IEIM403430 - Due Diligence: New Entity Accounts : Examples

The following examples illustrate the classification of entities as Active or Passive NFEs: 

Trading company 

  • EFG Ltd operates a plumbing business. Everything owned by the company is used in the plumbing business and all income arises from plumbing services other than a small amount of bank interest on an investment account. The bank interest is passive income, but since this represents less than 50% of the total income and none of the company’s other assets are held for the production of passive income, the company is an Active NFE. 
  • HJK Ltd runs a fish and chip shop. All shop fittings, stock and other assets of the company are used to run the shop. A side part of the premises is sub-let to a coffee shop, and the rent from this is 30% of the total income earned by the business. The rent is passive income, but since this represents less than 50% of the total income of the business and less than 50% of the company’s assets are held for the production of passive income, the company is an Active NFE. 
  • MNP Ltd owns a portfolio of properties that it rents out as holiday homes. It has no other income, and its only other assets are office furniture and bank accounts. The company’s employees maintain the properties, arrange the lettings and collect the rents. Since the company is actively carrying on a business of property rental, the rents in this case are not passive income and the properties are not held for the production of passive income. The company is an Active NFE. 
  • QRS Ltd is owned by a sole individual who holds a portfolio of properties that are leased out to tenants. QRSLtd’s income is primarily derived from rental income, and it has no employees that actively manage and maintain the properties. Since the company is not actively carrying on a business of property rental, has no employees, and the properties held produce passive income, the company is a Passive NFE.  
  • TUV Ltd is a trading company that pays rental income to its parent company, TUV Holdings Ltd. TUV Holdings Ltd owns the property that TUV Ltd uses for its business activities. The TUV group is a non-financial group. TUV Holdings Ltd is an Active NFE by virtue of the holding NFE criteria at Section VIII D(9)(d) of the CRS. 
  • WXY Ltd operates a high street toy shop, which generates 40% of its total income. The other 60% of its income is from dividends, from its shareholdings in three companies that own real estate. Since the dividends are passive income and represent over 50% of the company’s income, the company does not meet the test to be an Active NFE and is therefore a Passive NFE. 

 

Trust not professionally managed 

  • The CDE family trust holds various investments including real estate, cash, shares, antiques and artwork.  The trustee is John, a family friend. Although most of the trust’s income comes from dividends, the trust is not a financial institution because the financial assets are not professionally managed by another financial institution.  All of the trust’s income is passive and the trust is therefore a Passive NFE.