Luxembourg Tax News 2015-12 / FATCA e-alert issue 2015-09

Luxembourg Tax News 2015-12 / FATCA e-alert issue...

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FATCA draft law submitted to Parliament and text now available

The Luxembourg bill of law for FATCA has now been submitted to the Luxembourg Parliament (the “FATCA law”).

 

Background

The Foreign Account Tax Compliance Act (“FATCA”) was signed into law in the United States (“U.S.”) on 18 March 2010. Its purpose is to identify U.S. persons who may be evading U.S. taxes by investing through non-U.S. financial institutions or other non-U.S. entities. To accomplish this goal, FATCA creates a new information reporting and withholding regime, in addition to existing U.S. information reporting and withholding rules.

As the compliance to the U.S. FATCA regulations would have been contrary to legal restrictions in some countries, the U.S. entered into a series of intergovernmental agreements (“IGA”) with interested jurisdictions. These IGAs should address legal impediments and simplify the practical implementation of FATCA.

 

FATCA in Luxembourg

On 28 March 2014, Luxembourg signed a Model 1 IGA with the U.S. Treasury (the “Luxembourg IGA”).The council of Government adopted the FATCA bill (n°6798) on 6 March 2015 and it was  officially submitted to the Luxembourg Parliament on 27 March 2015 exactly one year after the signature of the Luxembourg IGA.

It is interesting to note that the submitted bill not only includes a copy of the signed Luxembourg IGA but also a copy of an updated version not yet officially signed. Indeed, the signed Luxembourg IGA actually makes reference to the Protocol signed on 20 May 2009 between Luxembourg and the U.S. and amending article 28 of the 1996 double tax treaty to align it with the international standard on exchange of information (the “Protocol”). Whereas Luxembourg ratified the Protocol on 17 March 2010, the U.S. have not ratified it so far and a quick ratification seems unlikely for the moment. The additional unsigned version of the Luxembourg IGA does not include this reference, but refers to the Convention on Mutual Assistance in Tax Matters of 1988.

 

Content of the FATCA law (highlights)

Scope of the ratification

The purposes of the FATCA law is to approve (and therefore to give legal value to) the Luxembourg IGA, including its Appendices I and  II and the “Memorandum of Understanding”. These were all signed on 28 March 2014.

 

Purpose of the IGA

The FATCA law aims at improving the accomplishment of the tax obligations at an international level as well as ensuring an effective exchange of information. Indeed, it provides detailed information about the exchange of information.

In the presentation of the reasons for the filing of the bill of law (“exposé des motifs”), the author of the bill of law n°6798 specifically mentions that “through the exemption of some financial institutions and financial products as well as the introduction of financial thresholds, the Agreement aims at reducing the administrative burden of the automatic exchange of information with the U.S. for the Luxembourg financial sector.”

 

Banking and professional secrecy and bearer shares

Conceptually, the Luxembourg IGA creates a derogation to the banking (and professional) secrecy as set forth by article 178bis of the general tax law. This statement has two major consequences.

  • Firstly, the FATCA law creates the legal basis for Luxembourg Financial Institutions to exchange reportable information as per the Luxembourg IGA. The comments that follow the bill of law n°6798 make it clear that the Luxembourg Financial Institutions “cannot refuse the communication of information on the basis of the professional secrecy to which they are generally subject to”.
  • Secondly, it is important to understand is that contrary to what is often said in the press, the banking (and professional) secrecy is not abrogated by the FATCA law. Rather the banking (and professional) secrecy remains the general case and the exchange of information the exception. This is confirmed by the fact that the information obtained by the Luxembourg Tax Authorities in the context of the application of the FATCA law can only be used by them for the intended purposes of the Luxembourg IGA (article 3 (1) of the FATCA law). The result, mentioned in the comments that follow the bill of law n°6798 is that the professional secrecy vis-à-vis the Tax Authorities is maintained and guaranteed since even in the case of a tax audit for FATCA purposes (see below further details in this respect) the information collected by the Luxembourg Tax Authorities in the context of the FATCA audit cannot be used for the purposes of taxation in Luxembourg.
  • Finally, it is interesting to note that the comment under article 4 of the FATCA law, the author refers specifically to the law on 28 July 2014 concerning the immobilization of bearer shares and the holding of a register of bearer shares holders with the view of ensuring the identification of bearer shares holders for FATCA purposes. Indeed, pursuant to the law of 28 July 2014, the identity of bearer shares holders has to be mentioned in a specific register created by the law of 28 July 2014. The issue, when it comes to FATCA requirements, is that the holder of such bearer shares register is not necessarily a Financial Institution in the meaning of FATCA. To avoid the situation where the use of bearer shares would allow to circumvent the application of FATCA, the abovementioned comment clarifies that the Financial Institution will have to require from the person acting as a custodian in the meaning of the law of 28 July 2014 to accomplish on its behalf and in its name the obligations foreseen by the Luxembourg IGA when it comes to bearer shares.

 

Options

The FATCA law confirms the availability for Luxembourg Financial Institutions of a certain number of options offered by the Luxembourg IGA:

  • According to the article 4 section 7 of the Luxembourg IGA, a Luxembourg Financial Institution may use the definition of U.S. Treasury Regulations instead of a definition that should correspond to the Luxembourg IGA provided that such application does not contravene the objectives of the Luxembourg IGA.
  • Luxembourg Financial Institutions may control, identify and report Financial Accounts defined under Appendix I, sub-sections II.A, III.A, IV.A and V.A of the Luxembourg IGA.
  • Luxembourg Financial Institutions may refer to the procedures described in the U.S. Treasury Regulations in order to determine whether an account is an U.S. account or an account held by a Non-Participating Foreign Financial Institution (“NPFFI”).

