FATCA e-alert issue 2015-13 | KPMG | BH

FATCA e-alert issue 2015-13

FATCA e-alert issue 2015-13

1000

Contact

Also on KPMG.com

Final administrative circulars on FATCA released

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”).

Circular on the Luxembourg FATCA legal requirements (ECHA n°2)

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 period of 3 years ending on 31 December of the calendar year preceding the calendar year during which the determination is made, or
  • The period of existence of the company, if this period is shorter than 3 years.

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:

  • Example 1: an account existing on 1 January 2015 becomes a US Reportable Account as of 1 November 2015. In this case, the account should be reported during the 2015 reporting year. Further, the relevant income received during the period 1 January 2015 to 31 December 2015 has to be reported in this case.
  • Example 2: an account existing on 1 January 2015 loses the status of US Reportable Account as of 1 November 2015. In this case, the account should not be reported during the 2015 reporting year.

 

Self-Certification forms

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.

 

US Indicia

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:

  • Example 1: an unequivocal indicia of a US place of birth is found in 2014 with respect to a pre-existing individual account that is a high-value account. The Reporting FI maintaining the account has decided to request a self-certification, as prescribed by Annex I, sub-section II. B4 of the IGA, to remediate, if applicable, said indicia. As at 31 December 2014, the requested self-certification has not been received from the client. In this case, said financial account should not be subject to reporting for the year 2014. Should no self-certification or other relevant document have been received by 30 June 2015, then the financial account should be subject to reporting for the year 2015.
  • Example 2: same as example as Example 1, except that the indicia found is a US Passport (or Green Card). Under this scenario, the financial account should be reported during the 2014 exercise.
  • Example 3: same as example as Example 1, except that the financial account is a low-value account. As at 31 December 2015, the requested self-certification has not been received from the client. In this case, the account should neither be subject to reporting during the year 2014 nor the year 2015. Should no self-certification or other relevant document have been received by 30 June 2016, then the financial account will be subject to reporting for the year 2016.

 

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:

  • Example 1: a financial account opened at Bank A, a Reporting FI, has been classified as a non-Reportable account as at 31 December 2016. In January 2017, a US indicia has been discovered with respect to said account. This finding will in no way affect the FATCA status of the account with respect to the year 2016. However, the Bank should envisage to report the account for the year 2017.
  • Example 2: a financial account opened at Bank A, a Reporting FI, has been classified as a US Reportable account as at 31 December 2016 based on an unequivocal indicia of a US place of birth. In January 2017, it is discovered that the account holder is nor a US citizen or resident. This finding will in no way affect the FATCA status of the account for the year 2016. The Bank A should thus report the account for the year 2016. However, there should be no reporting requirement for the year 2017.
  • Example 3: an individual high-value account opened at Bank A, a Reporting FI, has been classified as a US reportable account based on US indicia that have not been cured/remediated by 30 June 2015. However, in July 2015, relevant documentation has been received that have remediated the US indicia. In this case, the account should not be reported during the year 2015.

 

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.

 

Sanctions

With respect to sanctions the circular reiterates provided by the FATCA law:

  • In case of failure to comply with the due diligence requirements or failure to implement appropriate processes to report information, the Luxembourg tax authorities may fix an administrative tax penalty of up to EUR 250’000.
  • In case of failure to report, or late, incomplete or inaccurate information, the Luxembourg tax authorities may fix an administrative sanction of a minimum EUR 1’500 and a maximum of 0.5% of the amounts that should have been reported.

Updated Circular on the Luxembourg FATCA reporting file format (ECHA n°3)

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:

  • Unauthorized characters in the XML file: the Luxembourg Tax Authorities will not accept different characters "whitespace" (example: \ xe2 \ x81 \ x9f). Only the character "space" (\ x20) is accepted.
  • Negative amounts: The AccountBalance field (FATCA_LUX / FATCA / ReportingGroup / AccountReport) may contain negative amounts. Nevertheless, for the sake of alignment with the CRS scheme ("Common Reporting Standard"), the Luxembourg Tax Authorities will tolerate that these negative amounts are brought to 0 (zero).

 

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).

 

For further information, please do not hesitate to contact us.

 

 

 

 

 


Any tax advice in this communication is not intended or written by KPMG to be used, and cannot be used, by a client or any other person or entity for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing, or recommending to another party any matters addressed herein.The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
 

© 2017 KPMG Luxembourg, Société coopérative, a Luxembourg entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Connect with us

 

Request for proposal

 

Submit