This article examines selected legal developments relevant to legal advisors practicing in the field of private client law in 2023.
2023 saw many jurisdictions implementing legislation mandating the disclosure of (i) the ultimate individual shareholder (beneficiary) of corporations; (ii) the beneficiaries, trustees, and protectors of trusts and (iii) of cross-border planning structures to tax authorities that circumvent the Common Reporting Standard (“CRS”). The CRS, the automatic exchange of financial information received from entities such as financial institutions, pensions, and trusts, represents the first interstate exchange of financial information between approximately 120 participating jurisdictions.
To ensure the success of the CRS, the Global Forum on Transparency and Exchange of Information for Tax Purposes (the Global Forum) fostered by the OECD together Inter-American Development Bank (IDB) released a toolkit to educate States on the necessity of not only knowledge of the ultimate individual beneficial owner but also arrangements for tax. In addition to the educational toolkit, the Global Forum Secretariat and the IDB also assist States with the amendment of their legislation to comply with the toolkit. The Global Forum initiative is a result of the OECD’s Action Plan on Base Erosion and Profit Shifting (BEPS). BEPS Action 12 provides model disclosure rules for the mandatory disclosure of Common Reporting Standard (CRS) avoidance schemes. In particular it provides a disclosure framework for countries to elicit early information relating to aggressive or abusive international tax arrangements. The European adaptation of BEPS Action 12 is commonly referred to as DAC6 and the Italian adaptation of DAC6 is discussed below.
A director of a corporation that was incorporated under the federal Canada Business Corporations Act must, as of January 22, 2024, file annual information returns disclosing individuals who have significant control over the corporation with Corporations Canada. Significant control includes direct influence, indirect influence or control in fact. A failure to submit the required information will result in a fine of up to $100,000. The information that must be filed with Corporation Canada includes the name of the individual, their address for service if it has been provided to the corporation, and their residential address if it has not been provided to the corporation. This information will be available to the public where the individual is over eighteen years of age and where the individual is capable. If the director reasonably believes that making this information public would present a serious threat to the individual’s safety, the individual is incapable or the individual is a public office holder.
The Income Tax Act of Canada is amended to allow the Canada Revenue Agency to share shareholder information as provided on a corporation’s T2 schedule 50 and schedule 9 to an official of the Department of Industry Canada to verify and validate the shareholder data provided on both schedules with the data remitted by the director of the corporation. Given that section 241 of the Income Tax Act forbids the use or communication of taxpayer information except if authorized by the taxpayer, the amendment of the act was essential to allow for the cross-sharing of information between the Canada Revenue Agency and Industry Canada. A corporation must disclose on schedule 9 of its corporate income tax return all corporations it is related to or affiliated with. Schedule 50 requires a corporation to disclose its shareholders. New paragraph 241(4)(u) of the Income Tax Act allows the CRA to share with Industry Canada the information of a shareholder who holds at least ten percent of shares in a corporation, the shareholder’s name, social insurance number, where the shareholder is a corporation, partnership, or trust, its business number, partnership account number or trust account number, the percentage of shares held by the individual, and the classes held. Canada Revenue Agency, under paragraph 241(4)(u) of the Income Tax Act, can compare the related corporations by providing Industry Canada with the name of the subject corporation, the jurisdiction of residence, the business number, and the relationship between the particular corporation and the subject corporation.
The information submitted by the director to the corporation will also be shared with the Financial Transactions and Reports Analysis Centre of Canada (“FINTRAC”), which is governed by the Proceeds of Crime (Money Laundering) and Terrorist Financing Act.
