Understanding the Different Types of Non-Financial Entities under CRS and FATCA
Having examined in our last blog the classification of Financial Institutions under the Common Reporting Standard (CRS) and the Foreign Account Tax Compliance Act (FATCA), it’s equally important to understand the other major category: Non-Financial Entities (NFEs under CRS and NFFEs under FATCA). These are entities that do not fall within the definition of a Financial Institution. Although NFEs and NFFEs do not themselves have CRS due diligence or reporting obligations, they will be asked to certify their CRS and FATCA classification and identify their Controlling Persons (natural persons with ownership or control) when they hold accounts with Financial Institutions. This is so that the Financial Institutions can report accurately under CRS and FATCA.
Both CRS and FATCA divide NFEs/NFFEs into two main subcategories: Active and Passive. This distinction plays a vital role in determining whether just the entity or both the entity and the entity’s Controlling Persons are subject to reporting.
Active NFE/NFFE
An entity is generally considered an Active NFE (CRS) or Active NFFE (FATCA) if it does not exist primarily to hold passive investments.
Typical examples include:
- Operating businesses (e.g., manufacturers, retailers)
- Governmental entities
- International organisations
- Central banks
- Entities in liquidation (that were not previously passive)
- Start-ups (in their first 24 months of existence)
- Holding companies of an active group
- Entities with less than 50% of their income and assets being passive in nature
These entities are not subject to detailed scrutiny, and Financial Institution don’t need to look through them to identify Controlling Persons for reporting purposes.
Passive NFE/NFFE
An NFE is classified as Passive if it fails to meet the criteria for Active status. Typically, this includes:
- Personal investment companies
- Private trusts not managed by a financial institution
- Entities whose gross income is mostly from dividends, interest, royalties, or capital gains
Under both CRS and FATCA, Passive entities trigger an additional layer of due diligence: Financial Institutions must identify the entity’s Controlling Persons and determine whether the Controlling Persons are tax residents in a reportable jurisdiction for CRS or are U.S. persons for FATCA. If they are, then the Financial Institution must report the Controlling Person (CRS) and U.S. Persons (FATCA). Under CRS, though not under FATCA, Financial Institutions must also generally report the entity itself if it too is resident in a Reportable Jurisdiction.
Why This Matters
The Active vs. Passive classification impacts what information must be collected and reported. While Active entities generally present lower compliance burdens, Passive entities are scrutinized more closely to prevent tax evasion through opaque investment structures.
Conclusion
Just like Financial Institutions, getting the classification right for NFEs/NFFEs is critical. Passive entities must be especially careful to understand the reporting implications for their beneficial owners. In today’s compliance environment, classification is not just a regulatory requirement—it’s a transparency imperative.