Appendix II. Residence and Institutional Units
- Rita Mesias
- Published Date:
- October 2015
II.1 For the convenience of economies participating in the CDIS, this appendix provides key definitions and concepts, taken mainly from the Balance of Payments and International Investment Position Manual (BPM6).
II.2 The residence of each institutional unit is the economic territory1 with which it has the strongest connection. Residence can also be expressed as the center of predominant economic interest. Each institutional unit is a resident of one and only one economic territory determined by its center of predominant economic interest. Definitions for determining residence (given as follows) are designed to apply the concept of center of predominant economic interest. These definitions should be used in preference to a discretionary choice between different possible aspects of economic interest (see paragraph 4.113 in BPM6).
II.3 An institutional unit is resident in an economic territory when there exists, within the economic territory, some location, dwelling, place of production, or other premises on which or from which the unit engages and intends to continue engaging, either indefinitely or over a finite but long period of time, in economic activities and transactions on a significant scale. The location does not need to be fixed so long as it remains within the economic territory. Actual or intended location for one year or more is used as an operational definition; while the choice of one year as a specific period is somewhat arbitrary, it is adopted to avoid uncertainty and facilitate international consistency (see paragraph 4.114 in BPM6). Additional criteria for cases where there is no actual or intended physical presence for a year or more are discussed in paragraph II.6.
II.4 As a general principle, an enterprise is resident in an economic territory when the enterprise is engaged in a significant amount of production of goods and/ or services, or owns assets or incurs liabilities, from a location in the territory (see paragraph 4.131 in BPM6).
II.5 Taxation and other legal requirements tend to result in the use of a separate legal entity for operations in each legal jurisdiction. In addition, a separate institutional unit is identified for statistical purposes where a single legal entity has substantial operations in two or more territories (for example, for branches, land ownership, and multiterritory enterprises). As a result of splitting such legal entities, the residence of each of the subsequently identified entities is clear. The introduction of the terminology center of predominant economic interest does not mean that entities with substantial operations in two or more territories no longer need to be split (see paragraph 4.132 in BPM6).
II.6 In some cases, the physical location of an enterprise is not decisive to identify its residence because the corporation has little or no physical presence, for example, if its administration is entirely contracted out to other entities (see paragraph 4.134 in BPM6).
II.7 Mobile production involves an enterprise undertaking production from a base in one location, but delivering services in other locations. Mobile production processes include some transport activity, delivery of advice and on-site repair services, and short-term construction. The residence of such enterprises is determined from the base of operations, rather than the point of delivery or location of mobile equipment, unless the activities at the point of delivery are sufficiently substantial to amount to a branch, defined as follows (see branches). See also paragraph 4.136 in BPM6.
II.8 The main attributes of an institutional unit are that:
- (1) It is entitled to own goods or assets in its own right; it is, therefore, able to exchange the ownership of goods or assets in transactions with other institutional units.
- (2) It is able to take economic decisions and engage in economic activities for which it is itself held to be directly responsible and accountable by law.
- (3) It is able to incur liabilities on its own behalf, to take on other obligations or future commitments, and to enter into contracts.
- (4) Either a complete set of accounts, including a balance sheet, exists for the unit, or it would be possible and meaningful, from both an economic and legal viewpoint, to compile a complete set of accounts if they were to be required.
II.9 Institutional units are recognized in the cases of branches and notional resident units even though they may not fully satisfy criteria (1), (2), and (3).2
II.10 There are two main types of units in the real world that may qualify as institutional units:
- (1) Households—persons or groups of persons
- (2) Corporations (including quasicorporations), nonprofit institutions, and government units.
II.11 Cases of institutional units that are especially relevant for direct investment are reviewed as follows.3
II.12 A quasicorporation is an unincorporated business that operates as if it were an entity separate from its owners. It is treated as if it were a corporation. This treatment is applied whether a branch, limited liability or other type of partnership, or other unincorporated legal structure is used. Types of quasicorporations may include branches, notional residents for ownership of land, trusts, and so on.4 The intent behind the concept of a quasicorporation is to separate from their owners those unincorporated enterprises that are sufficiently self-contained, that is, that behave as if they were corporations.