For taxation years ending after December 31, 2023, Canadian trusts will generally have to file an information return, even if no income was earned during that taxation year. The information return must disclose the name, address, date of birth, the jurisdiction of residence, and the ITN of all trustees, beneficiaries, settlor(s), and protector(s). For reporting purposes, a trust includes a bare trust. A bare trust is created when legal title is separated from beneficial title. For example, a parent solely on title in a financial account with cash that belongs to a child is a bare trustee. For the international private client practitioner, the information reporting is relevant given that nominee corporations, which are bare trusts, are often used by Europeans to invest in Canadian commercial and residential real estate. The new reporting rules also include a new penalty for failing to file: $2,500 or five percent of the property’s value, whichever is greater, in addition to existing penalties for failure to file a trust return.
Mandatory disclosure rules relating to aggressive tax planning are part of BEPS action 12, the stated primary objectives of which included deterrence, increasing transparency by providing timely information to tax authorities regarding potentially abusive tax planning schemes, and identification of users and promoters of those schemes. BEPS Action 12 final report did not include a minimum standard for mandatory disclosure rules. The Canadian mandatory disclosure rules became effective on June 22, 2023, and are contained in subsection 237.3 of the Act. Reporting of a tax avoidance plan is done on CRA Form RC312 (Reportable Transaction and Notifiable Transaction Information Return) if it has any 1 of the 3 hallmarks: (a) contingent fees for the promoter; (b) confidential protection; or (c) contractual protection such as tax risk insurance or a promise to defend the scheme. Failure to file leads to: severe penalties. Although certain transactions are exempted from MDR Reporting, confusion remains on exactly what transactions must be reported. It will take time to understand this new legislation. The CRA agrees and has stated that: “The CRA’s approach to the application of these rules will develop over time based on our experience in dealing with specific factual circumstances.”
Foreign investors investing in Germany through partnerships should be aware of some recent developments in the taxation of partnerships in Germany:
Germany, like most jurisdictions, generally follows the principle of tax transparency for partnerships and non-transparency for corporations. While the income of corporations is taxed at their level, and the shareholders are only involved when profits are distributed, the income of partnerships is immediately attributed to the partners, where it is taxed with the individual tax rate of the partner (up to 47.475%). Only for the municipal trade tax levied on trading income, partnerships are regarded as being the taxpayer itself.
As the combined corporate income tax and trade tax rate for corporations is, on average, around thirty-two percent, partnerships have a disadvantage with respect to retained earnings. From 2022 onwards, tax law, therefore, allows that a partnership can—unanimously or with a three-quarter majority of its partners if foreseen by the partnership agreement—opt to be taxed like a corporation (corporate tax option). While this option has only been available for partnerships being registered with the (commercial) register, it should—from 2024 onwards—also be available for German civil law partnerships registered in the new partnership register. The option is available irrespective of the kind of income the partnership receives, in other words, also for mere administrative income (e.g., rental or capital) and is available to partnerships not having their seat or place of management in Germany or which do not receive any German income.
The exercise of the corporate tax option is treated like a change in the legal form under the German Reorganization Tax Act (Umwandlungssteuergesetz), even though from a civil law perspective, no actual change in the legal form takes place. As a consequence, a taxable transaction is assumed for (corporate) income tax purposes, in other words, any existing hidden reserves would be taxable as current profit. For business active/trading partnerships (gewerbliche Personengesellschaften), on its application, a tax-neutral deemed transfer of the assets is possible subject to further conditions. If a tax-neutral transfer was applied for, a subsequent transfer of the partnership interest within a period of seven years leads to retroactive taxation of the hidden reserves existent on the date the option became effective. The retroactive taxation, however, melts down by one-seventh for each full calendar year passed since the effective date. In contrast, a tax-neutral transfer is not possible for property administrating partnerships (vermögensverwaltende Personengesellschaften). These should, therefore, only exercise the option if no substantial hidden reserves exist, the capital gain from a disclosure of the hidden reserves is not subject to (German) taxation or the tax benefit from a taxation as corporation exceeds the tax costs from the deemed transfer.
