CRS and payment systems: do they issue payment orders to their clients?

We continue to cover the current topic of CRS (Common Reporting Standard) — an international standard for the automatic exchange of information on financial accounts. In previous articles, we told you about the basics of CRS, explained what information the Ukrainian tax service can receive as part of the exchange, and discussed the countries that have already joined the automatic exchange system and those jurisdictions that are still on the sidelines (outside the exchange).

Today, we will pay attention to an important question that we often hear from entrepreneurs: do payment systems participate in the automatic exchange of financial information? We will figure out whether payment services transfer data about their clients, which financial companies participate in CRS, and what aspects need to be taken into account when using payment platforms for international transfers.

Which financial institutions are required to share information under the CRS?

Under the CRS, the transfer of financial information falls on the shoulders of financial institutions that are required to comply with the international exchange requirements. The main participants are banks, credit unions, investment companies, insurance companies, custodian institutions, and depository institutions. These organizations are required to collect and share data about their customers’ accounts with the tax authorities of the countries that participate in the CRS.

However, the participation of payment systems in the CRS is a controversial issue. By definition, the CRS standard is more focused on traditional financial institutions, while many payment systems do not fall under the strict requirements. Payment services such as Revolut, Stripe, Wise, and others are often classified as “non-bank” payment providers and are not formally included in the list of mandatory CRS participants. This means that they are generally not required to share data about their customers with tax authorities.

That is, the general rule is that foreign payment systems do not participate in the CRS if they are either registered in countries that do not participate in the CRS or do not meet the criteria as depository financial institutions. If everything is clear with the first criterion, let’s look at the second criterion in more detail.

Are payment systems depository institutions?

The term “Depository Institution” means an entity that, in the ordinary course of its business, accepts deposits or other placements of customer funds (including current, settlement, savings or term accounts) and carries on banking or similar activities, such as the provision of credit, debt, securities and foreign exchange transactions, and trust or fiduciary services.

It is important that “deposit” in the CRS is understood broadly to include any placement of customer funds, regardless of legal form or terms. This may be a current, savings, term or other account, or any other form of investment of funds that the entity accepts in the ordinary course of its business. However, the interest on such funds, or the lack thereof, does not affect their classification as a deposit.

However, the issuance of electronic money in exchange for funds (including the opening of electronic wallets) is not in itself considered to be the acceptance of deposits in the ordinary course of banking or similar activities. But the combination of issuing electronic money and conducting payment transactions with it, including opening and servicing electronic wallets, with other types of payment services may lead to the recognition of the organization as an accountable Depository Institution.

From here we come to the conclusion that under certain conditions, payment systems can still be defined as Depository Institutions, since they open settlement accounts and can at the same time provide services similar to banks.

How to determine if a payment system participates in CRS?

In order to determine whether a payment system qualifies as a Depository Institution under the CRS, the following key aspects must be considered.

A payment system may be considered a Depository Institution if:

• It accepts deposits or maintains payment accounts for customers.
• It carries out at least one of the following activities:

1. Provision of loans (consumer, mortgage, etc.).
2. Trading in debt obligations, bills of exchange, securities.
3. Provision of trust or fiduciary services.
4. Conducting transactions with currency or financial leasing.

A payment system is not a Depository Institution if it:

• Accepts funds as collateral (e.g., pledge).
• Provides services for transferring funds without opening accounts, acquiring funds.
• Issues electronic money without providing other financial services.
• Conducts transactions with electronic wallets without attracting funds in a manner similar to deposits.

Thus, the main rules for non-bank payment institutions:

1. If an institution opens, maintains and operates payment accounts, it is considered to be engaged in banking or similar activities.
2. If the activities are limited to the transfer of funds without opening accounts or acquiring, it is not a Depository Institution.
3. If an organization only issues electronic money, it does not fall under the definition of a Depository Institution.

Thus, some payment systems can still participate in the auto exchange if they are registered in CRS member jurisdictions and if their business model includes functions similar to banking services.

Payment system license as the main criterion of CRS

Payment systems, as we call them, are financial institutions of various structures and licenses. In determining their participation in the CRS, it is important to consider the type of license that regulates their actual activities, since it is this that determines their obligations regarding the automatic exchange of financial information.

There are different types of licenses for payment systems, including:

