FATCA - IGA signed
On 28 March 2014 Luxembourg signed a so-called IGA with the United States of America to implement the US legislation known as FATCA. This newsletter provides you with some insights on the background of the signing of the IGA as well as first KPMG observations on the key points of the IGA.
The Foreign Account Tax Compliance Act (FATCA) was signed into law on 18 March 2010. Its purpose is to uncover U.S. persons who may be evading U.S. taxes by investing through foreign financial institutions (FI) or other foreign entities. Initially, it was envisaged that financial institutions around the world would sign an agreement with the Internal Revenue Service (IRS), i.e. the U.S. tax authorities, under which they would have to disclose their US clients in order to avoid a punitive 30% withholding tax to be applied on payments of U.S.-sourced income.
In early 2013, the U.S. Department of Treasury along with five European countries developed an alternative approach to the aforementioned approach, the Intergovernmental Agreement (IGA), aiming at reducing the substantial burden and legal impediments brought by FATCA on financial institutions around the world by enforcing FATCA into local law.
Since then, 24 countries (including Luxembourg) have signed such an agreement on FATCA with the U.S., and many more are still under negotiation.
Luxembourg signed an IGA that relies on the approach taken by Model 1 IGA and is close to the Model 1 Agreement in terms of content.
Thus, the IGA signed by Luxembourg essentially provides for an automatic exchange of information on an annual basis between the Luxembourg tax authorities and the U.S. authorities.
It should be noted that Luxembourg has signed a reciprocal agreement, meaning that the exchange of information between the U.S. authorities and the Luxembourg tax authorities encompasses information about account holders in each country’s financial institutions that are residents of the other country.
The Luxembourg IGA, like all other IGAs signed to the date, is composed of 3 parts:
- the core text, essentially treating the exchange of information between both authorities;
- Annex I, treating the due diligence requirements to be fulfilled by Luxembourg financial institutions; and
- Annex II, providing a list of Luxembourg financial institutions and products that are generally exempt from FATCA reporting because they represent a low risk of tax evasion for U.S. persons.
First KPMG observations
The core text and Annex I of the Luxembourg IGA are very close to the Model I Agreement in terms of content.
Annex II of the IGA is where country specifics were negotiated and taken into account. In the following, some of the essential carve-outs provided for by the Annex II:
- The FATCA Status “Banks Issuing Covered Bonds” may apply to banks that have as their sole activity the issuance of covered banks, i.e. the so-called “banques d’émission de lettres de gage”. This carve-out can to date only be found in the Luxembourg IGA.
- The FATCA Status “FI with a Local Client Base” may apply to a Luxembourg Bank for which 98% of its accounts are held by residents of Luxembourg, an EU Member State or Switzerland even in case some of the accounts are U.S. accounts.
- The FATCA Status “Luxembourg Investment Advisors and Investment Managers” may apply to many Luxembourg Management Companies.
- Further, the Luxembourg IGA is the first IGA to have special rules for the interpretation of the so-called “Restricted Fund” status.
Memorandum of Understanding
Luxembourg and the United States have signed a Memorandum of Understanding on FATCA along with the IGA. The Memorandum of Understanding essentially clarifies three points:
- First, as of the date of the signature of the IGA all Luxembourg financial institutions are deemed compliant with FATCA, irrespective if the IGA has been ratified by Parliament or not. This is important to help Luxembourg FIs meet the deadline of 1 July.
- Second, in case there would be a delay in the ratification process, Luxembourg's status of a “partner country” of Luxembourg would not get lost until September 2015 or even September 2016.
- The third point is that each Reporting Luxembourg FI shall use a GIIN number as for identification purposes under FATCA and should register on the IRS portal to obtain such a GIIN.
For further information, please do not hesitate to contact us.
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