Who can be considered as Connected Person for ESR

CA Rajiv HiraCA Rajiv Hira    23 May 2020
Who can be considered as Connected Person for ESR

As per "Cabinet of Ministers resolution no.31 of 2019 concerning, Economic Substance Regulations" Connected Person is a natural or juridical person who is related to one or more natural or juridical person(s) through direct or indirect ownership or control, or common control. 

Considering, the details (i.e. what age etc.) are not provided in the ESR, we need to look at the related legislation/ regulations for understanding more on the definition.

OECD's Common Reporting Standard

Reference / Source: https://www.oecd.org/tax/exchange-of-tax-information/CRS-related-FAQs.pdf (CRS-related Frequently Asked Questions - Feb 2019)

Determining Controlling Persons of Entity - The CRS (OECD's Common Reporting Standard) provides that the term "Controlling Person" must be interpreted in a manner consistent with Recommendation 10 and the Interpretative Note on Recommendation 10 of the Financial Action Task Force (FATF) Recommendations (Section VIII(D)(6) and associated Commentary). The Interpretative Note on Recommendation 10, inter alia, states that for legal persons those persons should be identified that have a controlling ownership interest in that legal person. In relation to legal persons that are companies it is then further specified that a “controlling ownership interest depends on the ownership structure of the company. It may be based on a threshold, e.g. any person owning more than a certain percentage of the company (e.g. 25%).” 

Point to be noted, The CRS provides that for purposes of determining the Controlling Persons of an Account Holder the AML/KYC Procedures pursuant to the anti-money laundering or similar requirements as implemented in the domestic law and to which the Reporting Financial Institution is subject apply. 

Considering this, we are required to refer to the domestic law on AML/KYC

Anti-Money Laundering and Combating the Financing of Terrorism and Illegal Organisations

Reference / Source: https://www.centralbank.ae/sites/default/files/2019-07/ME%20PMO%20AML-CFT%20%20Guidance%20-%20FIs%20Only%20-%20For%20publication%20on%20CBUAE%20website.pdf (Anti-Money Laundering and Combating the Financing of Terrorism and Illegal Organisations - Guidelines for Financial Institutions)

Reference document, provides the definition of "Beneficial Owner" i.e. Natural person who owns or exercises effective ultimate control, directly or indirectly, over a customer or the natural person on whose behalf a transaction is being conducted or, the natural person who exercises effective ultimate control over a legal person or Legal Arrangement. 

Where legal persons or arrangements are concerned, FIs are obliged to identify any natural person who owns or controls an interest of 25% or more. In order to achieve an effective understanding of the ownership and control structure of a customer that is a legal person or arrangement, supervised institutions should consider obtaining from the customer and including in the profile a detailed explanation or a diagrammatical chart providing the details of any ownership interests of 25% or more, and tracing them through any intermediate legal owners (whether legal persons or arrangements, or natural persons who are nominee stakeholders) to the natural persons who ultimately own or control them. 

Comments:

  1. Identify, beneficial owner (Natural person) of entities.
  2. Identify, direct & indirect ownership of 25% or more.
  3. Review the profile and control (example board, director, manager etc.) structure.
  4. Validate relationship /control between the natural person (example "minor"(children) shareholding may be constituted as ownership/ control by the the person exercising beneficial interest(example parents)). Similar parlance can be arrived on trust, foundation, or similar structure.

Instances where COMMON ownership or control rights are identified as 25% or more, may to be classified as "Connected Person".

Note: This information is based on my personal interpretation and references used. This content is for informational & knowledge sharing purposes only, and is not intended to provide, and should not be relied on for tax or accounting advice.

Disclaimer: Content posted is for informational & knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. The view/interpretation of the publisher is based on the available Law, guidelines and information. Each reader should take due professional care before you act after reading the contents of that article/post. No warranty whatsoever is made that any of the articles are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.

You can access Law including Guidelines, Cabinet & FTA Decisions, Public Clarifications, Forms, Business Bulletins for all taxes (Vat, Excise, Customs, Corporate Tax, Transfer Pricing) for all GCC Countries in the Law Section of GCC FinTax. 

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