Implementation of the Foreign Account Tax Compliance Act (FATCA)
FATCA is a set of information reporting rules designed to prevent and detect tax evasion by United States (US) persons. It reflects and promotes a global trend towards greater tax transparency and increased worldwide efforts to combat tax fraud in many sectors of the financial world. It also builds the basis for other international developments in this respect, such as the Common Reporting Standard (CRS) initiated by the OECD.
Even though FATCA originated in the United States, it also affects non-US entities.
Luxembourg signed an Intergovernmental Agreement (IGA) Model 1 with the United States on 28 March 2014 under the terms of which FATCA is applied in Luxembourg. The IGA was ratified on 24 July 2015 by the Luxembourg Parliament and enacted into Luxembourg law on the same date (FATCA Law).
Based on the FATCA Law, Luxembourg financial institutions (i.e. depositary and custodial institutions, certain insurance companies, and investment entities that do not benefit from an exemption) have to comply with some due diligence and registration duties. In addition, they have to report on FATCA to the Luxembourg tax authorities by 30 June each year (with respect to financial accounts existing in the previous year) even though they do not have any US reportable accounts (in this case, a nil report is required). The Luxembourg tax authorities will then automatically exchange this information with the US Internal Revenue Service (IRS) by 30 September.
Apart from Luxembourg banks, insurance companies, funds, or other entities that fall within the definition of investment entities (certain holding companies, securitisation vehicles, etc.) might be subject to full FATCA obligations despite the fact that they have neither US investments nor US investors. If the entity being an in-scope financial institution does not comply with its FATCA obligations as implemented under Luxembourg law, it risks being subject to local penalties (currently up to EUR 250,000 and 0.5% of the amount incorrectly reported) in addition to a 30% WHT in certain limited cases. Under a law voted on 16 June 2020 that clarifies compliance obligations, reporting financial institutions must have written policies and procedures, adequate systems, and appropriate controls (even on service providers to whom relevant tasks are outsourced). As of 2021, failure to submit a required FATCA report will be subject to a lump-sum penalty of EUR 10,000 (in addition to the penalties mentioned above).
It is worth noting that the FATCA Law (same as the IGA Annex II) provides some deemed-compliant categories (e.g. Collective Investment Vehicle, Sponsored Investment Entity, Luxembourg Investment Advisors and Investment Managers) under which Luxembourg financial institutions, should they qualify for one of these categories, would be subject to lighter FATCA obligations as non-reporting foreign financial institutions. Given the obligations under the new law mentioned above, it is recommended to document why the entity applies its non-reporting status and how it monitors the conditions that go with this status.
In order to comply with their FATCA obligations, financial institutions need to know the FATCA status of their account holders, investors, policy holders, etc. Therefore, even entities that do not qualify as financial institutions should analyse their FATCA status, as they need to certify it to their financial counterparts.
Implementation of the Common Reporting Standard (CRS)
On 21 July 2014, the OECD released the Standard for Automatic Exchange of Financial Account Information in Tax Matters, including the Commentary on the CRS. The CRS seeks to establish the automatic exchange of tax information as the new global standard. The automatic exchange of information involves the systematic and periodic transmission of extensive taxpayer information from the country in which a taxpayer's financial accounts are located to that taxpayer’s country of residence.
Similar to the provisions of FATCA and the various IGAs between the US government and partner governments around the world, the CRS imposes obligations on financial institutions, including some holdings companies, across the financial services market to review and collect information in an effort to identify an account holder’s country of residence and then, in turn, to provide certain specified account information to that home country’s tax administration.
The CRS has been incorporated in the amended Directive on Administrative Cooperation (DAC 2) officially adopted by the European Council on 9 December 2014. On 24 December 2015, the Luxembourg CRS Law of 18 December 2015 was published, enacting the CRS into Luxembourg law with an entry into force as of 1 January 2016. Therefore, Luxembourg financial institutions had, as of this date, to on-board new clients/investors according to specific procedures and review high value individual clients/investors no later than 31 December 2016. The CRS due diligence of their other pre-existing clients/investors (including all entities) had to be finalised no later than 31 December 2017.
