The case
I have been asked on a number of occasions whether a Liechtenstein Foundation with a board member resident in Switzerland has to be treated as resident in Switzerland for CRS purposes.
The MCAA itself does not define the term “residence” for a “Financial Institution” (FI), but the term is defined in section VIII, margin 4 and 5 of the CRS Commentary. Depending on how the term “residence” is defined, an FI falls within the scope of the AEOI or it does not. The definition contained in the commentary to the CRS has, therefore, been included in the AIAG. The CRS distinguishes three cases (CRS page 159): Where an FI does not have a residence for tax purposes, e.g. it is treated as fiscally transparent, or it is located in a jurisdiction that does not have an income tax, it is considered to be resident in the respective jurisdiction, if
i. It is incorporated under the laws of the Participating Jurisdiction, or
ii. It has its place of management (including effective management) in the Participating Jurisdiction, or
iii. It is subject to financial supervisory in the Participating Jurisdiction
In this context, the term “Participating Jurisdiction” refers to jurisdiction that has implemented the CRS.
Switzerland has incorporated these principles in Article 5 AIAG “Financial Institution resident in Switzerland” mutadis mutandi: According to Art. 5 Abs. 2 AIAG, FI that do not have tax residence in any jurisdiction or territory are treated as resident in Switzerland if they
a) Were incorporated under the laws of Switzerland; or
b) Have their place of management, including effective management, in Switzerland; or
c) They are subject to financial supervision in Switzerland.
If paragraphs a) and b) of Article 5 Abs 2 AIAG lead to an FI being established in several states or territories, it is considered to be a Swiss FI in relation to the financial accounts held in Switzerland (Art. 5 Abs. 3 AIAG). If, on the other hand, Art. 5 Abs 4 AIAG, referring to Trustees, leads to multiple residency, multiple registrations result. According to Art. 5 Abs 4 AIAG an FI in form of a trust is treated as resident in Switzerland if at least one of its trustees is resident in Switzerland. In this case each trustee has to carry out the verification, identification and reporting according to the law of his resident state.
In the case of a strictly legal assessment in accordance with the wording of Article 5 AIAG, foundations are not covered by this article and the residence of the Foundation Council in Switzerland does not result in obligations under the AIAG, unless they are not taxed in the participating jurisdiction. This applies, for example, to foundations registered in Panama. Liechtenstein Foundations are usually taxed* in Liechtenstein and Art. 5 Abs 2 AIAG may not be applicable.
*Note: FIs are treated as “resident” in Switzerland as defined by Art. 5 Abs 1 AIAG if they are subject to unlimited taxation (Art. 18 AIA Ordinance).
Source: industry
The commentary
There are many analogies between trust and foundations in CRS and CRS Commentary. For example, for Capital Participation Part VIII, (C) (4), Item 69, page 178: Foundations’ equity interests are equated with those of the trust, i.e. founders, foundations, beneficiaries, etc. This analogy becomes consistent when enforced by the system in the MCAA, CRS and the CRS Commentary. The fact that an exception is made about the question of “residency” is a surprise. However, Art. 5 Abs 2 AIAG only includes cases where no taxes are paid. This means that Art. 5 Abs 2 AIAG may only apply to Liechtenstein foundations that do not pay taxes. In these cases there is little room for arguing that the question of residency should not be assessed in the same way as a trust.