After a successful option,
the partnership is taxed as a non-transparent entity being subject to corporate income tax, solidarity surcharge, and trade tax;
the opting partnership would qualify as a company within the meaning of Art. 3 para. 1 lit. b) of the OECD model tax treaty, but would not qualify as a company within the meaning of Art. 2 of the EU parent-subsidiary directive (2011/96/EU);
profit distributions are subject to withholding tax of generally 26.375% which on application of the foreign partner might be partially refunded subject to an applicable double tax treaty and the German anti-treaty shopping rule of Section 50d paragraph 3 of the German Income Tax Act;
Without timing restriction, the option can be reversed for each following assessment period by the partnership, which is then again treated as a change of the legal form and leads to a deemed distribution of retained earnings and a taxable disclosure of hidden reserves unless an application to retain the book values can be made.
It remains to be seen to what extent the option will be accepted by taxpayers. At the very least, it is to be welcomed that the German legislators provide an option that is in line with international practice.
The main parts of the Act to Modernise the Law on Civil Law Partnerships (Personengesellschaftsrechtsmodernisierungsgesetz, “MoPeG”) will come into force on 1 January 2024. The aim of the law and the resulting reform of partnership law is, in particular, the statutory regulation of the structure of the civil law partnership, giving it the legal capacity for participating in legal transactions independent of its partners. Especially, the MoPeG abolishes for partnerships the principle of joint ownership in assets, i.e., the assets are no longer allocated to the partners in their entirety but directly to the partnership.
It has been questionable whether the abolition of the joint ownership that has applied to partnerships to date will have an impact on their taxation. According to the explanatory memorandum to the law, the MoPeG is not associated with “changes to the income tax principles for the taxation of partnerships.” This should apply, in particular, to transparent taxation. While literature supports such a view, especially for business active/trading partnerships, for property administrating partnerships this view might not be so clear since their full tax transparency is derived from Section 39 Federal Tax Code (Abgabenordnung) which states that assets under joint ownership are to be attributed pro rata to the joint owners for tax purposes if required for tax purposes. As already foreseen with the draft of the Growth Opportunities Act (Wachstumschancengesetz), the Secondary Credit Market Promotion Act (Kreditzweitmarktförderungsgesetz, “SCMPA”), which passed the upper house of the German parliament on 15 December 2023, eliminates the existing uncertainties. It does so by explicitly amending Section 39 Federal Tax Code in a way, for direct tax purposes, that partnerships with legal capacity are deemed to be jointly owned by the partners and, subsequently, their assets are deemed to be jointly owned assets. The changes foreseen in the SCMPA will come into effect as of 1 January 2024. As a result, for income tax purposes, both active/trading and property administrating partnerships should remain fully tax-transparent.
With respect to German real estate transfer tax, transfers of real estate from the partners to the partnership and vice versa, as well as between partnerships having (partly) the same partners can—based on the joint ownership concept for civil law purposes—currently benefit from tax exemptions subject to certain holding periods. With the MoPeG coming into effect, it has also been unclear whether such beneficial treatment would remain. In addition, discussions with respect to a general reform of the German real estate transfer tax law with respect to the taxation of share deals are still on-going. With the SCMPA, the status quo of beneficial treatment is established by stating that registered partnerships shall be treated as joint ownerships. Such treatment shall apply only until 31 December 2026. It seems to be the hope of the legislature that, until then, a general reform of the German real estate transfer tax law will be agreed on and implemented.
Italy has transposed into its legal system the Directive EU 2018/822 (“DAC6”), a stringent and combined system contrasting tax noncompliance and relocation of tax bases with elusive and evasive purpose by subjects, natural or legal persons, of Italian jurisdiction.
With the above-mentioned legislation, obligations have been imposed between the Member States for the automatic exchange of cross-border information, by intermediaries, whose definition includes professionals, and taxpayers, collected in registers made available to the adherent Member States. Intermediaries must report to the competent authority the cross-border arrangements identified by the hallmarks listed in DAC6.
