For entities that qualify as Foreign Financial Institutions (hereafter abbreviated as "FIs"), FATCA carries significant implications on processes, systems and business strategies. However, entities that are Non-Financial Foreign Entities ("NFFE") for FATCA purposes are also indirectly impacted because all FIs are legally required to identify their clients’ and investors’ FATCA status, generally using specific forms to be signed.
Basically, FIs have certain obligations under the FATCA Law, including documentation of clients and investors as well as reporting. The first reporting on 2014 financial account information was due in Luxembourg at the end of August 2015. Non-compliance with the FATCA Law is subject to local penalties that can be significant.
The FATCA Law requires entities to determine if they qualify as Financial Institutions (“FIs”) and, should that be the case, to identify all US clients and investors in order to report them to the US tax authorities (Internal Revenue Service, “IRS”) through the Luxembourg tax authorities. The definition of US clients in this respect is very broad and even includes certain US-owned foreign entities. FIs must also gather data on the relevant account/capital balances and global income and proceeds pertaining to their US clients or investors, as these data must be reported as well.
The FI definition is very extensive and includes not only banks, insurance undertakings and investment vehicles, but also some holding, financing or securitisation companies.
If your entity is not an FI, but an NFFE, it still needs to determine if it qualifies as a so-called Active NFFE or Passive NFFE, as counterparts will ask you to certify on this.
Entities that have not analysed their FATCA status yet should do so immediately to mitigate risk of potential penalties under the FATCA Law.
All accounts opened on or after 1st July 2014 are “new accounts” for FATCA purposes. Since then, each FI must upon account opening or investor onboarding, identify US Person(s) among its client or investors.
In practice, FIs ask their clients or investors to sign specific forms to certify their FATCA status and in certain cases to disclose the individuals that qualify as controlling persons under Luxembourg anti-money laundering provisions. These clients/investors or controlling persons need to be reported if they qualify as specified US person.
Accounts existing on 30 June 2014 are so-called pre-existing accounts. FIs had to follow certain procedures to review their pre-existing clients/investors. Depending on the type of clients/investors and the account balance or value as at 30 June 2014, the deadline for finalising this review was 30 June 2015 or 30 June 2016.
In Luxembourg, the reporting deadline is the 30th of June of each year for the data relating to the preceding calendar year. In case the FI has no US account holders or investors to report, Luxembourg Reporting FIs are still required to submit a nil report that would be kept at the level of the Luxembourg tax authorities and not shared with the US tax authorities.
Whereas the first reporting only included static data (such as name, tax identification number and account balance as at 31 December 2014), the reporting for the following years includes payments made and (as from 2017 for 2016) sales proceeds realised.
Reporting Luxembourg FI's omitting to comply with due diligence rules or to introduce procedures in view of reporting are also liable to a local penalty of up to EUR 250,000.
They may be in addition liable to a local penalty of 0.5% of the amounts that should have been reported, with a minimum of EUR 1,500, if they file a late, incomplete or inaccurate report.
In the rare case that a Luxembourg FI would be considered as significantly non-compliant with Luxembourg FATCA Law, such FI might be treated as a Nonparticipating FI by the IRS and therefore face a 30% withholding tax on US source income.
Luxembourg FIs cannot invoke any professional secrecy rules to refuse to report.
Reporting Luxembourg FIs should inform any US reportable individuals that information will be collected and possibly reported to the local tax authorities which will in turn exchange the data with the US tax authorities.
A Reporting Luxembourg FI must communicate to individuals the following:
Furthermore, Luxembourg FIs are required to inform the National Commission for the Data Protection. (“CNPD” “Commision nationale pour la protection des données”).
According to the Intergovernmental Agreement on FATCA signed between the USA and Luxembourg as well as the Luxembourg regulations implementing the relevant provisions this Agreement, each Luxembourg Reporting Financial Institution will have to file a report to the Luxembourg tax authorities prior to 30 June of each year.
This report will have to include each US reportable account and must be done in a specific format defined by the circulars issued by the Luxembourg tax authorities.
As the implementation of a reporting system within your company could be time consuming and expensive, especially with regards to the complexity of the technical aspects defining the format of the FATCA report, we can assist you during the entire reporting process.
We can provide you with a user-friendly solution addressing all your concerns, and allowing you to fulfil your obligations in a timely manner.
We have developed our own reporting solution according to the various draft circulars (i.e. ECHA 2 and ECHA 3) released by the Luxembourg tax authorities. This solution allows us to offer our clients a complete line of services including data collection, validation, reformatting and submission to the tax authorities.
Therefore, we will act as depositor and will use the official transmission channel to file the FATCA reporting to the ACD on behalf of our clients.
Deep dive "health check":
Tax Partner, PwC Tax Information reporting Sàrl, PwC Luxembourg
Tel: +352 49 48 48 4031