Charities: Due diligence: Entity status
IEIM404920: Charities: Due diligence: Entity Status
An entity that is not a Financial Institution will be a Non-Financial Entity (NFE). NFEs are divided into two categories, Active NFEs and Passive NFEs. The Passive NFE is a default category and will include any NFE that does not meet the criteria to be an Active NFE.
An NFE will be Active if it meets any of the following criteria:
- It is active by reason of income or assets. This is where less than 50% of its gross income is from passive income, and less than 50% of its assets are assets that produce, or are held to produce passive income. For details of passive income see IEIM404020.
- Its stock is regularly traded on an established securities market [see IEIM404000].
- It is a Government Entity [see IEIM400930], International Organisation [see IEIM400940], Central Bank [see IEIM400950] or a wholly owned subsidiary of such an entity
- It is a not for profit organisation set up for religious, charitable, scientific, artistic, cultural, athletic or educational purposes; or it is established and operated as a professional organisation, business league, chamber of commerce, labour organisation, agricultural or horticultural organisation, civic league or an organisation operated for the promotion of social welfare. In all cases the organisation must be exempt from income tax and its income and assets cannot be applied other than for the express purposes for which the organisation is established.
- In practice all UK charities that are not Financial Institutions and that are registered with one of the UK charities commissions or registered with HMRC as a charity and all non-charitable CASCs registered with HMRC, will be within the definition of an Active NFE and so will not be required to identify Controlling Persons.
For further definitions see IEIM404040.
Determining entity status
A charity may obtain a self-certification from the Account Holder to establish its status, or instead may use:
- Information in its possession; or
- Information that is publicly available (such as information published by an authorised government body or standardised industry coding system) based upon which it can reasonably determine that the Account Holder is an Active NFE or a Financial Institution.
For charities that are account holders a Financial Institution may use the public registers maintained by the Charities Commission for England and Wales and the Charities Commission for Northern Ireland and the Office of the Scottish Charity Register to establish that a charity is an Active NFE.
Investment entities in non-participating jurisdictions
Note though that a professionally managed investment entity that is tax resident in a Non-Participating Jurisdiction is always treated as a Passive NFE, even though it would be treated as a Financial Institution if it were resident in a Participating Jurisdiction (this ensures that it is not possible for controlling persons to avoid reporting by setting up such entities in Non-Participating Jurisdictions). For charities in Non-Participating Jurisdictions this means that they cannot self-certify as a Financial Institution to other Financial Institutions with whom they hold financial accounts, or from whom they receive grants. They must self-certify as a Passive NFE and identify Controlling Persons.
A US tax resident charity that is an Investment Entity Financial Institution makes a loan to a UK charity that is a Financial Institution. The USA is a Non-Participating Jurisdiction. It is necessary for the UK charity to determine not only the entity status of the US charity but also whether its Controlling Persons are Reportable Persons.
Determining Controlling Persons
For the purposes of determining the Controlling Persons of an Account Holder, a Financial Institution may rely on information collected and maintained pursuant to AML/KYC Procedures. Charities will not collect or maintain information for AML/KYC purposes, so should seek self-certification from the entity that identifies all Controlling Persons.
Determining whether a Controlling Person is a Reportable Person
For the purposes of determining whether a Controlling Person of a Passive NFE is a Reportable Person, a Financial Institution may only rely on a self-certification from either the entity Account Holder or the Controlling Person.