The Luxembourg “FATCA Law”1 became effective on 1 August 2015. Among other provisions, the FATCA Law implemented the Model 1 Luxembourg–U.S. intergovernmental agreement of 28 March 2014 (IGA). On the day prior to the law taking effect, the Administration des Contributions Directes (Office of Income Tax) issued two circulars on FATCA – the first providing guidance on the technical aspects of the information exchange between Luxembourg and the United States2 and the second clarifying the context of the FATCA Law.3 This article analyzes the impact of FATCA on covered institutions, pursuant to the provisions of the law itself and the relevant guidance.
Who is Concerned?
Foreign financial institutions (FFIs) that are obliged to report certain accounts to the Office of Income Tax are covered by the FATCA Law. Funds and their affiliated entities generally fall under the definition of an “investment entity” qualifying as an FFI.4
Managers may be surprised to discover that the definition of FFI in Luxembourg differs from other countries. As is the case for all Model 1 IGAs, the definition of FFI provided under the FATCA Law is country-specific. While U.S. Treasury rules may be applied in some circumstances to interpret parts of the FATCA Law and the IGA, such rules may not be used to determine whether an entity qualifies as an FFI in Luxembourg. Further guidance has been issued by the Office of Income Tax5 and self-regulating bodies – such as ALFI (the Association of the Luxembourg Fund Industry) and ABBL (the Luxembourg Bankers Association) – and the latter have indicated their guidance will be updated in the coming months.
FFIs are considered to be reporting FFIs under the FATCA Law (Reporting FFIs), unless they fall under an exemption or are deemed compliant (i.e., subject to lesser or no reporting requirements). FFIs falling under the “investment vehicle” category may meet the terms of several exemptions and deemed-compliant options – including, among others, the “sponsored entity” exception. This exception permits a Reporting FFI that qualifies under the FATCA Law as a sponsoring entity to register as such with the U.S. Internal Revenue Service, and additionally to register one or more sponsored entities with the Luxembourg Office of Income Tax. In such a case, only the sponsor must perform FATCA’s periodic reporting requirements; the sponsored entities would then not be required to report.
The FATCA Law imposes on Reporting FFIs the obligation to perform appropriate due diligence on persons or entities holding accounts with the Reporting FFIs and to report any U.S.-reportable accounts to the Office of Income Tax.
The due diligence requirements are detailed in Annex I of the IGA and impose review and reporting obligations. To avoid having an account being treated as a U.S.-reportable account, the account holder may complete a self-certification, and the Reporting FFI does not need to obtain further verification unless the Reporting FFI knows or has reason to know that such self-certification is incorrect or unreliable.
Reporting FFIs are required to send reports to the Office of Income Tax. These reports include, among other information, the basic details of the account, the balance and payments made.
The FATCA Law does not impose specific eligibility conditions on service providers that support FFIs in fulfilling their reporting obligations.
The FATCA Law provides the Office of Income Tax with two options to enforce compliance with the reporting obligations:
- An administrative fine of up to EUR 250,000 may be imposed, if a Reporting FFI does not (i) perform a reasonable due diligence or (ii) does not have a system in place to communicate the necessary information.
- An administrative fine may be imposed of at least EUR 1,500 and up to 0.5% of the amounts to be reported, if the report is not timely filed or is incomplete.
The deadline for the reporting is 30 June of each year. The first-year deadline for 2014 data was 31 August 2015.
The data for 2014 to be reported in 2015 includes basic data, such as the registered address, Luxembourg tax number, GIIN and the contact detail of the responsible officer for FATCA. Beginning with 2015 data, if the Reporting FFI does not identity any reportable U.S. accounts or other reportable data, the Reporting FFI must file a nil return (i.e., a return indicating that there are no reportable accounts). All other Reporting FFIs will be subject to full-scope reporting if the Reporting FFI has any U.S. accounts that are reportable.