Old CDOs fall outside scope of CRS

| 14/12/2015 | 0 Comments

CNS Business(CNS Business): As Cayman implements the OECD’s Common Reporting Standards (CRS), compliance teams working in structured finance will have taken a collective sigh of relief last week, as “old and cold CDOs” were exempted from CRS reporting obligations. The Department for International Tax Competition (DITC) also announced the 95 jurisdictions that will participate with Cayman in the first phase of the initiative to standardise reporting of international tax information, with all major countries involved except the US.

In an industry update, the DITC said that CDOs (Collateralised Debt Obligations), or Limited Life Debt Investment Entities (LLDIE), in existence before 17 January 2013 would be “Non Reporting Financial Institutions” in Cayman’s CRS submissions. Many such entities were left severely distressed as the CDO sector took the biggest hit in the financial crisis, which decimated the market in Cayman.

Also exempt from FATCA, the requirements of CRS, including detailed due diligence and verification of client information, will not apply to these debt instruments, which is a great relief, according to Maples and Calder. “The importance of the LLDIE exemption to the CLO market cannot be overstated,” the firm said in a client update.

With some 1,500 of these “old and cold” deals in Cayman, Maples said it would be practically impossible to make the amendments needed to comply with CRS or FATCA. “In many cases, non-compliance would trigger the forced resignation of Cayman based directors in order to avoid criminal penalties, which in turn could result in such deals defaulting or becoming ‘zombie’ CLOs to the potential detriment of investors.” 

There are 95 other countries participating in the first wave of the OECD initiative alongside Cayman (see the list here), including all the major industrialised nations and key offshore jurisdictions. The notable exception is the US, which has said it will not adopt CRS because it has already set up a framework for FATCA (Foreign Account Tax Compliance Act), which gets the information they want. However, by not participating, the US will not face any of the harsh withholding penalties that it will be imposing on entities in other jurisdictions where clients fail to comply with FATCA obligations.

The UK also has a FATCA agreement in place with the Cayman government and the UK wants Cayman and its other overseas territories and crown dependencies to comply with both regimes in 2016, before FATCA is phased out and full transition to CRS takes place in 2017.

To comply with CRS, Cayman entities that fall within the regulations, must submit reports to the relevant overseas authorities for all account holders captured by the rules, via the AEOI (Automatic Exchange of Information) portal. The DITC last week issued self-certification forms for both entities and individuals in order to assist with the data gathering exercise.

The first set of CRS regulations were issued by the Tax Information Authority in October, with the second set of rules now expected to follow in the first quarter of 2016, which will address issues related to compliance and enforcement of CRS in Cayman. The FATCA/CRS Working Group will also release a set of Guidance Notes for the industry in Q1 2016, covering practical issues of CRS specific to Cayman.

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Category: Finance, Financial Services

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