The aim of FATCA
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.
New account holders
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.
Due diligence regarding pre-existing accounts
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.
Control and penalties
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.
Data protection rules
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:
- The Luxembourg FI is responsible for personal data processing.
- The personal data is intended to be used for the purpose of the CRS.
- The data will be reported to the Luxembourg tax authorities and the tax authorities of the jurisdiction(s) of residence of the Account Holders or Controlling Persons of a Passive NFE.
- The reported individual has the right to access the data/financial information reported to the Luxembourg tax authorities and to rectify it.
- Reported individuals have to reply to each information request sent to them. A Reporting Luxembourg FI must also inform them what may happen if the fail to answer.
Furthermore, Luxembourg FIs are required to inform the National Commission for the Data Protection. (“CNPD” “Commision nationale pour la protection des données”).