Automatic Exchange of Financial Account Information under CRS

14.06.2023

On April 28, 2023 the Law of Ukraine “On Amending the Tax Code of Ukraine and other legislative acts of Ukraine regarding the implementation of the international standard of automatic exchange of information on financial accounts” no. 2970-ІХ dated 20.03.2023 entered into force. This Law introduced amendments to the Tax Code of Ukraine and other legislative acts regarding CRS implementation.

What is CRS

CRS (Common Reporting Standard) is a standard of automatic exchange of financial accounts information in tax matters which aimed to improve Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information (MCAA CRS) realization. MCAA was developed pursuant to Article 6 of Convention on Mutual Administrative Assistance in Tax Matters. It prescribes annual automatic exchange of information about reportable accounts between the members states.

📍 Therefore, automatic exchange of information about reportable accounts under CRS is aimed to detect person’s foreign income (money, assets etc.)

How it is going to work

Financial institutions collect information about financial accounts, which belong to reportable persons, transfer it (information) to tax authorities of such financial institutions’ jurisdiction, which in turn transfer information to tax authorities of the reportable person’s jurisdiction.

Financial institutions include the following types of organizations:

Depository institutions (banks, credit unions etc.);
Investment entities (investment firms, joint investment funds etc.);
Insurance companies (insurers, non-governmental pension funds);
Custodial institutions.

Natural persons and entities – non-residents (as well as entities which have non-resident ultimate beneficial owners) are considered as reportable persons.

The following information in respect of reportable person is going to be collected and exchanged:

name;
date and place of birth;
registered and residence address;
tax residency;
taxpayer identification number;
bank account number;
account balance or value as of the end of the calendar year;
depending on the type of the account – additional information may be required.

📍 In other words, automatic exchange of the financial accounts information under CRS will influence persons who, for example, are residents of Ukraine but have accounts in foreign banks (or their controlled foreign companies have such accounts). In this case foreign financial institutions will collect and transfer information about such accounts to tax authorities of their country and they, in turn – to the Ukrainian tax authorities. Mentioned construction will also work in other direction – Ukrainian financial institutions will gather and transfer information about accounts of non-residents to Ukrainian tax authorities and they will transfer such information to the tax authorities of country of such non-resident.

How financial institution are going to define reportable persons

As was mentioned before, reportable persons are non-residents. In order to determine their status financial institutions will take measures to make proper check of financial accounts.

They will have the right to demand, and accounts owners will be obliged to, provide following information / documents for due diligence:

self-certification from the account holder of the jurisdiction of residence of such account holder and/or controlling persons in order to determine the state (territory), resident of which the account holder or controlling person is;
information and/or documents, which are required by financial institution for the proper due diligence procedure for financial accounts. This may be residence address, phone number of the reportable person, instructions to wire funds to certain country etc. Financial institution may transfer information regarding reportable person to different countries, in case there are indicators of residency in relevant country.
other information and/or documents.

Moreover, Tax Code of Ukraine stipulates obligation of the account holder to inform Ukrainian financial institution about change of account holder’s tax residence status within 30 days.

If during due diligence procedure there will be grounds for financial institution to consider that person is simultaneously is Ukrainian resident and at least one another jurisdiction (for CRS purposes), such person may be considered as resident of relevant jurisdiction.

📍 That is, reportable persons should be attentive when they open financial accounts and when they determine their tax residency, because country where a person is a tax resident may claim for the taxation of person’s worldwide income. Therefore, it is important to make sure you have a justification and proof of your tax residency. In case there are some difficulties it is worth to engage professional consultants.

How due diligence procedures for financial accounts will be performed

Considering time of accounts opening, there are two types:

new accounts
preexisting accounts.

It is stipulated by Ukrainian legislation that first period for which Ukraine will transfer (receive) financial information within CRS, starts on July 1, 2023 and ends on December 31, 2023.

That’s why accounts opened from July 1, 2023 will be considered as new ones, and accounts which are opened on June 30, 2023 and operated in financial institutions will be considered as preexisting ones. If account is closed before June 30, 2023, it will not fall under due diligence procedure and there will not be an exchange of information in respect of such account.

