On 28 March 2014 Luxembourg signed a so-called IGA with the United States of America to implement the US legislation known as FATCA. This newsletter provides you with some insights on the background of the signing of the IGA as well as first KPMG observations on the key points of the IGA.
The Foreign Account Tax Compliance Act (FATCA) was signed into law on 18 March 2010. Its purpose is to uncover U.S. persons who may be evading U.S. taxes by investing through foreign financial institutions (FI) or other foreign entities. Initially, it was envisaged that financial institutions around the world would sign an agreement with the Internal Revenue Service (IRS), i.e. the U.S. tax authorities, under which they would have to disclose their US clients in order to avoid a punitive 30% withholding tax to be applied on payments of U.S.-sourced income.
In early 2013, the U.S. Department of Treasury along with five European countries developed an alternative approach to the aforementioned approach, the Intergovernmental Agreement (IGA), aiming at reducing the substantial burden and legal impediments brought by FATCA on financial institutions around the world by enforcing FATCA into local law.
Since then, 24 countries (including Luxembourg) have signed such an agreement on FATCA with the U.S., and many more are still under negotiation.
Luxembourg signed an IGA that relies on the approach taken by Model 1 IGA and is close to the Model 1 Agreement in terms of content.
Thus, the IGA signed by Luxembourg essentially provides for an automatic exchange of information on an annual basis between the Luxembourg tax authorities and the U.S. authorities.
It should be noted that Luxembourg has signed a reciprocal agreement, meaning that the exchange of information between the U.S. authorities and the Luxembourg tax authorities encompasses information about account holders in each country’s financial institutions that are residents of the other country.
The Luxembourg IGA, like all other IGAs signed to the date, is composed of 3 parts:
First KPMG observations
The core text and Annex I of the Luxembourg IGA are very close to the Model I Agreement in terms of content.
Annex II of the IGA is where country specifics were negotiated and taken into account. In the following, some of the essential carve-outs provided for by the Annex II:
Memorandum of Understanding
Luxembourg and the United States have signed a Memorandum of Understanding on FATCA along with the IGA. The Memorandum of Understanding essentially clarifies three points:
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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.
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