The objective of the Foreign Account Tax Compliance Act (FATCA) is to reduce tax evasion by US individuals with respect to income from financial assets held directly (on an account) or indirectly (through a foreign entity) outside the United States by inducing “foreign financial institutions” (FFIs) to report US account holders (and US beneficial owners of passive non-financial foreign entities) to the US Internal Revenue Service (IRS). FATCA imposes a 30-percent US withholding tax on US-sourced payments to FFIs (including banks, brokers, custodians and investment funds) that fail to comply with FATCA rules.
FATCA is a component of the Hiring Incentives to Restore Employment Act (HIRE Act), which was enacted by the US Congress and signed into law by the President of the United States on 18 March 2010, and added Chapter 4 of Subtitle A to the US Internal Revenue Code. The US Department of the Treasury (US Treasury) and the IRS issued final regulations under FATCA (the Final Regulations) on 17 January 2013, which were subsequently amended and completed by mean of additional regulations and notices.
The Final Regulations, as amended and completed, form the basis for the implementation of FATCA by FFIs worldwide, save for the application of an intergovernmental agreement (IGA) on FATCA entered into between the United States and a given partner jurisdiction, as this is the case for Luxembourg.
The IGA signed between Luxembourg and the United States on 28 March 2014 provides essentially for automatic exchange of information between the Luxembourg and US tax authorities on financial accounts (e.g. bank accounts, certain insurance contracts and units in investment funds) held in Luxembourg by citizens and residents of the United States. The IGA signed with the United States foresees a certain degree of reciprocity on the part of the United States, which are committed to exchange with Luxembourg certain information regarding financial accounts held individuals and entities resident in Luxembourg that are maintained by U.S. financial institutions.
The rationale for the signature of the IGA with the United States is to put Luxembourg’s relations with the United States in line with a declaration of 10 April 2013 by which Luxembourg announced that it will introduce, on 1 January 2015 and within the current scope of the EU Savings Directive (Council Directive 2003/48/EC), the automatic exchange of information within the European Union, a move that will be followed by the implementation of the OECD Common Reporting Standard starting from 1 January 2016 vis-à-vis the other EU jurisdictions and a significant number of non-EU jurisdictions.
The IGA between Luxembourg and the United States provides for a first exchange of information between these two countries by September 2015. As far as Luxembourg is concerned, the first exchange of information will relate to account balances as of the end of 2014, which will need to be reported by Luxembourg financial institutions to the Luxembourg tax authorities by 30 June 2015.
Additional information with respect to FATCA, including an extensive guidance compiled by ABBL for use by members in the context of the Luxembourg IGA, can be found in the documents below: