Cyprus is showing its commitment to global tax transparency with the implementation of the Common Reporting Standard (CRS). The CRS, developed by the Organisation for Economic Co-operation and Development (OECD), facilitates the automatic exchange of financial account information in tax matters between participating jurisdictions, aiming to combat tax evasion and enhance global tax compliance. Cyprus is a participating jurisdiction under the CRS for many years now, in fact its first annual automatic exchange of financial accounting information under the CRS took place in September 2017 regarding the 2016 tax year.
The “Guidance notes on the automatic exchange of financial account information” issued by the Cyprus Tax Department (“TD”) stipulate the relevant requirements regarding trusts categorized as either financial institutions or passive non-financial entities so that compliance with the CRS reporting obligations can be achieved. Below is an overview of the key developments, including recent clarifications from TD.
CRS overview and Cyprus participation
The CRS was adopted in Cyprus under the Law on Administrative Cooperation in the Field of Taxation (Law 205(I) of 2012), which mandates the automatic exchange of financial information between participating jurisdictions. In accordance with the CRS, Cyprus requires all reportable financial institutions within its jurisdiction to identify and report financial account holders' information to the TD on annual basis, where such account holders are reportable jurisdiction persons.
The TD is responsible for ensuring that this information is accurately reported and exchanged with other participating jurisdictions under the CRS.
Classification of trusts under the CRS
Under the CRS, trusts are considered as Entities and are categorized as either Financial Institutions (FIs) or Non-Financial Entities (NFEs), depending on their activities and structure.
A trust as a Financial Institution:
Most often a trust will be a FI if it has gross income primarily (more than 50%) attributable to investing, reinvesting, or trading in Financial Assets and is managed by another Entity that is a FI. The words “managed by” imply that the FI has some discretionary authority to manage the assets of the trust, either in whole or in part.
In practice the words “primarily attributable to investing ….” imply that gross income attributable to the said activities of the trust should amount to 50% or more of the trust’s gross income during the shorter of:
- The three-year period ending on 31 December of the year preceding the year in which the determination is made; or
- The period during which the trust has been in existence.
A trust as a Non-Financial Entity
If a trust does not meet the criteria to be an FI, it is considered a Non-Financial Entity (NFE). These trusts are further categorized into Active and Passive NFEs. Passive NFEs have additional reporting requirements, especially regarding the identification of their controlling persons as these are defined under CRS guidelines. The account of a trust which is a passive NFE and which has a financial account with a reporting FI will be reportable either if (i) the trust is a reportable person; or (ii) the trust has one or more controlling persons that are reportable persons.
Recent clarifications and key updates from the TD
On January 31, 2025, TD issued a detailed announcement (Announcement 19112/2024) addressing several key aspects of the CRS's application to trusts and requiring all Cyprus-resident trusts to complete relevant CRS questionnaire and submit it to the TD irrespective of whether there is an obligation to report, which will then exchange the information with other participating jurisdictions.
The TD has extended the deadline for submitting the questionnaire until March 31, 2025, to provide trusts more time to comply.
Implications for trustees and beneficiaries
Trustees of Cyprus-resident trusts need to ensure compliance with the CRS by:
· Determining whether the trust qualifies as a FI or a Non-Financial Entity.
· Gathering and maintaining accurate records regarding the tax residency of the trust’s account holders and beneficiaries.
· Submitting the required reports to the TD by the extended deadline.
Non-compliance with CRS obligations leads to significant penalties and heightened scrutiny from tax authorities, starting from as far back as the tax year 2016 (the first year of reporting). Trustees should stay informed and seek professional guidance to ensure they meet their international tax reporting obligations.
Conclusion
The latest developments in CRS implementation highlight Cyprus's commitment to international tax transparency. Cyprus not only contributes to enhanced tax transparency but also demonstrates its alignment with global standards, reinforcing its efforts to ensure consistency across jurisdictions and a coordinated approach to tax compliance. Trusts that are deemed to ‘operate’ in or through Cyprus must comply with the new regulations to ensure smooth operations under the global tax framework. Proper understanding and adherence to CRS requirements are crucial for trustees and beneficiaries to navigate the increasingly complex landscape of international tax reporting.