The set of sensitive information to be communicated includes, among others, that concerning the identification of the relevant intermediaries and taxpayers, the distinctive elements of cross-border transactions, and the jurisdictions of residence of the taxpayers concerned. DAC6 provides mechanism to contrast BEPS (Basis Erosion Profit Shifting) behaviours and is intended to contrast both aggressive tax planning and related arrangements designed to undermine the automatic exchange of information between countries (CRS) as well as arrangements that prevent identification of natural persons beneficial owners of assets by using opaque structures.
Relevant hallmarks are listed in Annex IV to DAC6, which has been transposed into Italian legislation. Among those, Hallmark D2 concerns beneficial ownership and is aimed at contrasting Opaque Offshore Structures that obscure the beneficial owner of assets. A peculiarity of Hallmarks D is that, different from others, they apply irrespective of a potential tax benefit, and, therefore, they do not require the Main Benefit Test.
DAC6 obligations combine with the provisions of anti-money laundering legislation effective in Italy as of 2007, which provides an obligation for intermediaries and professionals to make adequate verification of their clients and identification of the ultimate beneficial owner and duty to report suspicious transactions to the competent authority. The beneficial owner in anti-money laundering legislation, applicable also in DAC6 legislation, is the natural person(s), other than the client, in whose interest, ultimately, the ongoing relationship is established, the professional service is rendered, or the transaction is carried out. If case identification of the ultimate beneficial owner is not possible for the professional, the latter shall refuse assistance to the client.
Legal professional privilege is only partially safeguarded and the legal professional privilege in the context of DAC6 legislation is aligned to that of the anti-money laundering legislation. Intermediaries (which in the context of DAC6 include legal professionals) are exempted from the obligation to report for information received by the client, or otherwise obtained, in the phase of analysis of the juridical situation or in the activity of defence in legal proceedings, including tax and arbitration proceedings, and including the advice on whether to start legal proceedings. Legal professionals are safeguarded from professional responsibility in the case of a breach in good faith of such legal professional privilege. But exempted intermediaries, including legal professionals, must timely inform the other intermediaries involved in the arrangement, or in their absence, the taxpayer of the reporting obligations. This latter obligation may, in the view of the authors of this article, jeopardise the legal professional privilege even in the cases it is granted.
As required by European anti-money laundering legislation, the Register of Beneficial Owners has been recently established and has become operational in Italy in December 2023. All companies, associations, and foundations with juridical personalities and trusts must disclose information on their beneficial ownership. The beneficial owner is the natural person(s) who ultimately directly or indirectly own(s) more than twenty-five percent of the legal entity, or otherwise exercise(s) control over such entity. All above entities must communicate their beneficial owner(s) and if it is not possible to identify a beneficial owner on the basis of the above criteria, the beneficial owner shall be the natural person(s) who has/have the powers of legal representation, management or direction of the legal entity.
The Register of Beneficial Owners is accessible by authorities and persons subject to anti-money laundering obligations. Following a decision by the European Court of Justice, the Register of Beneficial Owners is no longer publicly accessible.
At the very last moment, the Court suspended the provisional basis operation of the Register of Beneficial Owners upon request of fiduciary companies, so the duty of disclosure is now stayed until a decision on the merits by the Court.
Aligned with global initiatives for heightened transparency and equitable taxation, the Peruvian government, echoing jurisdictions worldwide, has undertaken significant legislative changes on mandatory reporting. This section explores key shifts in Peru’s information disclosure landscape, adapting domestic laws with international standards set by the OECD and the Financial Action Task Force. The core objectives of these new obligations are to fulfill Peru’s international commitments and adhere to recommendations aimed at combating tax avoidance and evasion, establish mutual administrative assistance for fiscal purposes, and prevent money laundering and terrorism financing.
