On 6 January 2015, the Luxembourg tax authorities (administration des contributions directes) released a draft version of the first administrative circular (ECHA - n°2) on the Foreign Account Tax Compliance Act ("FATCA"), (the "Circular"). The Circular deals with the automatic exchange of information between Luxembourg and the United States of America.
Under the Model 1 intergovernmental agreement (the "IGA") signed on 28 March 2014 by Luxembourg and the United States, Luxembourg financial institutions (within the meaning of the IGA) have to exchange information concerning the assets held by U.S. citizens or U.S. tax residents with the Luxembourg direct tax authorities which will transfer the information provided to the U.S. Tax Administration, the Internal Revenue Service (the "IRS").
The Circular recalls the legal requirements imposed on Luxembourg under the IGA and states expressly that an additional circular defining the technical aspects of the exchange of information should be provided later on.
While under the Luxembourg legislative procedure, the IGA will enter into force once it has been ratified by a law. The Circular is however only a draft version for the time being which provides a French translation of the main points and the key definitions of the IGA and its annexes.
According to Article 10 of the IGA combined with the Memorandum of Understanding, Luxembourg has until 30 September 2015 to ratify it. Furthermore, in the event Luxembourg is not able to complete its ratification process by 30 September 2015, the US Department of Treasury may accept a delay of one additional year - i.e. until 30 September 2016. If the IGA enters into force after 30 September 2015, reporting for 2014 and 2015 would be due on 30 September 2016.
The key points of the Circular are as follows:
- the information is to be reported to the Luxembourg direct tax authorities by 30 June at the latest following the calendar year-end to which the information refers;
- in the case of missing, late, incomplete or false reporting, the Luxembourg reporting financial institution risks a maximum penalty of 0.5 % of the amounts that should have been reported;
- the Luxembourg direct tax authorities authorise reporting Luxembourg financial institutions to identify whether an account should be reported or not pursuant to the due diligence procedures prescribed either by the Luxembourg IGA or by the U.S. Treasury regulations;
- dormant accounts should be reported if relevant information that is mandatory for the exchange of information is available;
- an entity should be considered a "Financial Institution" by reference to the information listed in the Registre de Commerce et des Sociétés or by reference to the list established by the Commission de Surveillance du Secteur Financier or by the Commissariat aux Assurances;
- regarding the definition of an "Investment Entity", the Luxembourg direct tax authorities confirm that the definition should be interpreted in a manner consistent with a similar language set forth in the definition of "financial institution" in the Financial Action Task Force Recommendations;
- the Circular confirms that an entity should not qualify as a non-financial foreign entity if the entity functions as an investment fund.
Furthermore, on 8 January 2015, the Luxembourg bankers' association (Association des Banques et Banquiers, Luxembourg, the "ABBL") published a template for entity self-certification that can be used in the context of the FATCA due diligence requirements applicable to Luxembourg financial institutions. The aim of this document is to provide Luxembourg financial institutions with a valid alternative to the IRS W-8 series forms in the context of the FATCA classification of Luxembourg entities that are not investing in US assets.