On 31 July 2015, the Luxembourg Tax Authorities released the final administrative circular ECHA n°2 and the updated administrative circular ECHA n°3 on FATCA (“Foreign Account Tax Compliance Act”) with regard to the automatic exchange of information between Luxembourg and the United States.
Following the Model 1 Intergovernmental Agreement (“IGA”) that was signed by Luxembourg and the United States on 28 March 2014, Luxembourg Financial Institutions have to exchange information concerning the assets held by U.S. citizens or residents with the Luxembourg Tax Authorities (“Administration des Contributions Directes”) which will transfer the information provided to the U.S. Tax Administration, the Internal Revenue Service (“IRS”).
The 33-pages long-awaited circular is limited to the legal requirements imposed on Luxembourg financial institutions (“FI”) under the IGA signed with the United States.
Further to the Luxembourg FATCA law dated 24 July 2015 and published on 29 July 2015 (PDF, 173 KB), the circular provides some practical guidelines in French on the outlines of said IGA and its annexes.
In particular, the circular provides some clarifications with respect to the following:
Alignment with CRS
The circular generally states that, to the extent possible, the Luxembourg tax authorities intend to align the FATCA Guidelines with OECD Commentary on the Common Reporting Standard (CRS).
Key Definition of Financial Institutions under the Luxembourg IGA
The circular emphasizes that the definition of Investment Entity should be understood in such a manner that the activities and operations of an Investment Entity should be exercised with a “commercial purpose” and “for or on behalf of a customer”.
Furthermore the circular points out that an entity should qualify as investment entity if its income is generated by the activity of investment, reinvestment and trading in financial assets. Indeed, an entity should be considered to perform substantially the activity of an Investment Entity if more than 50 % of the income generated results from such activities during the shorter of the following two periods:
The Luxembourg Authorities further confirm that the definition should be interpreted in a manner consistent with similar language set forth in the definition of “financial institution” in the Financial Action Task Force Recommendations.
In addition, the circular prescribes that in general, a Luxembourg holding company should qualify as Passive Non-Financial Foreign Entity (“NFFE”) and might in some cases qualify as Active NFFE or Investment Entity depending on the nature of assets, income and the shareholding structure of the entity.
In fact, a Luxembourg holding company should be considered to qualify as Investment Entity, if the activities or operations are exercised with “commercial purpose” and “for or on behalf of a client”. This might be the case, when a Luxembourg holding company issues shares through public offering or the equity of the Luxembourg holding company is considered open to a large number of unrelated investors and/or the Luxembourg holding company holds itself out as investment vehicle.
Private wealth management companies taking the form of a “société de gestion de patrimoine familial” should qualify as Passive NFFE under Luxembourg IGA.
Unregulated securitization vehicles, not subject to the supervision of the “Commission de Surveillance du Secteur Financier” should qualify as Passive NFEEs through the application of the similar rules defined above for the Luxembourg holding companies.
Account subject to reporting obligations
The circular offers useful clarifications with respect to when an account should be treated as an U.S. Reportable Account for a given year.
The circular provides the following examples:
The circular confirms that there is no prescribed form to be used and that the IRS Forms (e.g. Forms W-8 or W-9) might be used to determine the FATCA status of an account holder.
Further, a self-certification can be either a separate document or included in the account opening form.
Currency translation rule
In the context of the due diligence threshold and aggregation rules a Reporting Luxembourg Financial Institution should convert the U.S. Dollar threshold amounts using the spot rate published as of the last day of the calendar year preceding the year in which the Reporting Luxembourg Financial Institution is determining the balance or value.
The finding of a US passport or a Green Card triggers the immediate qualification of the account as a US Reportable Account, i.e. in this case the remediation periods for US indicia as prescribed in the Annex I of the IGA should not apply.
The circular provides the following examples in this context:
Change of circumstance after year-end
The circular states that the end of each appropriate reporting period (i.e. in general 31.12.N) as the reference/end date to consider whether an account qualifies as a US Reportable Account or not for that given year.
Here again, the circular provides some helpful examples:
Obligation to submit Nil Reports
The circular confirms as a general rule that, in absence of US Reportable Accounts, a Luxembourg Reporting FI is required to file a nil return. In addition the circular provides that, in case a Luxembourg Reporting FI deregisters from the IRS FFI list during a given calendar year, the Luxembourg Financial Institution should be obliged to submit a FATCA report for the calendar year of de-registration.
Account balance for accounts closed during the year
The circular emphasizes that the purpose of the automatic exchange of information should be to capture the account balance that is extracted from the account prior to the closure (rather than the account balance at closure, which in general should amount to nil).
Most favored nation clause
The circular confirms the application of the most favored nation clause, with respect to the article 4 of the Luxembourg IGA and the Annex I, in case the US should negotiate a more favorable IGA with another Partner Jurisdiction. This provision should not apply to the Annex II with the exception of sub-section V. F “Partner Jurisdiction Accounts”.
Further, the circular confirms that entity accounts opened between 1 July 2014 and 31 December 2014 may be considered as pre-existing accounts for due diligence purposes as provided by IRS “Notice 2014-33”.
Controls by the Luxembourg Tax Authorities
The circular states that the Luxembourg Tax Authorities will perform controls with respect to the due diligence requirements of the Annex I. In particular, with respect to the processes, e.g. the IT systems, that have been implemented by the Reporting FIs. In addition, the Luxembourg tax authorities will control that no practices have been adopted by the Reporting FIs with the intend to circumvent reporting requirements.
With respect to sanctions the circular reiterates provided by the FATCA law:
Along with the ECHA n°2, the Luxembourg Tax Authorities issued a final update of the ECHA n°3 defining the technical aspects of the exchange of information.
Compared to the draft version issued on 30 June 2015, the following points of the technical circular have been updated:
As a reminder, please note that the deadline for the FATCA reporting with respect to Financial Accounts as at 31 December 2014 was exceptionally extended to 31 August 2015 (instead of 30 June).
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