Flash News Luxembourg Financial Institutions:

Transcription

1 Flash News FATCA in Luxembourg: official guidelines published 10 August 2015 The law adopting the US-Luxembourg Intergovernmental Agreement (the IGA) under the terms of which the US Foreign Account Tax Compliance Act (FATCA) will be applicable, has recently become effective. On 31 July 2015, Luxembourg tax authorities published two circulars providing more guidance. Following the adoption (24 July) and publication (29 July) of the law enacting the IGA ( the Law ), the Luxembourg direct tax authorities (Administration des contributions directes (ACD)) have issued, on 31 July 2015, two circulars: ECHA n 2, which provides comments on legal obligations and interpretations of technical terms under the IGA, and ECHA n 3, which contains technical aspects and explains the transmission of information. The ECHA n 3 corresponds, in general, to the draft version, initially published on 2 February 2015 and updated end-june. However, the final version of ECHA n 2 brings significant changes to the first draft version dated 6 January This news focuses on the key elements of ECHA n 2 ( the Circular ). As a general remark, it seems that Luxembourg tax authorities intend to align, to a certain extent, their guidelines with the OECD commentary to the Common Reporting Standard (CRS). However, it is important to take into account the local features. Luxembourg Financial Institutions: An entity is a Financial Institution (FI) if it falls into one of the following categories: Custodial Institution; Depository Institution; Investment Entity; Specified Insurance Company.

2 As far as Custodial Institutions 1 are concerned, the Circular requires the term financial asset to be understood in line with the CRS definition. Furthermore, it lists some types of entities (partially with reference to the Law of 5 April 1993 on the financial sector), that must not be considered Custodial Institutions. The Circular states that banks authorised to exercise their activity under Art. 2 of the Law of 5 April 1993 qualify as Depository Institutions 2. However, the Circular confirms that an entity doesn t perform a banking or similar business if it accepts deposits only as collateral or security pursuant to a sale or lease of property or pursuant to a similar financing arrangement between such entity and the person holding the deposit with the entity. For Luxembourg, the category of Investment Entities is the most important in terms of number of entities in scope. According to the Circular, an Investment Entity s activities must be exercised commercially and in the name of a client. Furthermore, each entity whose gross income is primarily attributable to investing, reinvesting, or trading in financial assets, qualifies as Investment Entity. In this respect, the Circular defines the term primarily similar to the US FATCA Regulations. For Specified Insurance Companies 3, the Circular clarifies that reinsurance companies that only offer agreements with indemnifying character, don t qualify as FI. In addition, insurance brokers are not Specified Insurance Companies. Each FI residing in Luxembourg is considered subject to Luxembourg laws and regulations. All entities that have their seat or effective place of management in Luxembourg are considered residents. Foreign branches of Luxembourg FIs are excluded. Branches of foreign FIs are Luxembourg FIs, only if they are: 1. supervised by the Commission de Surveillance du Secteur Financier (CSSF) or the Commissariat aux Assurance, or 2. registered with the Luxembourg register of commerce. The Circular mentions that the same logic applies for legal arrangements and Luxembourg investment funds that are Fonds Commun de Placement (FCPs). In addition, certain regulated vehicles (such as UCIs and UCITS, Specialised Investment Funds (SIFs), SICARs and securitisation vehicles) are also considered Luxembourg FIs according to the Circular s provisions. Non-Reporting Luxembourg FIs are those 1. listed in Annex II of the IGA, or 2. otherwise qualifying as deemed-compliant FI under the US FATCA Regulations. The Circular states that Non-Reporting Luxembourg FIs are neither required to register with the IRS to obtain a GIIN, nor to submit a Zero-Report to the Luxembourg tax authorities; exceptions from this rule apply to FIs with local client base and to Sponsored Investment Entities that have identified US Reportable Accounts. 1 Custodial Institutions are defined as entities whose main business is to hold financial assets on behalf of others. 2 Depository Institutions are entities that accept deposits in the ordinary course of a banking or similar business. 3 Specified Insurance Companies are entities that issue, or have to make payments for a Cash Value Insurance Contract or an Annuity Contract.