1. Bank or Depository Institution License – If the payment system has a banking license, it is required to comply with the CRS requirements and transfer customer account data to tax authorities. Some payment systems may function not only as payment providers, but also as full-fledged banks, providing deposit and loan services. In such cases, they are required to participate in the automatic exchange of financial information.
2. EMI (Electronic Money Institution) License – permission to issue electronic money. Payment systems with such a license, for example, Wise, provide electronic wallet services and bank details (IBAN), but are not depository financial institutions. This means that they are exempt from the obligation to transfer customer data under the CRS, since they do not provide traditional bank deposit services.
3. EMI License with extended functions – in some jurisdictions, payment systems with an EMI license that provide functions similar to banking may fall under the CRS. For example, if an EMI issues IBAN accounts and provides access to wealth accumulation or storage facilities, it may be required to report under the CRS.
4. PI (Payment Institution) Licence – a licence to carry out payment transactions, but does not include banking or depository functions. Payment processors with a PI licence, such as Revolut (in its PI version), are also not required to participate in the CRS, as they are not classified as depository institutions.
5. PI Licence with Enhanced Financial Functions – if a payment processor with a PI licence provides services that include elements of banking activities (for example, long-term storage of significant amounts of money), it may also fall under the CRS requirements.
6. Payment Aggregator Licence – this type of licence regulates the collection and transmission of payment data for trading transactions, but is not equivalent to a bank or depository institution licence. Accordingly, payment aggregators are also not required to participate in the CRS.
7. Investment intermediary license – if the payment system combines payment functions with investment services (for example, providing a platform for trading financial assets), it may fall under the CRS. Such payment systems are required to transfer data about their clients if they offer services similar to investment brokers or management companies.

It is worth noting that some payment systems inform clients about the possibility of transferring data to the competent authorities. There are cases when payment systems ask to fill out a form for notification under the CRS (for example, such a document may be called Tax Residency Self Certification Form), which means that the company identifies tax residents of CRS member countries. If the client’s account meets the reporting criteria under the CRS, the payment system is obliged to transfer data to the local tax authority or the body of the participating jurisdiction.

Although EMIs and other non-credit financial institutions are not subject to the CRS reporting obligation, it is important to remember that account information can be obtained by the tax authorities at any time upon request and there is no escape from this.

Thus, participation of payment systems in the CRS depends on their license and availability of financial functions close to traditional banking or investment services. However, most payment systems, especially those with EMI and PI licenses, are not subject to automatic exchange of financial information via the CRS.

Which payment system accounts are of interest to the tax authorities?

Payment systems such as Stripe, Wise, Revolut, and others are mainly used for instant transfers and transactions. They allow users to quickly send money around the world, pay for goods and services, and make small transfers. By their nature, these systems are not designed to store large sums of money on a long-term basis.

Tax authorities are primarily focused on identifying large savings and income that may indicate tax evasion. Therefore, bank accounts where large sums of money are stored, as well as where there are regular receipts indicating significant financial turnover, most often come under the attention of tax authorities. Let’s take a closer look at which accounts and transactions may attract the attention of tax authorities.

1. Accounts with large amounts and long-term storage of funds

Accounts with balances of $250,000 or more, especially if the funds are stored for a long period of time, are a key indicator for tax authorities. Such accounts may raise suspicions from tax authorities, as they may indicate significant unreported income. If the payment system provides features that allow you to store such amounts, tax authorities may request information on such accounts, especially if the account is registered in a jurisdiction participating in the CRS.

Payment systems such as PayPal and Revolut sometimes provide access to individual bank details (such as IBAN accounts), which allows them to be used as a “bank account analogue”. However, such platforms are not suitable for storing large amounts, and most users store relatively small amounts on them, which reduces the interest of tax authorities.

2. Accounts with regular and significant transactions

Payment systems may also attract the attention of tax authorities if large amounts of money regularly pass through the account, even if they are not stored for a long time. For example, if large amounts of money are regularly deposited into an account in a payment system and then quickly withdrawn or transferred to other accounts, this may raise questions from tax authorities about the origin of the funds.

It is important for users to understand that high-frequency transactions of large amounts may be considered an indication of commercial activity or income, which obliges the user to declare such income and pay the corresponding taxes.

3. Accounts in jurisdictions with strict CRS control

Some payment systems are registered in jurisdictions that strictly comply with CRS requirements and are required to transfer tax information about clients. Such jurisdictions include, for example, EU countries and the UK. In this case, information about large amounts in accounts in payment systems may also be transferred to the tax authorities of the country of residence.

How to reduce the risk of falling under CRS when using payment systems?

To reduce the likelihood of falling under automatic reporting under CRS, payment system users are advised to:

1. Avoid keeping large amounts in payment system accounts. Payment platforms are best used for quick transactions rather than for accumulating capital.
2. Limit the amount of one-time transfers and distribute large transfers into smaller transactions if possible and within the terms of use.
3. Withdraw funds after receipt to avoid leaving large amounts in the account for a long time, which could attract the attention of tax authorities.
4. Understand the requirements of the payment system’s jurisdiction and familiarize yourself with the company’s reporting policies. For example, if the system is registered in the EU or the UK, the likelihood of data exchange is higher.

Thus, if the payment system is used for its intended purpose – for prompt transfers without storing large amounts, the likelihood of CRS reporting and the risk of tax control is minimal.

After all, the automatic exchange of information under the CRS standard is aimed primarily at identifying large savings and significant financial transactions that may indicate income not taken into account in tax returns.

However, each payment system has its own characteristics and requirements, which may vary depending on the jurisdiction and license. Therefore, it is important to approach the choice of a payment system taking into account your financial goals and possible reporting obligations.

If you are interested in how the CRS standard may affect the use of a specific payment system, leave a request for an individual consultation with a lawyer at Azola Legal Services. We will consider your case in detail and offer optimal recommendations for your financial transactions.