II.13 When a nonresident unit has substantial operations over a significant period in an economic territory, but no separate legal entity, a branch may be identified as an institutional unit. This unit is identified for statistical purposes because the operations have a strong connection to the location of operations in all ways other than incorporation.
II.14 The identification of branches has implications for the statistical reporting of both the parent and branch. The operations of the branch should be excluded from the institutional unit of its head office in its home territory and should be reported consistently in both of the affected economies. Each branch is a direct investment enterprise (DIENT).
Special cases involving branches
II.15Construction projects. Some construction projects undertaken by a nonresident contractor may give rise to a branch. Construction may be carried out or managed by a nonresident enterprise, without the creation of a local legal entity: For major projects (such as bridges, dams, power stations) that take a year or more to complete and that are managed through a local site office, the operations would usually satisfy the criteria for identification of a branch. In other cases, the construction operations may not satisfy the conditions for recognition as a branch, for example, for a short-term project or one based from the home territory rather than a local office.
II.16Mobile equipment. Mobile equipment, including ships, aircraft, drilling platforms, and railway rolling stock, may operate across more than one economic territory. The criteria for recognition of a branch also apply in these cases.
II.17 A multiterritory pipeline that passes through a territory, but it is not operated by a separate legal entity in that territory, would be recognized as constituting a branch or not, according to whether there is substantial presence, availability of separate accounts, etc.
II.18 Some enterprises operate as a seamless operation over more than one economic territory. Although the enterprise has substantial activity in more than one economic territory, it cannot easily be broken up into a parent and branch(es) because it is run as an indivisible operation with no separate accounts or decisions. Such enterprises are typically involved in crossborder activities and include shipping lines, airlines, hydroelectric schemes on border rivers, pipelines, bridges, tunnels, and undersea cables. Some nonprofit institutions serving households may also operate in this way.
II.19 Governments usually require separate entities or branches to be identified in each economic territory for more convenient regulation and taxation. Multiterritory enterprises have usually been exempted from such requirements, but there may be arrangements, such as a formula for payment of taxation to the respective authorities.
II.20 In the case of a multiterritory enterprise, it is preferable that a parent and separate branch(es) be identified separately for each economy. If possible, enterprises would be identified in each territory of operation according to the principles for identification of branches discussed previously. If that is not feasible because the operation is so seamless that separate accounts cannot be developed, it is necessary to prorate5 the total operations of the enterprise into the individual economic territories.
II.21 A joint venture is a contractual agreement between two or more parties for the purpose of executing a business undertaking in which the parties agree to share in the profits and losses of the enterprise as well as the capital formation and contribution of operating inputs or costs. It is similar to a partnership, but typically differs in that there is generally no intention of a continuing relationship beyond the original purpose. A joint venture does not necessarily involve the creation of a new legal entity.
II.22 Whether a quasicorporation is identified for the joint venture depends on the arrangements of the parties and legal requirements. The joint venture is a quasicorporation if it meets the requirements for an institutional unit, particularly by having its own records. Otherwise, if each of the operations is effectively undertaken by the partners individually, then the joint venture is not the institutional unit and the operations would be seen as being undertaken by the joint venture partners separately. (In that case, there would usually be direct investment enterprises that undertook the joint venture operations of each of the partners.) Because of the ambiguous status of joint ventures, there is a risk that they could be omitted or double-counted, so particular attention needs to be paid to them.
II.23 Estates and trusts are not incorporated but are legal arrangements that have aspects of legal identity separate from their owners and trustees. An estate is the legal device to hold the property of a deceased person before that property is distributed to the beneficiaries. A trust is a legal device by which property is held in the name of one party or parties (the administrator or trustee) who is (are) under an obligation to hold assets for the benefit of another party or parties (the beneficiary or beneficiaries). Administrators and trustees are required to keep the trust and estate assets separate from their personal property and they must account to the beneficiaries for the income and assets. These legal arrangements are treated as separate institutional units. This treatment is necessary because it is neither meaningful nor feasible for the trust assets to be allocated to the beneficiaries and then be combined with the assets of beneficiaries who are resident in another economy. Trusts can be used for businesses, asset management, and for nonprofit institutions.
