounts of capital. The assets could not be attributed to the beneficiaries until such time as there was a distribution from the trust structure.

From the state’s point of view, this situation was highly disadvantageous, because it enabled the payment of tax to be postponed for many years. States did not have the ways and means to control and collect information about structures that were often located in exotic, far-off corners of the world. It was necessary to expand cooperation in the exchange of tax information between countries so that information flowed simply and automatically between the interested states. It also became necessary to introduce instruments requiring financial institutions to gather and forward information not only about entities formally registered as the holder of an account, deposit, policy or the like but also about the persons truly controlling the entity.

Breakthrough in exchange of information

Appropriate regulations were introduced for the first time in the US Foreign Account Tax Compliance Act of 2010, commonly known as FATCA, which imposed on remitters a 30% withholding tax if they did not collect and forward to the US tax authorities information about American entities directly or indirectly holding an account at the institution. The United States encouraged other countries to sign bilateral agreements under which the parties would exchange information obtained from their own domestic financial institutions. Poland entered into such an agreement with the US which went into effect on 1 July 2015.

But the milestone was joint development by the OECD and G20 countries in 2014 of a global standard for exchange of tax information, the Common Reporting Standard (CRS). Fifty-five countries have undertaken to exchange tax information from the beginning of 2017 for the first time based on CRS as implemented in their national legislation. Another 46 jurisdictions—including Switzerland—will join the automatic exchange programme at the beginning of 2018. CRS was also adopted as part of EU law pursuant to Council Directive 2014/107/EU of 9 December 2014, requiring member states to implement relevant regulations in this area by 31 December 2015. Poland did not meet that deadline, but on 24 May 2016 the Ministry of Finance published its proposed Act on Exchange of Tax Information with Other Countries, which is expected to enter into force in the second half of 2016.

What does it mean for trusts and foundations?

Under the new reality, there are two situations to consider which a trust institution may find itself in. First, the trust or foundation itself may be deemed to be a reporting financial institution (RFI) which must collect and forward to the tax authorities information about the beneficiaries of the funds gathered at the institution. Second, a trust may the holder of an account at an RFI. Then it will be necessary to determinate the scope of information about the participants in the structure which may be required to be provided to the reporting institution.

The trustee administering the trust structure should consider whether the trust qualifies as an RFI. CRS and FATCA provide complex rules for making this determination. Generally speaking, it may be assumed that the trustee will have a reporting obligation if the trustee has its headquarters or management in a state participating in information exchange and:

  • It holds financial assets for the account of others
  • In its economic activity it trades in money market instruments or manages a portfolio of assets for and on behalf of others, or
  • In its economic activity it invests, administers or manages financial assets or funds for others.

If the trust qualifies as an RFI, it will have to collect information concerning the details of accounts subject to reporting (account number, name and identification number of the RFI), the personal details of the account holder, the account balance as of the end of the calendar year (or other reporting period applied) and a detailed list of gross interest, dividends, proceeds from trading or redemption of financial assets, and other income obtained in connection with the trustee’s exercise of this function.

The trustee is also required to report the persons controlling the trust or foundation and provide their personal details. Controlling persons include the settlor or founder, backer, trustee and beneficiaries. All of these persons must be disclosed, with an indication of the total value of the assets of the trust/foundation and amounts of payments to such persons during the given reporting period. Significantly, any controlling person who is a legal person is required to exercise due diligence in determining the details of the persons controlling the entity. The draft of the Polish act provides for fiscal penal responsibility for persons who fail to collect and forward information or provide inaccurate or incomplete information.

It should be stressed that the rules indicated above apply to all reporting financial institutions with respect to the reported accounts. Thus even if the trustee or foundation is not classified as an RFI, the reporting obligation will lie e.g. with the bank where the bank account is opened, the brokerage managing the trust’s portfolio, or the insurer issuing an investment policy. These entities will also be required to determine the controlling persons if their due diligence shows that the account holder is not acting on his own account. In that situation, the reporting institution will probably demand such information from the trustee or foundation, under the threat of refusing to open a new account or closing an existing account.

When is the beneficiary not a controlling person?

There is a certain legal category of beneficiaries who are not subject to reporting.

In most jurisdictions, the settlor or founder of a trust or foundation may indicate the character of the entitlements vested in the beneficiaries—in particular, who will be a beneficiary of the trust structure and at what time and to what extent the beneficiary will be able to participate in the assets and profits of the trust/foundation. Such beneficiaries are known as express (or direct) beneficiaries because their rights and entitlements in the trust can be determined.

But it is also permissible to establish discretionary beneficiaries, who instead of an enforceable claim for payment of a specific share at a specific time have only the right to be considered by the trustee when taking decisions on distributions from the assets of the trustee/foundation. Thus whether and to what extent the trustee transfers assets from the trust to such beneficiaries is up to the trustee. Beneficiaries of this type are treated as reported persons only during the reporting period in which they actually receive payment from the trust/foundation. It thus may happen in the case of a discretionary trust that none of the beneficiaries are reported by the financial institution.


Introduction of automatic exchange of tax information on such a broad scale clearly represents a milestone in combating aggressive tax practices. But it also poses a challenge, particularly for those actively participating in the exchange of information—i.e. reporting financial institutions. For beneficiaries of trust relationships, it is the last moment to conduct tax due diligence and plan the next steps so that the first automatic exchange of tax information does not come as a surprise.

Tomasz Krzywański, Private Client Practice, Wardyński & Partners