Luxembourg government approves draft FATCA legislation

On March 6 Luxembourg’s government adopted the draft legislation transposing into national law the grand duchy’s intergovernmental agreement with the US and facilitating compliance by the country’s financial institutions with the requirements of the Foreign Account Tax Compliance Act.

FATCA, which was signed into law in 2010 but only took effect last July, is designed to identify US persons (citizens, residents, green card holders, there spouses or other individuals with a connection to the US) who may be failing to declare tax purposes investments or assets in accounts with non-US financial institutions or other entities, which can include not only banks but insurance companies, asset management firms or funds and even trusts.

The legislation is designed to compel non-US institutions and entities to report to the Internal Revenue Service on any accounts held by US persons through an information reporting and withholding regime, in addition to existing reporting and withholding rules. Institutions failing to comply face the threat of a 30 per cent withholding levied on any US-sourced income.

Since compliance with the FATCA rules would have been contrary to legal restrictions on the sharing of information in various countries, as well as to reduce the administrative burden on financial institutions affected, Washington has signed a series of intergovernmental agreements with various jurisdictions designed to circumvent the legal issues and simplify practical compliance, in most cases by requiring institutions to report to their domestic tax authority, which will forward the data to the US, rather than directly to the IRS.

Luxembourg signed a Model 1 IGA, providing for institutions to report to their home authority, with the US Treasury on March 28 last year. The government’s approval of the draft legislation now paves the way for the ratification of the IGA signed with Washington and implementation of the measures required to enable Luxembourg institutions to comply.

The legislation will next be submitted to the Chamber of Deputies for approval. Once the law is enacted, the grand duchy’s Direct Tax Administration is expected to revise, finalise and implement two draft circulars issued at the beginning of this year. One expected change is that following a decision in the UK, it now appears that institutions will no longer be required to file a report even if they have no US-related accounts.

Following passage of the legislation and issue of the tax authority circulars, the first delivery of information is due to take place later this year, with reporting scheduled to take place by financial institutions to the Direct Tax Administration on June 30, then by the tax authority to the IRS on September 30.

The draft circulars issued by the Direct Tax Administration can be consulted at:—FATCA.pdf and—FATCA.pdf.

Tax authority issues draft circular on FATCA compliance

On January 6, 2016 Luxembourg’ Direct Taxation Authority issued a draft administrative circular regarding compliance in the grand duchy with the US Foreign Account Tax Compliance Act and the implementation of automatic exchange of information between Luxembourg and the United States in line with the Model 1 FATCA Intergovernmental Agreement signed by the two countries on March 28 last year.

The agreement, which has yet to be transposed into national law, requires Luxembourg ‘financial institutions’ to provide information regarding assets held by US citizens or residents with the Direct Taxation Authority, which will transfer it to the US Internal Revenue Service. The technical aspects of the exchange of information process will be set out in a future circular.

Information must be provided by financial institutions as defined by the agreement by June 30 for the previous calendar year. Late, missing, incomplete or inaccurate reporting risks a penalty of up to 0.5% of the amounts affected. It appears that institutions will still have to file a report even if they have no US-related accounts. A secure system will control access to the information provided, whose use is limited to the purposes set out in the IGA. Reporting can be delegated to a service provider.

Accounts excluded from the FATCA compliance requirements include pension savings accounts, certain fixed-term life assurance contracts, and real estate co-ownership accounts. The draft circular also sets out compliance rules for investment providers and entities including sponsored investment entities, controlled foreign companies, private investment advisers and investment managers and regulated collective investment funds. It also stipulates that an entity should not qualify as non-financial foreign entity if it operates as an investment fund.

The draft circular may be subject to amendment before it is finalised and put into effect. It can be consulted at—FATCA.pdf