The Luxembourg bill of law for FATCA has now been submitted to the Luxembourg Parliament (the “FATCA law”).
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.
The FATCA law confirms the availability for Luxembourg Financial Institutions of a certain number of options offered by the Luxembourg IGA:
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.
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”) (…).”
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
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.
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.
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.
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