Interesting to note also, is that a Luxembourg Reporting Financial Institution is authorized by article 2 (3) of the FATCA to delegate the execution of its FATCA obligations to a third party service provider. In this case, however, the Luxembourg Reporting Financial Institution remains fully liable for the compliance vis-à-vis the FATCA law and the accomplishment of the FATCA law requirements as confirmed by the comments attached to the bill of law n°6798. This statement is in line with the general principle of the FATCA regulation based on which, although the execution of some tasks may be delegated, the responsibility cannot be transferred.

 

Control and penalties

The FATCA law confirms that the Tax Authorities will control the accomplishment of the diligence rules and will verify the functioning of the compliance mechanisms established by the Luxembourg Financial Institutions. Furthermore, the tax authorities will control that the Luxembourg Financial Institutions do not establish practices to circumvent the exchange of information. In particular, the Tax Authorities will control and check the appropriate functioning of the methods set up by the Luxembourg Financial Institutions for the exchange of information. Penalties are foreseen in case of absence of compliance with requirements of the FATCA law.

  • Firstly, the FATCA law confirms the administrative penalty already mentioned in the draft circular (ECHA - n° 2) that will be applied in the case a Luxembourg Financial Institution does not meet the reporting obligations. Indeed, if the reporting obligation is not fulfilled (i.e. no reporting, late reporting, incomplete or erroneous reporting), the Luxembourg Financial Institution may incur an administrative fine of maximum 0.5% of the amount that should have been reported, with a minimum of €1.500.
  • However, the FATCA law goes beyond and creates a second type of penalty applicable in case of a failure in the respect of the due diligence requirements or in case of absence of implementation of reporting mechanisms. The Reporting Financial Institution concerned may be penalized with an administrative fine of a maximum of €250,000.

A reformation appeal against such decisions is open to the Luxembourg Financial Institution concerned, and can be lodged with the Administrative Court.

 

“Zero” or “Nil reporting”

The FATCA law confirms that the first reporting on the part of Luxembourg Financial Institutions, related to the year 2014, is due on 30 June 2015 at the latest.The existence of an obligation to file “zero” or “nil” reporting in case a Reporting Financial Institution has no Reportable Account to declare has been long debated, especially since the change of position of the U.K. and other tax authorities in this respect.

The existence of such an obligation to file “zero” or “nil” reporting in Luxembourg is confirmed in the comments attached to the bill of law n°6798. Indeed, at the occasion of the comment under article 2 (5) of the FATCA law dealing with the penalties incurred by Financial Institution that would not fulfil their FATCA obligations, the author of the FATCA law mentions that “even in case the amounts to be declared would be zero, the Reporting Financial Institution is required to communicate a report with a zero value (“un message à valeur zero”) (…).”

 

US TIN

Article 2 (2)( a) (1) of the Luxembourg IGA mentioning the U.S. taxpayer identifying number (“U.S TIN”) among the pieces of information to be reported by Luxembourg Reporting Financial Institutions.

 In this respect the FATCA bill requires under its article 2 (6) that “pursuant to article 2, paragraph 2, letter a, point 1 of the Agreement [the Luxembourg IGA] and concerning the communication for year 2017 and subsequent years, the Luxembourg Reporting Financial Institution is required to use all means (“mettre en oeuvre tous les moyens”) in order to obtain and report the U.S. TIN, in the meaning of article 1, paragraph 1, letters kk of the Agreement, for each Specified U.S. Person.”

 

Link with OECD and EU initiatives

General comments

In the presentation of the reasons for the filing of the bill of law (“exposé des motifs”) the author of the bill of law n°6798 specifically refers to OECD and EU initiatives, respectively the Common Reporting Standard (“CRS”) and the European directive 2011/16/UE on Administrative cooperation in the field of taxation recently amended by the European directive 2014/207/UE (the “revised DAC”), often nicknamed “OECD FATCA” and “EU FATCA”.

The commitment taken by Luxembourg to implement the new global standard on automatic exchange of information set forth by the CRS and the revised DAC at the latest as from 2017 with respect to information related to tax year 2016 is formalized and reiterated.

A translation of the Luxembourg IGA has been exchanged via diplomatic notes on 3 June and 25 July 2014 between Luxembourg and U.S. authorities. In some cases, the French terminology in this document does not match with the one used by the OECD in the official French version of the CRS (largely based on the model I IGA which also served as a basis for the Luxembourg IGA). For consistency purposes and in order to simplify the interpretation and avoid confusion and doubts, the author of the bill of n°6798 confirms in the comment under article 1 of the FATCA law that it is more appropriate to use the French terminology of the official translation of the CRS de facto confirming that the initial French translation of the Luxembourg IGA should not be used anymore.

 

Information obligation

Based on article 3 (4) of the FATCA law the Luxembourg Financial Institution must inform each individual concerned that information concerning him/her will collected and transferred in accordance to the Luxembourg IGA.

This measure is particularly interesting since it is not foreseen by the Luxembourg IGA itself. The inclusion of this provision in the FATCA law is rather the evidence of the influence of the future revised DAC and the CRS in the context of which such information is mandatory, as well as the consideration of the EU legislation on personal data protection.

 

Next steps

As a next step, the Luxembourg State Council will need to provide its comments on the bill, before it will be subject to parliamentary vote.

 

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.

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