In recent years, there has been a marked increase in the automatic exchange of financial information between tax administrations. Two regulations govern this exchange of information. The first, FATCA (Foreign Account Tax Compliance Act), applies to financial assets held overseas by individuals with US Person status, i.e. those who qualify as US taxpayers under US tax law. The second, CRS (Common Reporting Standard) involves all OECD countries who participate in this data exchange, which covers over 100 jurisdictions.
Combatting tax evasion
“Within FATCA, there are two models of cooperation agreements with the US administration (the Intergovernmental Agreements, or ‘IGAs’)”, explains Michel Iannone, Director – Risk and compliance services at Value Partners. “Luxembourg signed the first Model (IGA Level I) on 28 March 2014. This means that the assets of individuals considered to be US citizens that are held through companies established in Luxembourg must be reported to the Luxembourg administration, which will, in turn, report them to its US counterparts.” The CRS standard was inspired by FATCA and has been translated into a European directive and transposed into Luxembourg law.
This means that the assets of individuals considered to be US citizens that are held through companies established in Luxembourg must be reported to the Luxembourg administration, which will, in turn, report them to its US counterparts
Despite their differences, both regulations have the same aim of fighting tax evasion and increasing the transparency of assets held by individuals in foreign countries. They also both apply to a significant number of companies based in Luxembourg. “FATCA and CRS apply to all entities registered with the Luxembourg Business Registers (LBR). These entities must first determine their status, which will define whether or not the entity is subject to mandatory reporting. Only entities with a status of financial institution are required to report to the Luxembourg Inland Revenue (ACD) on the beneficial owners of the accounts they manage, through a publication channel defined by the ACD”, Marco Scappaticci, Senior Regulatory Reporting Officer at Value Partners, explains.
The importance of compliance
Importantly, there is no minimum holding threshold for someone to be reported as an account holder. A financial entity will have to report all beneficial owners of managed accounts to the ACD, regardless of the amount or proportion held. It’s important to note that once a company is classified as a financial institution, according to the criteria established by the FATCA/CRS regulations, it must submit its mandatory reporting by 30 June each year. A fine of up to 250,000 euros may be applied to a company that has failed to comply with its reporting obligations. Accounts linked to individuals or companies may also be blocked. “The other element is that, since the 4th AML Directive came into force – the European regulation against money laundering and terrorist financing – aggravated tax fraud has been considered to be a first-class money laundering offence. Compliance with FATCA or CRS is one of a number of indications that an entity is tax compliant and therefore that the entity is not being used for tax evasion or, by extension, involved in aggravated tax fraud”, Michel Iannone points out.
To fully comply with the rules, entities registered with the Luxembourg Business Registers must have the necessary knowledge to determine their FATCA/CRS status. As soon as they are classified as financial institutions, they must also be able to report through the appropriate tools validated by the ACD. Value Partners is a one-stop-shop, providing its clients with all the services necessary to meet these obligations, including a recently strengthened reporting team.
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