On 6 January 2015, the Luxembourg Tax Authorities released a draft version of the first administrative circular (ECHA - nº2) on FATCA (“Foreign Account Tax Compliance Act”). It concerns the automatic exchange of information between the Grand-Duchy of Luxembourg and the Government of 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 30-pages draft circular is limited to the legal requirements imposed on Luxembourg under the IGA signed with the United States. The circular states that an additional circular defining the technical aspects of the exchange of information should be provided later on. While the Luxembourg IGA has still to be transposed into law, this circular provides a French translation of the outlines of said IGA and its annexes, keeping in mind that it is only a draft version for the time being and that we expect a number of amendments and corrections.
Some interesting provisions from the circular are:
The information is to be reported to the Luxembourg Tax Authorities by 30 June at the latest following the calendar year-end to which the information refer.
The treatment of the reported information should be done under guarantee of a secured, limited and controlled access. The information exchanged can only be used for the purposes defined according to the IGA.
In case of missing, late, incomplete or false reporting, the Reporting Luxembourg Financial Institution risks a maximum penalty of 0,5% of the amounts that should have been reported.
The circular also indirectly confirms the requirement of a nil report, as it states that the features of a nil report to be issued will be defined in a second technical circular, in case a Reporting Luxembourg Financial Institution has no reportable accounts.
Accounts subject to reporting obligations
The Luxembourg Tax Authorities authorize Reporting Luxembourg Financial Institutions to identify whether an account should be reported or not pursuant to the due diligence procedures prescribed either by the Luxembourg IGA or by the U.S. Treasury Regulations.
A joint account from which a U.S. Person withdraws should be reported in the reporting year in which the specified U.S. Person disappeared from the account.
An account transferred to another partner jurisdiction should be reported in the year of transfer. Note that we expect this to be extended to apply not only to transfers to other partner jurisdictions.
Dormant accounts should be reported if relevant information that is mandatory for the exchange of information is available.
An Entity should be considered a Financial Institution by reference to the information listed in the Registre de Commerce et des Sociétés or by reference to the list established by the Commission de Surveillance du Secteur Financier (CSSF) or by the Commissariat aux Assurances.
At first glance, the draft circular does not consider the more favorable terms with regards to the alternative procedures applicable on entity accounts that have been opened on or after 1 July 2014 and before 1 January 2015. The United States had published the relevant notification of more favorable terms on 25 November 2014. We expect this to be amended in a coming version, given that the Ministry of Finance had unofficially stated that the transitional rule would be available for Luxembourg financial institutions.
Currency translation rule
A Reporting Luxembourg Financial Institution should convert the U.S. Dollar threshold amounts using the spot rate published by the European Central Bank 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 draft circular defines an investment entity, as any entity that conducts as a business (or is managed by an entity that conducts as a business) operations for or on behalf of a customer. The Luxembourg Authorities hereby 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.
Furthermore, the draft circular confirms that an entity should not qualify as non-financial foreign entity if the entity functions as an investment fund.
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