Note: when we use the term “private equity” we use this as a synonym for private market funds of all types. It appears this term is still more familiar to the general audience, and it is easier to abbreviate (“PE”) when writing blogs and articles.
Contrary to this, “FATCA & CRS” is more difficult to write than AEOI (the “Automatic Exchange of Information”) but again, the latter is the lesser known way to refer to this regime.
PE funds invest in a variety of asset classes at the bottom of their tier of entities, but above this lowest tier most PE funds have substantially similar considerations in classifying their legal entities for AEOI, regardless of asset class.
As this is the foundational step in compliance, it needs to be done correctly. Please be aware that these high level insights are only a guide, and as there may be exceptions based on your facts, we advise you to consult with your tax adviser.
1. Fund managers will be financial institutions (“FIs”) but they may not need a GIIN or have to report
- FATCA: They are generally considered deemed compliant FIs as they solely manage investments on behalf of investors
- CRS: They will be reporting FIs but will not have “Financial Accounts”, so will not have to report investors but may need to file a nil return
- FATCA & CRS: If these entities participate in fund investments they will likely have “Financial Accounts” and be required to comply in full
2. General partners are often the trickiest to classify: they could be reporting FIs; deemed compliant FIs; or passive non-financial entities (“NFEs”); and though less likely, active non-financial entities
- Same as above, if they are earning a fee solely for advising on investment activities they are likely to be FIs with no reporting obligations, but if they are being used as investment vehicles they will need to comply in full
- If they are there for legal purposes only and/or do not engage in any activities, even if they earn a fee, they are likely to be considered passive NFEs
- In the unlikely circumstance they have people who perform non-investment activities (admin, etc), or act as a holding company for active businesses, they could be considered active NFEs
3. Holding companies can also be challenging to classify, though in practice we still occasionally see advisors classifying them all as FIs, which is not correct. These are most often classified as passive NFEs or financial institutions, but can also be active NFEs in traditional PE
- There are some straightforward situations that make the classification simple:
- If the entity primarily holds non-debt direct interests in real property it is likely a passive NFE
- If the entity primarily hold shares in another holding company and has external investors it is likely a reporting financial institution
- In traditional PE, if the holding company is holding shares in an underlying active operating company it may be classified as an active NFE
- If the entity primarily holds an interest in an underlying holding company and has one owner, its parent, it is likely a passive NFE
- When the holding company primarily holds financial (non-real estate) assets and has third party and/or more than one interest holder (related entities, investors, JV partners, lenders, etc) the entity often qualifies as a reporting financial institution. However, variations to this fact pattern (ie. the number or type of interest holders) makes classification more taxing 🙂 In this case the classification may not be clear and may vary by jurisdiction and/or driven by other considerations such as the interpreted intent of the regulations, business purpose, or simply the risk appetite of the fund
For questions relating to the above, or to discuss how Optax can help support your business with quality tax advisory services, please get in touch.
