Friday, July 17, 2015

What is an “entity” in the Common Reporting Standard

CRS defines the term “Entity” to mean

“a legal person or a legal arrangement, such as a corporation, partnership, trust, or foundation.”

At first view, a corporation seems to be considered a legal arrangement and not  a legal person. The examples “corporation, partnership, trust” however relate to both legal person and legal arrangement. CRS doest not distinguish between legal person and legal arrangement because  different jurisdictions will classify partnerships and trusts differently, i.e. sometimes an entity, sometimes a legal arrangement.

On the question of what is an entity, the commentary on the CRS enlightens as follows:

“This term is intended to cover any person other than an individual (i.e. a Picture8natural person), in addition to any legal arrangement. Thus, e.g. a corporation, partnership, trust, fideicomiso, foundation ( fondation, Stiftung), company, co-operative, association, or asociación en participación, falls within the meaning of the term “Entity”.”

This explanation leaves the reader with the sorry task of trying to find out what legal arrangements will be entities. A legal arrangement is broader than a contract, since trust deeds are typically not considered to be contracts. A legal arrangement hence encompasses contracts and unilateral declarations.

We will approach this topic by looking to the fideocomiso, a construct of nowadays Latin American law, although, previously known by Roman and German law. Wikipedia explains:

A trust or fidecomiso1 (Latin fideicommissum fides, “faith” and commissus, “commission”) is a contract under which one or more persons transmits goods, money or rights, present or future, of his property to another person (a natural or legal person) so that it administers or invests the assets for their own benefit or for the benefit of a third party called beneficiary.

Certainly all escrows would fall under that definition of fiedicomiso. However, it is not clear to me whether a retention of title, a lien or pledge that necessitates possession of the creditor would be considered an Entity for purposes of the CRS. In all those legal institutes one party has possession of property owned by another party. The possessing party has to manage the property in ways that honor the ownership of another.  Since the ambition of the CRS is so grand –catch all those tax evaders—it seems reasonable to assume that even a retention of title is a fidecomiso and hence an Entity.

The practical implications are enormous. Anyone granting credit against collateral, be it retention of title of pledge, may be deemed an entity, with the result that they have to report their customers. (No good time to be a pawnbroker.)

It is once again vexing that the law and the CRS do not operate with clarity so that presumably innocent bystanders to tax evasion are caught in a whirlwind of red tape.

One question remains: Are power of attorneys considered entities for CRS purposes. It seems far-fetched since the definition of fideicomisio talks about the transfer of property whereas a power of attorney typically does not comprise such transfer. However, the fideicomisio includes future transfers.

Lawyers who do not want to take a position on the question whether a power of attorney is an entity might say the classification depends on the facts and circumstances. The facts and circumstances to consider will be how close the power of attorney is to a staple fideicomiso. The criteria I can imagine are how clearly fiduciary duties are spelled out or discernible from the context. The more fiduciary duties are spelled out, the more likely the contract or legal arrangement will be classified as an entity for CRS purposes.

Overly broad definitions of the CRS render much of the standard absurd. That a retention of title or a power of attorney are deemed Entities is a view clearly based on the language of the CRS. How courts are going to fix this mess remains a mystery.

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