Based on the result of those on-boarding and due diligence procedures, the Luxembourg financial institutions have to file CRS reports to the Luxembourg tax authorities by 30 June each year (with respect to financial accounts maintained in the previous year). The Luxembourg tax authorities will then automatically exchange this information with the relevant other jurisdictions by 30 September. Although filing a nil report is optional until 2020, Luxembourg tax authorities recommend to do so. Under a law voted on 16 June 2020, nil reports are mandatory as of 2021 (i.e. reporting for the year 2020). The penalties for missing or incorrect reporting, as well as non-compliance, are similar to those mentioned for FATCA above. As for FATCA, reporting financial institutions need to have written policies and procedures, adequate systems, and appropriate controls in place.
The CRS report will have to comply with the specific format defined by the Luxembourg tax authorities’ Circular ECHA 4. The jurisdictions for which data must be exchanged are listed in a Grand-Ducal Decree, which is updated generally once a year.
FATCA and CRS common data protection treatment
According to the Luxembourg FATCA and CRS Law, as well as Luxembourg data protection rules, each individual concerned (including controlling persons of certain entities) shall be informed on the processing of one’s personal data before a Luxembourg financial institution processes the data for FATCA and CRS purposes. Furthermore, each individual concerned must be informed about the jurisdiction with which the data is exchanged.
Each individual subject to the FATCA and CRS reporting (including controlling persons of certain entities) has the right to access and rectify one’s personal data but is also required to respond to the financial institution’s request for relevant information.
EU state aid
As of 18 December 2019, the EC has four formal state aid cases pending involving Luxembourg companies to examine whether there was any breach of the EU rules on state aid. For the latest one, the opening of the investigation was released by the EC on 7 March 2019.
On 19 September 2018, the EC also released the final decision for the McDonald's case and stated that no state aid was granted by Luxembourg.
Upon the publication by the EC of each of the opening/final decision(s), the Luxembourg government consistently stated that Luxembourg is confident that the allegations of state aid are unsubstantiated and that it will be able to convince the EC that no particular tax treatment or selective advantage was granted.
Additional information is available on the website of the PwC EU Direct Tax Group (https://www.pwc.com/gx/en/services/tax/international-tax-services/eu-direct-tax-group.html).
In 2017, Luxembourg was one of the original 68 jurisdictions to sign the Organisation for Economic Co-operation and Development (OECD)-sponsored Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS), commonly referred to as the ‘Multilateral Convention’ or ‘MLI’.
On 14 February 2019, Luxembourg’s Chambre des Députés voted to approve Bill No 7333, necessary to ratify the text of the MLI. No changes have been made to the original list of reservations and notifications submitted to the OECD.
Following this, on 9 April 2019, Luxembourg deposited with the OECD its instrument of ratification of the MLI. Under the provisions of the MLI, this formal action defines the subsequent timing for the MLI to begin to come into effect for Luxembourg’s network of tax treaties.
The MLI formally 'entered into force' for Luxembourg on 1 August 2019.
The dates on which the provisions of the MLI that apply to Luxembourg’s double tax treaty (DTT) network then actually come into effect are variable, as these also depend on the timing of ratification process for the MLI by each relevant treaty co-signatory. However, it is now clear that, insofar as the new 'Principal Purposes Test' in the MLI potentially limits the treaty benefits of reduced or zero rates of withholding taxes (WHTs), for many of Luxembourg’s treaties these MLI measures take effect on 1 January 2020.
Conversely, Luxembourg’s treaties with countries that have yet to sign the MLI, such as the United States (US), cannot be affected by any MLI modifications, unless and until the country concerned has both subsequently signed the MLI and gone through its ratification and deposit processes.