The world is becoming increasingly globalized, and cross-border activity is now the norm. That means that countries across the world need to work together cooperatively and collaboratively in order to ensure that taxpayers are paying the correct amount of tax in the appropriate jurisdiction. For example, the U.S. government needs to ensure that a U.S. citizen living in London with an offshore company in the Cayman Islands is paying the right amount of U.S. income tax. Of course, when different jurisdictions are involved, this is easier said than done.
So, how can tax administrators in countries around the world ensure that their citizens aren’t evading or avoiding their tax responsibilities? Well, the Automatic Exchange of Information (AEOI) is designed to do just that. With the AEOI, specific information pertaining to account holders and their accounts are provided to the tax authorities of their domestic domicile by the banks with whom they hold the accounts. This can have significant implications for companies, specifically offshore companies. When it comes to the AEOI, every company should be aware of a few things.
Your Business Won’t Necessarily Be Subject to AEOI Regulations
First and foremost, it is important to note that business ownership is not automatically exchanged as part of the AEOI, as banks are not required to share company proprietorship details. That means that jurisdictions are under no obligation to send information about business ownership to the other jurisdictions automatically. The information that will be reported includes dividend income, interest income, sales proceeds from financial assets, and account balances. As long as a company is classified as an active NFE, meaning that the company has economic substance and was not incorporated in a specific jurisdiction solely to reduce tax liabilities, then no reporting will occur. The key is that the company must be able to proof its economic substance.
However, many shell companies and offshore companies will likely be classified as a passive NFE according to the new regulations. An entity determined to be a passive NFE is controlled by one or more persons deemed to be reportable persons under the new regulations, meaning that the person holds an account in a participating jurisdiction and is a tax resident of a reportable jurisdiction. So, let’s say that a UK citizen has a shell company registered in Malta. Because Malta is a participating jurisdiction, the details of the passive NFE will be reported to the UK government.
AEOI Regulations Aren’t Universal
Secondly, it is important to note that the AEOI has not been universally adopted. If your company is classified as a passive NFE, this doesn’t necessarily mean you will be subject to reporting. It all depends on the jurisdiction your company is incorporated within and whether that jurisdiction is participating in the AEOI.
Ultimately, it is crucial to do your research to gain a fuller and more complete picture of how the AEOI will affect your company specifically and what action you need to take as a result. And remember, it never hurts to get in touch with a professional for advice and guidance.
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