Why Custodial Institutions Are Not Look-Through Entities

Automatic Exchange of Information (AEOI) under CRS/FATCA is highly structured and tiered. It is designed to allocate reporting once—not duplicate it. Yet a frequent error is to apply Passive NFE look-through rules to Financial Institutions (FIs), particularly Custodial Institutions (CIs). In this episode, we explain why that approach is incorrect.

🔎 What You’ll Learn

1️⃣ The CRS/FATCA Hierarchy (Why Duplication Is Prohibited)

CRS/FATCA establishes a strict reporting hierarchy:

1. Financial Institutions are Reporting FIs, not Reportable Persons.
2. The system intentionally avoids duplicate reporting by multiple FIs on the same interest.

Misreading this hierarchy is the root of many AEOI errors.

2️⃣ Where the Confusion Starts: Passive NFE Rules

The Organisation for Economic Co-operation and Development CRS FAQ explains that for a Passive NFE, all parent entities must be looked through to identify controlling persons—regardless of the ownership chain.

❌ The mistake: importing this Passive NFE rule into trust analysis and requiring a new trust to look through an existing Custodial Institution even when that CI is a Reporting FI.

This conflates:

1. Look-through rules for Passive NFEs, with
2. Reporting rules for trusts and Financial Institutions.

3️⃣ What the CRS Actually Says About Trusts

CRS guidance on trusts notes that controlling persons of entity equity holders should be identified.

But two paragraphs earlier, it clarifies a critical condition:

👉 Entities are only looked through where they are reportable persons.

Because Financial Institutions are non-reportable persons, they are not subject to look-through.

Overlooking this condition leads to the erroneous conclusion that a custodial institution settlor must be looked through.

4️⃣ The CRS Implementation Handbook: Clarification, Not Expansion

The CRS Implementation Handbook exists to assist understanding and implementation—it does not amend or expand the Standard.

“Clarity” does not equal modification.

While the Handbook explains that where an equity interest is held by an entity, the controlling persons of that entity are treated as equity interest holders, it does not state that this applies to non-reportable entities, such as:

1. Financial Institutions
2. Regularly traded corporations
3. Government entities
4. International organisations
5. Central banks

The effect is a shift of reporting responsibility—not a blockage or duplication—and not an expansion beyond the CRS.

5️⃣ What This Means in Practice

1. A trust must look through entity settlors, trustees, protectors, or beneficiaries only where those entities are reportable.
2. A Custodial Institution that is a Reporting FI is not a look-through entity.
3. Therefore, the reporting chain stops at the institutional level for the trust.
4. Any reporting obligation sits with the custodial institution itself, under its own CRS/FATCA duties.

6️⃣ International Consistency

Other jurisdictions apply the same logic. For example, Hong Kong Inland Revenue Department CRS guidance confirms that where a settlor, beneficiary, or controlling person is an entity, that entity is looked through to identify natural persons—without overriding the distinction between reportable and non-reportable entities.

🎯 Key Takeaway

Custodial Institutions are not look-through entities under CRS or FATCA.

Applying Passive NFE rules to Financial Institutions produces over-reporting, duplication, and incorrect compliance outcomes. Correct AEOI hinges on understanding who reports, who is reportable, and where the obligation sits.