Peru’s adherence to the Common Reporting Standard (CRS) is anchored in Article 6 of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, ratified by 124 jurisdictions, including Peru in 2018. This framework extends to the Multilateral Competent Authority Agreement for the Automatic Exchange of Financial Account Information. Double taxation instruments signed with various countries, including Canada, Switzerland, and Mexico, also incorporate clauses on mutual administrative assistance and information exchange. The National Superintendency of Customs and Tax Administration (SUNAT) is authorized to facilitate mutual administrative assistance in tax matters. The OECD’s Standard for Automatic Exchange of Financial Account Information guides the exchange process in Peru, outlining the required financial information, involved financial institutions, types of accounts, relevant taxpayers, and the reasonable common due diligence procedures institutions must follow.
Since 2018, financial institutions within the national financial system must regularly provide information on passive transactions with clients. Regulated by Supreme Decree 256-2018, the most notable thing for this obligation is the removal of the need for a judicial order to lift banking secrecy. An individual or legal entity is reportable when they have tax residence in any of the reportable jurisdictions, meaning a jurisdiction that is part of the information exchange agreement, or when it qualifies as a passive non-financial entity whose controllers are residents in any of the reportable jurisdictions. Reporting entities must conduct reviews to obtain identification data of account holders and controllers with foreign tax residences. For instance, prior to opening a new account, financial institutions are required to obtain an affidavit from the account holder, affirming their tax residence in a reportable jurisdiction.
At a high level, compliance with the reporting procedure entails due diligence processes, identification of reportable accounts and clients, and annual reporting to SUNAT, who subsequently shares this information with the tax authorities of subscribing countries. This reporting includes detailed data pertaining to account holders and comprehensive information on account specifics such as cumulative balances, earnings, averages, etc. Furthermore, the reporting obligation extends to disclosing the identity and ownership details of the ultimate beneficial owner. This includes critical aspects such as name, date and place of birth, domicile, and jurisdictions of residence.
The financial information must be submitted annually between January 2 and May 31 of the subsequent year. Non-compliance is subject to fines, emphasizing the importance of maintaining supporting documentation, preserving records and systems, and adhering to due diligence procedures.
The regulatory framework introducing the obligation of Ultimate Beneficial Ownership (UBO) filing in Peru was established through Legislative Decree No. 1372 on August 2, 2018. This mandates both domestic and foreign legal entities, whether established in Peru or abroad, to disclose the identification of their ultimate beneficial owners (UBOs). The UBO concept was initially introduced in 2017 through regulations creating Peru’s Financial Intelligence Unit, but this specific norm aims to unify the definition and regulate the obligation of legal entities to transparently disclose their ultimate beneficiaries.
Entities are required to disclose information on all UBOs, including individuals, legal entities, or autonomous patrimonies managed by third parties. The definition encompasses various entities such as investment funds, mutual funds, and trusts. Beneficial owners are defined as individuals who effectively and ultimately own or control legal entities or clients involved in transactions. To identify UBOs, criteria such as ownership, control, and senior managerial positions are considered. The criteria are not alternatives but graduated measures, where ownership is considered first, followed by control and, if necessary, senior managerial positions.
SUNAT issues resolutions specifying the form, deadline, and conditions for filing the UBO declaration. In case of changes in ownership or control entities are obliged to update the information. To ensure accurate and accessible information, legal entities must implement internal procedures, including reasonable mechanisms to obtain and retain information on the identification of their UBOs. This involves verifying identity details, keeping UBO information up-to-date, and retaining UBO information. Non-compliance with filing the report, updating it or not adjusting to the mandatory due diligence internal procedures is subject to significant fines.
While the recent legislative changes in Peru align with international standards and contribute to the global effort against tax avoidance and evasion, practical challenges and confidentiality uncertainties persist. The legislation and implementation systems must yet guarantee that the process is carried out under certain parameters that ensure confidentiality and security in the transmission and processing of the shared data. Ensuring the data requires that the sending, use, and storage of a large volume of information employ secure and compatible methods of transmission between countries as well as effective and efficient data encryption systems. This poses a significant challenge, especially when considering countries that lack advanced computer systems, proper physical facilities, and technically qualified personnel to carry out these tasks.