3 Luxembourg Specific Cases: Taking the example of a Société de participations financières (SOPARFI), the Circular comments on the treatment of holding companies and similar vehicles (like the Société de patrimoine familial (SPF)). This kind of entities can have industrial and/or commercial activities, in addition to holding interest in related entities. According to the Circular, a SOPARFI usually qualifies as Passive Non-Financial Foreign Entity (NFFE) but, depending on the assets, income and/or shareholders, it could also qualify as FFI or Active NFFE. In particular, a SOPARFI can qualify as Investment Entity if its activities and/or operations are exercised commercially and in the name of a client. The Circular explains that this could particularly be the case if the SOPARFI goes public or if its capital is open to a certain number of unrelated investors and/or it rather functions as an investment vehicle. Unregulated securitisation vehicles are classified according to the same rules as SOPARFIs, whereas regulated securitisation vehicles are classified as Investment Entities. Financial Accounts The Circular describes the different types of Financial Accounts. Specific points of attention are the following: Amounts accepted by insurance companies for certain products can qualify as Depository Account; Annuities related to products exempted under Annex II and re-insurance contracts related annuity contracts are not considered Annuity Contracts under the IGA; Re-insurance compensation contracts between two insurance companies do not qualify as Depository Account. Annex II of the IGA contains certain instruments that are exempt from the definition of Financial Accounts. According to the Circular, this exemption applies to the following instruments: Contracts for old age provision (Art. 111bis Luxembourg Income Tax Law), if the annual contributions do not exceed USD 50,000 or the total contributions do not exceed USD 1 million; Building saving agreements, if the annual contributions do not exceed USD 50,000; Complementary (company) pension schemes (Régime complémentaire de pension (RCP)), regardless of the annual or total contributions. In this respect and by application of the exception for Partner Jurisdiction Accounts in Annex II of the IGA, the circular refers to similarity of Luxembourg complementary pension schemes to the Belgian regime and the fact that similar Belgian pension regimes are exempt. Due Diligence Procedures The Circular authorises Luxembourg FIs to apply industry codes, and lists other types of publicly available information based on which FIs can perform their account holder due diligence. There will be no prescribed self-certification form. Luxembourg FIs may choose to use a specific form, to include the relevant questions in a more complex account opening form, or to use the US forms (W-8, W-9 Forms).

4 A Luxembourg FI may apply the procedures set out in the US FATCA Regulations when performing the account holder due diligence for each section of Annex I of the IGA, for all Financial Accounts, or only for a clearly identified group of accounts. Financial Institutions may delegate their FATCA obligations to third party service providers. However, the Circular highlights that FIs are still responsible for their FATCA obligations and that the delegation must not compromise the verification of FI s compliance by Luxembourg tax authorities. The Circular provides several examples for cut-off rules and change of circumstances. In general terms, the end of the calendar year (or any other appropriate period) is the decisive date to see what documentation has been identified and made available as per that date. But FIs have the full periods given by Annex I of the IGA to perform the pre-existing account due diligence. As a reinforcement of the due diligence rules on TIN (Taxpayer Identification Numbers), for the reporting of the 2017 and of following years data, the Reporting Luxembourg FIs should do everything possible to obtain and report the US TIN. Reporting: Reporting Luxembourg FIs cannot invoke any professional secrecy to refuse to report. Furthermore, they must inform each reported individual that information will be collected and reported. The Law and the Circular explicitly refer to the Luxembourg law on data privacy and protection for what has to be communicated to the client before the reporting. Data elements used in the context of FATCA cannot be stored longer than required by the IGA and must comply with the legal provisions applicable to data controllers. The Circular lists the data to be exchanged with respect to the relevant years. As explained earlier, it clarifies. It also specifies that the TIN for the data referring to 2017 must be reported in Closed accounts identified as US Reportable Accounts must be reported. If a preexisting individual account has not yet been finally classified in line with the relevant due diligence procedures, the FI must perform certain due diligence and classification steps when closing it. Besides, unless the FI decides otherwise, the rollover of a rollover deposit is not considered as an account closure. For the years 2015 and 2016, the IGA requires a temporary reporting of payments made to Non-Participating FIs. The Circular clarifies that this applies only to payments related to Financial Accounts held by Non-Participating FI. Each Luxembourg Reporting FI registered with the IRS must submit a reporting; if it doesn t have Reportable Accounts, it must submit a Zero-Report. Luxembourg FIs that have de-registered with the IRS have to submit a reporting for the year of de-registration. However, an entity registered with the IRS as Sponsoring Entity is not compelled to submit a Zero-Report if, after applying the due diligence procedures for its Sponsored Investment Entities or Controlled Foreign Corporations (CFCs), it hasn t identified US Reportable Accounts. This exception applies if the Sponsored Investment Entity or CFC hasn t yet registered to obtain its own GIIN. Luxembourg FIs must submit the reporting to the Luxembourg tax authorities, using mandatory transmission channels, no later than 30 June following the end of the calendar year to which the reporting refers. The deadline for the reporting for 2014 has been exceptionally extended to 31 August 2015.