Financial institution will have to obtain self-certification within opening of account (it may be part of opening account documents package), which allows to determine tax residency of the account holder, as well as to confirm authenticity of such document basing on the information received within AML/KYC procedures. Specified documents and information will allow financial institution to determine whether an account is reportable.

Within opening of new accounts for entities financial institutions, besides obtaining of self-certification, will also define whether entity is a passive one and obtain self-certification in respect of each controlling person.

There are following types of preexisting accounts:

High values accounts (for natural persons) – account balance or value on June 30, 2023 exceeds US$ 1 mln;
Lower value accounts Рахунки (for natural persons) – account balance or value on June 30, 2023 does not exceed US$ 1 mln;
Entity accounts – account balance or value on June 30, 2023 does not exceed US$ 250,000.

In general, due diligence procedure regarding lower account may be described as follows:

Financial institution defines whether account is lower value account.
Financial institution checks information about current address of a person and relevant documentary evidence. Basing on the mentioned information financial institution classifies financial account as reportable one (if address is in another jurisdiction) or as non-reportable one.
In case there is no documentary evidence of person’s address, financial institution applies other indicia to identify account (phone numbers, e-mail, instructions to wire fuds to other jurisdiction, “hold mail” instruction / “in-care-of” address etc.). After mentioned indicia applied financial institution defines whether account is reportable or non-reportable.
In case after due diligence there are several indicia that account relates to different jurisdictions, financial institution should receive from the account holder self-certification. Basing on the received self-certification financial institution defines whether the account is reportable or not and defines reportable jurisdiction(s).

In general, due diligence procedure regarding high account may be described as follows:

Financial institution reviews indicia (phone numbers, e-mail, instructions to wire fuds to other jurisdiction, “hold mail” instruction / “in-care-of” address etc.) in electronic databases. Basing on the mentioned information financial institution classifies financial account as reportable one (in case there are all indicia).
In case financial institution does not discover any indicia in electronic databases, it reviews paper documents which it has received for the last 5 years.
In case after due diligence there are no indicia, relationship manger classifies account as reportable (non-reportable) one on the basis of actual knowledge manager has.

In general, due diligence procedure regarding entities account may be described as follows:

Financial institution defines whether the account value exceeds US$250,000, if not – account is not reportable.
If account value exceeds US$250,000 financial institution defines tax residency of entity, in particular place where entity was incorporated or organized. Basing on the mentioned information it is defined whether account is reportable or not.
If financial institution defines that entity is non-financial passive one, it reviews whether the account value exceeds US$ 1 mln, if yes – financial institution should receive self-certification of entity and controlling persons and define whether the account is reportable or not.

Deadline for completing due diligence for new accounts and high value accounts for natural persons is December 31, 2023, deadline for including in the report – July 1, 2024, expected date of exchange with other countries – September 30, 2024.

Deadline for completing due diligence for lower value preexisting accounts of natural persons and entities is December 31, 2024, deadline for including in the report – July 1, 2025, expected date of exchange with other countries – September 30, 2025.

📍 Currently there is only a draft of Order on applying of Common Standard on Reporting and Due Diligence for Financial Account Information, which should be approved by Ministry of Finance of Ukraine, that’s why algorithm of due diligence is based on sections 3-6 of CRS.

What are the penalties

Besides general penalties and fines, which are stipulated by current Ukrainian legislation regarding undeclared income and which depend on circumstances (size and type of income, proof of intent etc.), there will also be special responsibility in respect of CRS, in particular provision of self-certification with inaccurate information – penalty in the amount of 100 of minimum wage.

However, the law specifies that such special responsibility will not be applied until December 31, 2024 and during period from January 1, 2025 until December 31, 2025 50% of the mentioned penalty will be applied.

Moreover, information relating to the accounts of one person (Ukrainian citizen), total balance of which does not exceed US$ 250,000 (on December 31 of the year which falls under martial law) and was received by Ukrainian tax authorities under CRS procedure, cannot be used by such tax authorities to calculate tax payments of a person.

📍 Therefore, if resident of Ukraine plans (from July 1, 2023) to open an account in foreign jurisdiction, and to receive income on such account, there is a good chance that Ukrainian tax authorities will get such information and there will be necessary to make relevant tax payments. But if on December 31 of the year which falls under martial law total balance of persons accounts does not exceed US$ 250,000, then tax authorities will not be able to calculate relevant taxes.