As the regulatory landscape evolves, addressing these practical considerations becomes crucial for fostering compliance and protecting the rights of taxpayers involved in the process.
Several reporting requirements promulgated under U.S. tax law and Treasury Regulations require U.S. corporations to disclose identifying information on any shareholder as part of the annual tax return. Similar requirements apply to foreign corporations engaged in U.S. business. Additionally, rules scheduled to go into effect in January 2024, require reporting to the Financial Crimes Enforcement Network (“FinCEN”).
U.S. Corporations are required to file tax returns and report income on Form 1120 (U.S. Corporation Income Tax Return) at the end of each taxable year. Similar rules apply to foreign corporations engaged in a U.S. business.
As part of their Form 1120, U.S. corporations are required to disclose persons directly owning twenty percent or more of the total voting power of all classes of stock entitled to vote and whether they directly or indirectly own fifty percent or more of the voting power. If so, identifying information is reported on Schedule G of Form 1120.
Domestic corporations that are twenty-five percent owned by foreign shareholders and foreign corporations engaged in a trade or business within the U.S. have additional reporting requirements if they enter a “reportable transaction” with a related party. In those instances, the reporting corporation must file Form 5472 (Information Return of a twenty-five percent Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business) and include information about indirect twenty-five percent foreign shareholders.
The Corporate Transparency Act (“CTA”) became effective on January 1, 2021, as part of the U.S. Treasury’s efforts to counter shell companies used to facilitate tax fraud, terrorism financing, drug trafficking, and money laundering. The CTA requires that certain corporations, limited liability companies, and similar entities (each, a “Reporting Company”) disclose to FinCEN identifying information about the beneficial owners who own or control the Reporting Company and about the applicants who form or register the Reporting Company. A Reporting Company includes any corporation or limited liability company that is not an excluded company. Examples of excluded companies include publicly traded companies, entities that exercise governmental authority, banks, businesses that are registered with certain governmental bodies, inactive companies not owned by any foreign persons, large operating companies (twenty or more full-time U.S. employees, more than $5 million in sales, and a physical operating presence in the United States). The CTA provisions apply to domestic Reporting Companies and foreign Reporting Companies if they are registered to do business in the U.S. by the filing of required documents with the Secretary of a relevant state.
A “Beneficial Owner” is defined under the CTA as any individual who owns twenty-five percent or more of a Reporting Company or directly or indirectly exercises “substantial control” over a Reporting Company. Substantial control includes acting as a senior officer, having authority over the appointment or removal of senior officers or a dominant majority of the board of directors, and having substantial influence over important matters of the company. Where interests in a Reporting Company are held by a trust, the trustees, and in certain circumstances, beneficiaries may be treated as owning interests in or having substantial control over the Reporting Company.
An “Applicant” is defined as any individual who files a document with a secretary of state’s office to (1) form a US Corporation (C and S corporation), limited partnership, limited liability company or other entity OR (2) register a foreign corporation, limited partnership, limited liability company, or other entity to do business in a US jurisdiction.
The CTA will go into effect on January 1, 2024, and the due date for filing the report will depend on the formation date of the Reporting Company, as follows:
Any Reporting Company in existence before January 1, 2024, will be required to file the necessary report not later than January 1, 2025.
Any Reporting Company that will be created or registered between January 1, 2024 and December 31, 2024, will be required to file the necessary report within ninety days of its effective creation.
Any Reporting Company created or registered on or after January 1, 2025, will be required to file the necessary report (including Application information) within thirty days of its effective creation.
If there is any change with respect to the information previously submitted to FinCEN, such as a change in any beneficial owner, the Reporting Company must file an updated report within thirty days after the date on which such change occurs.
