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AEOI Classification Blog

The different types of Entity Classifications

By May 9, 2025No Comments

The Different Types of Entity Classifications for Financial Institution under CRS and FATCA

In our previous post, we explored why entity classification is vital under the Automatic Exchange of Information (AEOI) frameworks—namely, the Common Reporting Standard (CRS) and the Foreign Account Tax Compliance Act (FATCA). Now, let’s delve a little deeper into one of the two top-level categories: the Financial Institution (FI).

Under both CRS and FATCA, Financial Institutions have core obligations to conduct due diligence and report on financial accounts held by non-residents or U.S. persons. However, these regimes define Financial Institutions with subtle but important differences. Understanding the four main types of Financial Institutions is key to compliance.

  1. Custodial Institution

    A custodial institution primarily holds financial assets for others. Examples include banks and brokerages. If more than 20% of an entity’s gross income is attributable to holding financial assets for customers, it will typically be classified as a custodial institution.

  2. Depository Institution
    These are entities that accept deposits in the ordinary course of a banking or similar business. Retail and commercial banks, credit unions, and savings institutions fall into this category. Their defining feature is their traditional banking activity.

  3. Investment Entity

    This category is broader and more complex. Under CRS, an entity is an investment entity if it:

    • Gets most of its income from activities such as trading or portfolio management on behalf of clients (the so-called “Gross Income” test), or
    • is managed by another Financial Institution and earns income mainly from investing or trading financial assets (the so-called “Managed By” test). Under FATCA, however, entities located in jurisdictions that have signed Inter-Governmental Agreements (IGAs) with the United States can be classified as Investment Entities if they meet the “Managed By” test—even if their income does not come mainly from investing or trading financial assets

  4. Specified Insurance Company

    This refers to insurance companies (or their holding entities) that issue or are obligated to make payments under cash value insurance or annuity contracts. Not all insurers qualify—only those offering such products fall within this definition.

Each Financial Institution type has specific obligations under CRS and FATCA, including registration, reporting, and customer due diligence. Misclassifying an entity can lead to reporting errors, reputational risk, and even penalties.

Conclusion

Correctly identifying the type of Financial Institution is more than a technical exercise. It is central to achieving compliance with global transparency standards. If your entity is involved in financial services or even if it is just a passive investment or succession vehicle, your classification under both frameworks must be accurate or you run the risk of serious compliance failures and penalties.