While free from the most burdensome consequences of the incoming EU DAC6 intermediary disclosure rules, Swiss and Liechtenstein fiduciaries are not entirely untouched by them. As elaborated in the article I co-authored in Trusts & Trustees on the effects of the OECD Model Disclosure Rules (MDRs) and EU DAC6 on fiduciaries (available here), the broad scope and intrusiveness of the incoming reporting regimes will fundamentally alter the profession for many fiduciaries. Fortunately, for Swiss or Liechtenstein fiduciaries, the full impact is delayed – perhaps indefinitely, though likelier for no more than a few years. Nonetheless, even non-EU fiduciaries must assess the consequences to their current activities under the EU DAC6 protocol.
This blog analyzes the following DAC6 consequences for Swiss- or Liechtenstein-based fiduciaries, notably trustees and Treuhänder:
DAC6 mandates that for certain transactions or scenarios relating generally to OECD CRS or BEPS action item 12, qualifying EU intermediaries must:
While different sets of characteristics determine which transactions or scenarios related to perceived CRS abuses are reportable, core commonalities across the relevant characteristics are an objective standard (“reasonable to conclude”) and the absence of an intent element (“has the effect of”). By draining the standard of subjectivity and motive, the EU DAC6 revokes the Intermediaries’ discretion to distinguish between abusive and non-abusive activities. Furthermore, the scope of qualifying EU intermediaries – capturing anyone “who provides aid, assistance or advice” in connection with the reportable transaction – is vast. As a result, a few relief provisions notwithstanding, trustees and similar fiduciaries must consider the DAC6 reporting implications for almost all cross-border transactions where they play a role…. But only so long as the fiduciary has sufficient jurisdictional nexus with the EU.
In order to be subject to the full extent of the DAC6 disclosure rules, the potential Intermediary must be:
Few Swiss and Liechtenstein trustees will squarely satisfy any of the top three criteria due to their location in jurisdictions that have not yet enacted these laws. There is, however, a risk of implication through membership in a professional association in an EU jurisdiction. This jurisdictional hook is not yet defined though. It does not appear in the OECD MDRs and thus is not further developed in the commentary section of that document. Furthermore, the scope of associations “related to legal, taxation, or consultancy services” could be strictly limited to professional organizations for those specific industries or more broadly refer to any businesses with these services as conspicuous components. For certain Swiss or Liechtenstein trustees, the extent may be determinative. Under a broad interpretation, membership in an EU-based fiduciary association, like STEP UK, might compel them to test all their actions for reportability under DAC6, even in the absence of any other EU nexus.
Otherwise, most Swiss or Liechtenstein trustees will never fall under the DAC6 reporting requirements without a point of contact generated by their EU operations. For Swiss or Liechtenstein trustees and Treuhänder, typically, that point of contact will be a lower-tier company or partnership out of a jurisdiction like Luxembourg. However, the contact point could range from Cypriot, Maltese or Scottish trusts to Dutch Anstalts to Italian Fiduciaria to Maltese or Scottish partnerships to any other component of a private wealth management structure set up in an EU jurisdiction. If the Swiss or Liechtenstein trustee oversees such EU operations, it must scrutinize any cross-border transactions involving these EU operations for the DAC6 reporting implications. Such direct application of DAC6 is the most burdensome scenario Swiss or Liechtenstein trustees might face, but not the only one.
Even Swiss and Liechtenstein trustees with purely local or non-EU operations cannot completely escape the pull of the DAC6 disclosure rules because of the residual reporting responsibility for taxpayers. As explained above, DAC6 imposes its reporting obligations primarily on Intermediaries, rather than their clients. However, the clients – if EU resident themselves – may incur a residual reporting duty. This duty attaches to the EU client if the transaction is reportable, but there is no Intermediary obligated to report it. One clear example of such a scenario is where legal professional privilege prohibits the Intermediary from disclosing client information and thus relieves the Intermediary of a DAC6 reporting responsibility. There are others though, namely, where the Intermediaries are located in non-EU jurisdiction and lack any point of contact with the DAC6 regime. In such situations, any EU client(s) connected to the reportable transaction are themselves on the hook for reporting it.
An illustrative example may be useful.
As the above scenario will be common enough for many Swiss or Liechtenstein trustees to encounter, they must think through the implications. The first question must be whether the fiduciary duty of the trustee towards the beneficiary imposes a legal obligation of some sort on the trustee? I think, very likely not. To my knowledge, no legal precedent compels a fiduciary to undertake such reporting on behalf of the client where the responsibility falls directly on the client, rather than on the client’s structure (though I am no expert on fiduciary law and its interpretations). Further, the regime itself envisions a method for clients to report without Intermediary support and provides no means for Intermediaries reporting outside of their own jurisdictions. As such, it seems that DAC6 neither mandates nor allows for the Swiss trustee to report on behalf of the EU beneficiary.
However, the inquiry for most Swiss and Liechtenstein fiduciaries will not end with the extent of their legal duties. While most clients may accept that bankers offer a narrow set of banking-related services and offer little beyond the terms and conditions of the account opening contract, they rightly expect fiduciaries to do more. In fact, a broad commitment to the client’s interests is a prime element of many trustee’s overall offering package. As such, if the local tax authority were to demand an explanation from our EU beneficiary for any neglect of his or her DAC6 residual reporting duty, the beneficiary will probably demand his or her own explanation from the Swiss trustee. While this vexation with the Swiss trustee is unlikely to turn into legal action, the client relationship may be irreparably harmed and the trustee’s reputation for client service correspondingly tarnished.
So, what is a conscientious fiduciary to do in this case? Several options spring to mind – none of which is optimal – and are set forth below in order of the fiduciary’s ascending burden:
As Swiss and Liechtenstein fiduciaries contemplate their responses to the EU’s DAC6, they will need to assess their contact points to the disclosure regime, measure the scope of their involvement and determine which – if any – of the above services they might wish to offer any clients who suffer the consequences of residual holding reporting.
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