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Guide on tax suitability of financial products & transparency rules for entities

Source: BRP Tax SA

In the context of the tax suitability of financial products, the Financial Institution managing the assets of a fiscally transparent entity must be able to comply with the tax rules of the country of residence of the "ultimate private taxpayer" or Ultimate Beneficial Owners (UBOs) of an entity. Therefore, knowing the latest tax information in the country of the UBO is key when providing investment services as it may have significant impact on portfolio’s performance and on the business relationship itself. In practice, tax suitability means excluding investments subject to detrimental or harmful taxation, and not tax advice.

Definition of Anti-tax avoidance rules

Anti-tax avoidance rules are intended to combat tax evasion. These rules are based on different legal doctrines, such as abuse of law, fraud, simulation and prevalence of substance over form. They aim to prevent the use of acts for purposes other than those provided by law or with no other justification than to reduce taxation, obtain undue tax credits, or some type of tax benefit.

Tax transparency for Ultimate Beneficial Owners (UBOs)

Amongst others, we can refer to tax transparency rules which imply that resident Ultimate Beneficial Owners (UBOs) of an entity (by definition a natural person/individual) include in their taxable income their proportionate share of some or all of the undistributed income of an entity. Indeed, for various reasons, foreign structures may be used by individual residents for tax purposes in a country who are shareholders or controlling persons or ultimate beneficiaries of interposed structures. These legal or non-legal entities are often located in low or no-tax jurisdictions.

Country-specific transparency criteria and the flow-through approach

Some countries have implemented anti-avoidance rules in their domestic tax legislation in order to establish the rule of “economic reality”. Under this rule tax authorities may challenge transactions where the legal form (i.e., corporate structures and arrangements) does not appear to be consistent with the intended economic purpose or objective of the transacting parties. The prevention of tax avoidance through the use of structures is carried out by the country-specific issuance of Blacklist and Controlled Foreign Companies (CFC) rules.

CFC rules disregard, for tax purposes, the participation of an individual taxpayer’s interest in certain foreign entities, resulting in the immediate recognition or attribution of the income as if it were earned directly by the resident.

The application of these rules generally involves the fulfilment of several cumulative or non-cumulative criteria/conditions:

  • A defined percentage of direct or indirect ownership of the structure or subjective criteria on the basis of which the person qualifies as a controlling person.

  • Jurisdiction of the country of incorporation is black-listed country or absent from a white list.

  • Tax rate of the structure’s profits compared to the domestic corporate tax rate.

  • Presence or absence of economic substance or commercial activity.

  • Passive income (interest, dividends, royalties, rents).

Several criteria based on the AML/KYC/FATCA/CRS documentation allow the Financial Institution to assume the tax transparency of an entity and apply a flow-through approach.

Use Cases

1. For instance, in the case of a Trust or a Foundation, some questions should be raised:

  • Does the country of the Settlor/Founder or beneficiary recognize the Trust?

  • Is the Trust/Foundation revocable?

  • Is the Trust/Foundation charitable?

  • Does the Settlor/Founder have powers over the Trust/Foundation (distributions, change of beneficiaries, power to conclude life insurance policies)?

  • Is the Settlor/Founder the sole beneficiary?

  • If the Settlor/Founder is deceased, is the income distributed annually to the beneficiaries?

2. The image below shows that in order to perform tax suitability checks with the web-based application inApp, the Client Model form will require clear understanding and specification of the transparency rules of the financial structure.


If you would like to learn more about how Indigita’s solution inApp address the topic discussed here, please contact us at or by telephone at +41 44 552 59 40.

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