Flexible Corporate Structures with Little or No Physical Presence6
II.24 Multinational enterprises often diversify their investments geographically, through organizational structures. These include certain special purpose entities (SPEs) that facilitate financing of investments for the multinational enterprise from sources both internal and external to the enterprise group.7 Additionally, SPEs also serve other functions such as regional administration including management of foreign exchange risks and other activities aimed at profit maximization. SPE is a generic label applicable to these organizational structures, which are also variously referred to as financing subsidiaries, conduits, holding companies, base companies, and regional headquarters. In some instances, multinational enterprises may use existing operational companies to perform functions usually associated with SPEs. While there is no international standard definition of such companies, typical features of these entities are that their owners are not residents of the territory of incorporation, other parts of their balance sheets are also vis-à-vis nonresidents, they have few or no employees, and little or no physical presence.
II.25 SPEs are residents of the economies in which they are incorporated or organized and, therefore, they may be direct investors (DIs) or DIENTs. Even if they are shell companies or pass-through units without any other productive economic activity of their own, they qualify as DIs or as DIENTs by virtue of being resident in one economy and being owned by, or owning, an enterprise in a different economy. Thus, positions between DIs and DIENTs that are SPEs are to be treated in the same way as those with investors and enterprises that are not SPEs. It is important to note that most SPEs do not meet the definition of financial intermediary and so the exclusion from direct investment of debt positions between most SPEs and other financial institutions does not apply.
II.26 Identifying ultimate host and ultimate investing economies (UIEs) to determine geographical allocation is helpful for direct investment positions in addressing some of the concerns raised by SPEs. However, given the complexity of some investment structures and the practical difficulties in implementation, only UIE is recommended as part of the additional elements of the CDIS. For details on UIE, see the Benchmark Definition of Foreign Direct Investment (BD4), Annex 10.
II.27 It should be noted that debt positions of financial intermediaries are excluded from direct investment data if they involve both a resident financial intermediary, and a nonresident financial intermediary, other than insurance corporations and pension funds. In cases of external debt of a financial intermediary with a direct investment enterprise or direct investor that is not a financial intermediary, the debt is part of direct investment.
II.28 In general, the following financial intermediaries are classified in this sub-sector: central bank, commercial banks, “universal banks,” “all-purpose” banks, savings banks (including trustee savings banks and savings banks and loan associations); post office giro institutions, post banks, giro banks; rural credit banks, agricultural credit banks; cooperative credit banks, credit unions; traveler’s check companies that mainly engage in financial activities, and specialized banks or other financial institutions if they take deposits or issue close substitutes for deposits. The liabilities of deposit-taking corporations are typically included in measures of broad money.
Money Market Funds (MMFs)
II.29 MMFs are collective investment schemes that raise funds by issuing shares or units to the public. The proceeds are invested primarily in money market instruments, MMF shares and units, transferable debt instruments with a residual maturity of less than one year, bank deposits, and instruments that pursue a rate of return that approaches the interest rates of money market instruments. MMF shares can be transferred by check or other means of direct third-party payments.
Non-money Market Investment Funds (non-MMF)
II.30 Non-MMF investment funds are collective investment schemes that raise funds by issuing shares or units to the public. The proceeds are invested predominantly in long-term financial assets and nonfinancial assets (usually real estate). They are not transferable by means of check or other means of direct third-party payments.
II.31 Hedge funds are a kind of investment fund. Hedge fund is a term that covers a heterogeneous range of collective investment schemes, typically involving high minimum investments, light regulation, and a wide range of investment strategies.
Other Financial Intermediaries, Except Insurance Corporations and Pension Funds
II.32 Other financial intermediaries, except insurance corporations and pension funds consist of: financial corporations engaged in the securitization of assets; underwriters, and securities and derivative dealers (on own account); financial corporations engaged in lending including financial leasing; as well as personal or commercial finance; central clearing counterparties, specialized financial corporations that assist other corporations in raising funds in equity and debt markets, and provide strategic advisory services for mergers, acquisitions, and other types of financial transactions, and any other specialized corporations that provide short-term financing for corporate mergers and takeovers; export/import finance; factoring companies; and venture capital and development capital firms.