Automatic Exchange of Financial Account Information (OECD AEOI/CRS)

Explanation of the terms and concepts related to OECD AEOI/CRS and used in Client’s questionnaire

Tax residence

Each country has its own definition of ‘tax residence’. Normally, the following below listed aspects are used to clearly define tax residence:

• in respect of natural persons, tax residence is a residency for tax purposes, a jurisdiction where the person is taxed based on the person’s habitual abode, centre of vital interests, occupation etc.;
• in respect of legal persons, tax residence is a residency for tax purposes, a jurisdiction where the person is taxed based on the person’s country of registration (incorporation), place of effective management,  place of business, etc.

There might be situations where a natural or legal person qualifies as a tax resident under the tax residence rules of more than one jurisdiction. This is known as dual or multiple tax residence.

Please visit the OECD website where your can read overview of the tax residency rules applicable in jurisdictions.

Fiscally transparent entity 

In certain instances, a legal entity is considered a fiscally transparent entity (FTE), also known as flow-through entity or pass-through entity. FTE is a legal entity where the owners and/or beneficial owners of the entity are taxed for the income earned by the entity and not the entity itself, i.e. income “flows through” to owners and/or beneficial owners.

For purposes of the Global Standard, a legal entity is recognised as a tax resident of the country in which the entity’s place of effective management (PoEM) is situated.

Place of effective management

As defined by the OECD, the “place of effective management” is the place where key management and commercial decisions that are necessary for the conduct of the entity’s business as a whole are in substance made [OECD (2017), Standard for Automatic Exchange of Financial Account Information in Tax Matters, Second Edition, OECD Publishing, Paris, p.192]. All relevant facts and circumstances must be examined to determine the place of effective management. If necessary, you should seek advice from tax authorities and/or consult a qualified professional adviser.

Active non-financial entity (NFE)

In accordance with Section XII Automatic Exchange of Financial-Account Information, Article 86 of the Taxes and Charges Act of the Republic of Latvia, the term “Active Non-Financial Entity” means any non-financial entity (with or without legal personality) that meets at least one of the following criteria:

1) less than 50 percent of the NFE’s gross income for the preceding calendar year or other appropriate reporting period is passive income and less than 50 percent of the assets held by the NFE during the preceding calendar year or other appropriate reporting period are assets that produce or are held for the production of passive income. Passive income would generally be considered to include the portion of gross income that consists of:

1. dividends;
2. interest payments and payments that are economically equivalent to interest payments;
3. rents, leases and royalties, other than rents, leases and royalties derived in the active conduct of client’s trade or the main business conducted;
4. annuities (that feature a cash value savings component);
5. gains from the sale of financial assets that gives rise to the passive income described previously (except for gains from broker/dealer primary activity);
6. gains from transactions in financial instruments (except for gains from broker’s (dealer’s) principal activity);
7. gains from forex transactions (except for gains from broker/dealer primary activity);
8. net income from swaps (except for that from broker/dealer primary activity);
9. amounts received under cash value insurance contracts (contracts that feature a cash value savings component);
10. other gains that are economically equivalent to the gains mentioned above herein;

2) the stock of the NFE is regularly traded on an established securities market or the NFE is a related entity of an entity the stock of which is regularly traded on an established securities market;

3) the NFE is a governmental entity, an international organisation, a central bank, or an entity (legal person) wholly owned by one of the foregoing;

4) substantially all of the activities of the NFE consist of holding (in whole or in part) the outstanding stock of, or providing financing and services to, one or more subsidiaries that engage in trades or businesses other than the business of a financial institution, except that an entity does not qualify for this status if the entity functions (or holds itself out) as an investment fund, such as a private equity fund, venture capital fund, leveraged buyout fund, or any investment vehicle whose purpose is to acquire or fund companies and then hold interests in those companies as capital assets for investment purposes;

5) the NFE is not yet operating a business and has no prior operating history, but is investing capital into assets with the intent to operate a business other than that of a financial institution, provided that the NFE does not qualify for this exception after the date that is 24 months after the date of the initial organisation of the NFE;

6) the NFE was not a financial institution in the past five years, and is in the process of liquidating its assets or is reorganising with the intent to continue or recommence operations in a business other than that of a financial institution;

7) the NFE primarily engages in financing and hedging transactions with, or for, related entities that are not financial institutions, and does not provide financing or hedging services to any entity that is not a related entity, provided that the group of any such related entities is primarily engaged in a business other than that of a financial institution;

8) the NFE meets all of the following requirements:

1. it is established and operated in its jurisdiction of residence exclusively for religious, charitable, scientific, artistic, cultural, athletic, or educational purposes; or it is established and operated in its jurisdiction of residence and it is a professional organisation, business league, chamber of commerce, labour organisation, agricultural or horticultural organisation, civic league or an organisation operated exclusively for the promotion of social welfare;
2. it is exempt from income tax in its jurisdiction of residence or in other tax residence;
3. it has no shareholders or members who have a proprietary or beneficial interest in its income or assets;
4. the applicable laws of the NFE’s jurisdiction of residence (that is a participating jurisdiction) or of other jurisdiction of residence or the NFE’s formation documents do not permit any income or assets of the NFE to be distributed to, or applied for the benefit of, a private person or non-charitable entity other than pursuant to the conduct of the NFE’s charitable activities, or as payment of reasonable compensation for services rendered, or as payment representing the fair market value of property which the NFE has purchased;
5. the applicable laws of the NFE’s country of incorporation (that is a  participating jurisdiction) or of tax residence or the NFE’s formation documents require that, upon the NFE’s liquidation or dissolution, all of its assets be distributed to a governmental entity or other non-profit organisation.

The term “Passive Non-Financial Entity” means

1) any NFE (with or without legal personality) that is not an Active NFE;

2) an investment entity that is referred to in Article 68 (1) 2) of the Taxes and Charges Act and that is not a Participating Jurisdiction Financial Institution.

Data processing

We also inform you that your data will be processed and delivered to the Latvian tax authority in the manner prescribed by and for the purpose specified in Section XII Automatic Exchange of Financial-Account Information of the Taxes and Charges Act of the Republic of Latvia.

The information contained in this section of the website is for general information purposes only. The information should not be construed, regarded or relied upon as a legal or tax research, statement of opinion, recommendation, or advice. Bank is not responsible for the contents of the OECD website.