Entity classification is the foundation of every FATCA and CRS programme. Get it wrong and every downstream obligation, from due diligence to reporting, is built on a shaky base. This guide walks through the decision points we use in practice.
Start with the activity test
A Financial Institution is defined by what the entity does, not what it is called. The four FI categories (Custodial Institution, Depository Institution, Investment Entity, Specified Insurance Company) all hinge on activity and income tests. For most operating businesses the answer is straightforward: they are NFEs.
The investment entity trap
The investment entity test catches the most entities by surprise. A holding company that is professionally managed and whose income is primarily passive can fall inside the definition, especially in jurisdictions that follow the broader CRS interpretation. Document the income test and management arrangement each year.
Active vs Passive NFE
Once you have concluded an entity is an NFE, the active or passive determination governs whether controlling persons must be identified. Use a clear two-part test: less than 50% passive income and less than 50% passive assets keeps you Active.
Document the rationale
The classification itself is only half the work. A short memo capturing the test applied, the data used and the reviewer is what makes it defensible at audit. Store it with the entity record, not in a personal folder.