5 Most Favoured Nation Clause: The Circular confirms the application of the most favoured nation clause to the Art. 4 of the IGA, as well as to the procedures in Annex I of the IGA. As far as Annex II is concerned, the most favoured nation clause applies only to the exception for Partner Jurisdiction Accounts. The Circular includes a reference to Notice , in which the IRS authorised FATCA Partner Jurisdictions to treat entities that opened accounts after 30 June 2014 but before 1 January 2015 as pre-existing accounts. Controls and Sanctions: The Circular does not provide detailed information about the concrete control mechanism the Luxembourg tax authorities intend to use. However, it indicates what the areas of attention might be. Luxembourg tax authorities will control the FI s compliance with the due diligence obligations and verify the functioning of the mechanisms, in particular the information technology used to transmit the communication. Furthermore, the tax authorities will verify that Luxembourg FIs haven t adopted procedures to circumvent the information exchange. The Circular allows Luxembourg FIs to apply US FATCA Regulations when this is foreseen by the IGA. If the FI chooses to do so, it must document it in its FATCA procedures. This choice is only available for clearly defined situations and not on a case-by-case basis. If a Reporting Luxembourg FI doesn t apply the due diligence rules or doesn t put in place procedures in view of the reporting, it risks a penalty of maximum EUR 250,000. In case of absence, late, incomplete or erroneous reporting, a Reporting Luxembourg FI would be subject to a penalty of 0.5% of the amounts that should have been reported, with a minimum of EUR 1,500. To avoid circumvention of the information exchange rules, the Circular states that a depository of bearer shares issued by a Financial Institution must be a Reporting FI. What s next? Financial Institutions subject to reporting obligations as set out in the Law and the Circular must submit their reporting before 31 August 2015, even if Zero-Report. The next level of automatic exchange of information will be reached with the implementation of the CRS and the European Directive implementing the CRS. Compared to FATCA, the CRS will involve the exchange of significantly more information. Under FATCA, many FIs could handle the due diligence and reporting obligations with semi-manual procedures, but CRS will require enhanced processes and systems. Last but not least, banks should not forget to look at the requirements under the QI agreement, which has been updated in In particular, the requirements to have a compliance program (including written policies and procedures) should not be underestimated.

6 For more information, please contact us: Kerstin Thinnes Partner Marie Laffont Director Camille Perez Manager Frauke Anna Maria Ortmann Senior Advisor PwC Luxembourg ( is the largest professional services firm in Luxembourg with 2,450 people employed from 55 different countries. It provides audit, tax and advisory services including management consulting, transaction, financing and regulatory advice to a wide variety of clients from local and middle market entrepreneurs to large multinational companies operating from Luxembourg and the Greater Region. It helps its clients create the value they are looking for by giving comfort to the capital markets and providing advice through an industry focused approach. The global PwC network is the largest provider of professional services in audit, tax and advisory. We re a network of independent firms in 157 countries and employ more than 195,000 people. Tell us what matters to you and find out more by visiting us at and PricewaterhouseCoopers, Société coopérative. All rights reserved. In this document, PwC Luxembourg refers to PricewaterhouseCoopers, Société coopérative (Luxembourg) which is a member firm of PricewaterhouseCoopers International Limited ( PwC IL ), each member firm of which is a separate and independent legal entity. PwC IL cannot be held liable in any way for the acts or omissions of its member firms.