Update of the tax compliance regulations (FATCA/CRS/DAC 6) and the impact on the Luxembourg fund industry

July 8, 2020 | Blog

In the everyday increasing legal demand for transparency and exchange of information, Luxembourg funds, their investors and management, have to be compliant with regulations like FATCA, CRS and, since more recently, DAC 6.

Stay up-to-date and read more about the recent amendments to these regulations in Luxembourg.

   I.   FATCA / CRS – what changes?

On June 9, 2020, both the CRS Law of December 18, 2015 and the FATCA Law of July 24, 2015 (the Laws) have been amended by the Luxembourg Parliament approving the bill of law No 7527 (the Amendment Law)

In brief, the aim of the Laws is to facilitate the exchange of information between jurisdictions, in order to increase the transparency and prevent tax avoidance.

Hence, the Laws impose due diligence and reporting obligations for the Reporting Financial Institutions (including investment funds) (the RFI), providing the Luxembourg tax authorities with the information concerning reportable bank accounts.

The reports are to be submitted every June 30 after the end of the calendar year to which the information refers.

The Amendment Law, entering into force on January 1, 2021 clarifies existing obligations applicable to RFI but also introduces a few new obligations, that may be summarized as follows:

  • The RFI are explicitly prohibited to adopt practices designed to circumvent the disclosure of information;
  • RFI are obliged to create a register of actions taken and evidence used to ensure the fulfilment of their obligations for 10 years after the end of the calendar year in which they are required to report the information. In connection therewith, the Amendment Law clarifies that Luxembourg tax authorities have statute of limitation of 10 years for the investigation under the FATCA and CRS regulations;
  • RFI are obliged to implement policies, controls, procedures and IT systems appropriate with the nature, particularities and size of the RFI to ensure the fulfilment of reporting and due diligence obligations;
  • Filing of the nil reports in the absence of reportable accounts is no longer optional but mandatory under FATCA and CRS reporting obligations. If a nil report is not duly filed, such non-compliance may result in penalties of EUR 10,000.
  • A fine up to EUR 250,000 applies to RFI in case of breach of any obligation imposed by FATCA and CRS regulations other than its personal data protection obligations further to an inspection or inquiry (before the Amendment Law, the fine was applicable only to non-compliance with due-diligence obligations). In addition, if reportable accounts are found to be non-reported or under-reported, an additional penalty of a maximum of 0.5% of the non-reported amount could apply.

The RFI remains responsible for the fulfilment of these obligations although it has delegated the performance of these obligations to services providers (e.g. registrar and transfer agent). It means that the RFI shall ensure that service providers have put in place policies, controls, procedures and IT systems to enable the RFI to comply with its obligations.

   II.   Extension of reporting deadlines – FATCA/CRS/DAC 6

Beside FATCA and CRS, the Luxembourg fund industry is also subject to the mandatory exchange of information under the DAC 6 law of June 25, 2020. With the main purpose to detect potentially aggressive tax arrangements, DAC 6 law introduces obligation of reporting for the intermediaries under certain conditions in case where an arrangement may fall under an exhaustive list of hallmarks.

Further to the European Commission's proposal of May 8, 2020 regarding Directive 2011/16/EU to extend certain deadlines for reporting and exchanging information in tax matters due to the Covid-19 crisis, as well as the Council Directive of June 24, 2020 amending the Directive 2011/16/EU, the Luxembourg Ministry of Finance issued a communication dated June 4, 2020 (the Communication) confirming that Luxembourg with proceed with allowed extensions of the deadlines.

According to the Communication, the Luxembourg government issued bill of law (n.7625) on July 6, 2020 introducing a deferral of the deadlines for communication under the CRS, FATCA and DAC 6 legislation in the following manner:

  • For DAC 2 and FATCA: the deadline will be deferred by 3 months (i.e. information should be reported by September 30, 2020);
  • For DAC 6: the deadline will be extended by 6 months
    • information on reportable cross-border arrangements from the period June 25, 2018 –  June 30, 2020 should be reported by February 28, 2021 (instead of August 31, 2020);
    • the date for the beginning of the period of 30 days for reporting by intermediaries (or tax payers) for cross-border arrangements that become reportable on or after July 1, 2020 should begin on January 1, 2021; and
    • the first automatic exchange of information between Member States should take place on April 30, 2021 (instead of October 31, 2020).

Pending the entry into force of these legislative changes, the penalties for late transmission of information laid down in the above-mentioned laws will not be applied.

   III.   The practical impact and our assistance

The deferral of deadlines certainly means a moment of relief for the players in the Luxembourg fund industry, allowing them to get better introduced with the new requirements, collect the necessary information and perform the relevant analysis imposed by the FATCA/CRS/DAC 6 regulations in time for the deferred reporting deadlines.

In practice, the investment funds and their related services providers (e.g. the registrar and transfer agent/depositary for FATCA/CRS and the investment fund manager/advisor, if any for DAC 6) shall ensure that the relevant due diligence process and procedures ensuring compliance with the new reporting obligation towards the Luxembourg tax authorities are in place during this transitional period.

In this respect, they should review the business plan impact and adapt, as far as necessary, the legal aspects (fund documents and services providers agreements), the compliance aspects (procedures, policies and controls including ongoing transactions monitoring and staff training) and the operational aspects (IT systems).

In particular, asset managers shall identify potential situations where they act as an intermediary based on their activity/business model and shall review relevant investment products to detect potential aggressive tax arrangements that shall fall into the scope of DAC 6.

For any further guidance, assistance or information, please reach out one of your regular contacts at AKD or send an email to tax@akd.eu or funds@akd.lu

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