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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