What Is the Correct CRS Classification for My Entity?

The Common Reporting Standard (CRS) is a global framework for the automatic exchange of financial account information between international tax authorities. Developed by the Organisation for Economic Co-operation and Development (OECD) in 2014, its primary purpose is to increase tax transparency and combat cross-border tax evasion. Under this standard, financial institutions in participating countries are required to identify accounts held by tax residents of other jurisdictions and report this information to their local tax authority. The CRS establishes a standardized process for collecting and exchanging this data annually, creating a consistent mechanism for international tax cooperation.

The Primary Classification Financial vs Non-Financial Entities

The first step for any organization subject to the Common Reporting Standard is to determine its classification as a Financial Institution (FI) or a Non-Financial Entity (NFE). An “Entity” under CRS is a broad term that includes legal persons and legal arrangements, such as corporations, partnerships, and trusts, but it does not apply to individuals. This initial determination is significant because the subsequent compliance obligations differ entirely depending on the outcome.

A Financial Institution is generally defined as an entity that is a Depository Institution, Custodial Institution, Investment Entity, or a Specified Insurance Company. Any entity that does not meet the specific criteria to be classified as an FI is, by default, considered a Non-Financial Entity. An incorrect classification can lead to significant compliance issues.

Financial Institution Categories

Once an entity determines it is a Financial Institution, it must identify which of the four specific categories it belongs to. These categories are narrowly defined, and an entity must meet the specific criteria of one to be considered an FI. All FIs are considered “Reporting FIs,” with an obligation to perform due diligence to identify and report financial accounts held by non-resident individuals and entities.

The four categories are:

• A Depository Institution is an entity that accepts deposits in the ordinary course of a banking or similar business, including commercial banks, savings banks, and credit unions.
• A Custodial Institution is an entity that holds, as a substantial portion of its business, financial assets for the account of others. This means at least 20% of the entity’s gross income is attributable to holding financial assets and related financial services.
• An Investment Entity is a category with two types. The first includes entities that primarily conduct as a business activities like portfolio management or managing financial assets for others. The second type is any entity whose gross income is primarily attributable to investing or trading in financial assets, and it is managed by another Financial Institution.
• A Specified Insurance Company is any entity that is an insurance company that issues, or is obligated to make payments with respect to, a Cash Value Insurance Contract or an Annuity Contract.

Non-Financial Entity Categories

If an entity does not meet the criteria for any of the Financial Institution categories, it is classified as a Non-Financial Entity (NFE). Within this classification, a distinction must be made between an “Active NFE” and a “Passive NFE.” This determination is based on the nature of the entity’s income and assets.

Active NFE

An entity qualifies as an Active NFE if it meets specific criteria related to its operational activities. The most common test is an income and asset test: an entity is active if less than 50% of its gross income from the preceding calendar year is passive income and less than 50% of the assets it held are assets that produce passive income. Passive income generally includes dividends, interest, rents, royalties, and annuities.

Other entities automatically qualify as an Active NFE, including:

• Corporations with stock that is regularly traded on an established securities market.
• Governmental entities, international organizations, and central banks.
• Entities that are in the process of liquidating or emerging from bankruptcy.
• Newly formed “start-up” companies that have not yet begun business operations.

Active NFEs have minimal obligations under CRS; they simply need to certify their status to their financial institution.

Passive NFE

A Passive NFE is defined simply as any NFE that is not an Active NFE. This includes entities that primarily earn passive income or hold passive assets, such as personal investment companies or certain family trusts. The primary compliance obligation for a Passive NFE is significantly different from that of an Active NFE and centers on the concept of “Controlling Persons.”

When a Passive NFE opens an account with a financial institution, it must not only certify its status but also identify its Controlling Persons. A Controlling Person is the natural person who ultimately exercises control over the entity. For a corporation or partnership, this is generally any individual who holds more than a certain percentage of ownership, often 25%. For a trust, Controlling Persons include the settlor, trustees, protector, beneficiaries, and any other natural person exercising ultimate effective control over the trust. The financial institution holding the account is then required to report the details of these Controlling Persons if they are tax residents of a reportable jurisdiction.

Completing the CRS Self-Certification Form

The practical application of CRS classification culminates in the completion of a CRS Self-Certification form. This is the document that an entity must provide to its financial institution, such as a bank or asset manager, when opening a new account or upon request for an existing account. The form serves as the entity’s formal declaration of its status under the Common Reporting Standard, and financial institutions rely on this document to fulfill their own due diligence and reporting obligations.

To complete the form correctly, an entity must provide several key pieces of information. This starts with basic identification details, including the entity’s full legal name, registered address, and its Taxpayer Identification Number (TIN) for each jurisdiction where it is a tax resident. An entity that is a tax resident in multiple jurisdictions may need to provide a TIN for each one.

The most important part of the form is the declaration of the entity’s specific CRS classification. The entity must tick the appropriate box corresponding to its status, such as Depository Institution, Active NFE, or Passive NFE. If an entity classifies itself as a Passive NFE, it must also provide detailed information for each of its Controlling Persons, including their name, address, date of birth, and TIN.