Luxembourg

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 under 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 within private equity or real estate structures, 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 (up to EUR 250,000 and 0.5% of the amount incorrectly reported in case of audit findings) 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 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.

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. 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, prior to the reporting, 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.

The Luxembourg law introducing DAC 7 into national law also amends the CRS Law with regard to data protection requirements. This law establishes a new obligation to notify on an annual basis individual clients and investors (as well as controlling persons) on the personal information shared in the CRS reports, prior to their filing.

Implementation of DAC 6 in the Luxembourg law 

On 21 March 2020, the Luxembourg Parliament voted to approve the Bill (n°7465) implementing the Directive (EU) 2018/822 on mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements (commonly referred to as 'DAC 6'). The law dated 25 March 2020 follows the text of DAC 6 rather closely and is applicable since 1 July 2021. The Luxembourg tax authorities have issued guidelines in the form of an FAQ updated from time to time.

DAC 6 makes it mandatory for intermediaries (or taxpayers if there is no intermediary or intermediaries subject to professional secrecy as defined by EU member states' domestic laws) to report some cross-border transactions and arrangements to the domestic tax authorities and will trigger the subsequent automatic exchange of information to tax authorities of all EU member states through access to a central directory.

During the Luxembourg legislative process, amendments were made to the initial provisions in relation to professional secrecy at the request of the State Council. As a result of these amendments, the benefit of professional secrecy, initially limited to lawyers, has been extended to auditors and qualified accountants. In most cases, the reporting obligation to the Luxembourg tax authorities will therefore be shifted to other intermediaries or to the taxpayer.

Based on the ECJ decision dated 8 December 2022, our view is that intermediaries benefiting from this legal privilege have an obligation to notify any other intermediary not protected by professional secrecy and who are their clients, or if not the case, the relevant taxpayer(s), of their reporting obligations within a period of ten days following the earliest of the above-mentioned events.

The Luxembourg law introducing DAC 7 into national law also amends the law dated 25 March 2020 with regard to data protection requirements. This law establishes a new obligation to notify individuals concerned on the personal information shared in the DAC 6 reports, prior to their filing.

Implementation of DAC 7 in the Luxembourg law

On 3 May 2023, the Luxembourg Parliament voted in favour of the bill of law n°8029, to implement DAC 7 into the Luxembourg legal system (the ’DAC 7 Law‘), with more than five months of delay.

The DAC 7 Law, taking effect as of 1 January 2023, introduces obligations on reporting platform operators (as defined by the DAC 7 Law) to collect information on their users being sellers and provide it to the Luxembourg tax authorities on an annual basis. The activities in scope of DAC 7 are the rental of immovable property, personal services, the sale of goods, and the rental of any mode of transport carried out through platforms. It also introduces new (standardised) automatic exchange of information between the EU tax authorities, regarding the taxable events and income generated through these platforms.

EU state aid

On 5 December 2023, the Grand Chamber of the Court of Justice of the European Union (CJEU) rendered its judgment in joined cases C-451/21 P and C-454/21 P regarding the action brought by Engie group companies and Luxembourg against the judgments of the General Court of the European Union (GC) of 12 May 2021 (T-516/18 and T-525/18) that previously confirmed the existence of State Aid under article 107 TFEU. The CJEU ruled that the European Commission (EC) erred in its State Aid analysis of the tax rulings granted to Engie group.

On 14 December 2023, the CJEU rendered its judgments in the case C-475/21 P regarding the action brought by Amazon group companies and Luxembourg against the judgment of the GC of 12 May 20221. The CJEU ruled that Luxembourg did not grant any State Aid to Amazon. In essence, the CJEU upheld the GC judgment despite errors in the GC’s reasoning. This was because the EC’s decision had to be annulled in any event because of the incorrect determination of the reference system, rather than for the reasons given by the GC.

On 8 November 2022, the CJEU published its final decision on two appeals (C-885/19 P, and C-898/19P) regarding the formal state aid investigation by the EC dating back to October 2015 in relation to an Advance Pricing Agreement of Fiat Finance & Trade Ltd (FFT). The CJEU annulled the EC’s decision setting aside the finding that FFT had received state aid. The CJEU concluded that the GC’s decision was vitiated by an error of law. Essentially, the CJEU confirmed that when performing a state aid analysis in tax cases, the determination of the reference system, which is a key element of that analysis, should be based on the domestic tax legislation of the member state concerned, recognising that, at the current stage of development of EU law, there is no general harmonisation of tax measures across the European Union, and, accordingly, member states have the power to define the rules of ‘normal’ taxation of an integrated company (albeit such power must be exercised in a manner consistent with the provisions of EU law).

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).

Multilateral instrument (MLI)

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 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, insofar as the new 'Principal Purposes Test' in the MLI potentially limits the treaty benefits of reduced or zero rates of WHTs, for many of Luxembourg’s treaties these MLI measures took 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.