The Luxembourg tax authorities have recently published the answers to frequently asked questions (FAQ) on the implementation of the Common Reporting Standard (CRS): read them here (publication date 28 April 2016, only French version).
The key information from the FAQ can be summarized as follows:
a) The FAQ starts by giving a list of references to national as well as international legal documents and publications:
b) Furthermore, the FAQ confirms that the list of Reportable Jurisdictions to be reported to in calendar year 2017 will be issued by the Luxembourg tax authorities in due time on the website of the Luxembourg tax authorities.
Additionally, the FAQ confirms that in principle the following jurisdictions quality as Reportable Jurisdictions in 2017:
c) The FAQ confirms that the list of Participating Jurisdictions has been published by Grand-Ducal Decree and will be updated in due time. It is important to note that the definition of “Participating Jurisdiction” is a key factor in assessing whether a look-through approach has to be applied on certain Investment Entities that are resident in a jurisdiction that is not a Participating Jurisdiction.
It should also be noted that the United States of America is considered a Participating Jurisdiction and is included in the list of the Grand-Ducal Decree because of the information exchange under the existing FATCA (Foreign Account Tax Compliance Act) IGA.
d) The Luxembourg tax authorities confirm that only the calendar year can be considered (by Reporting Financial Institutions) an “appropriate reporting period” when applying the relevant due diligence and reporting obligations.
a) To date, the Luxembourg tax authorities have not identified a type of entity that might be included in the definition of Non-Reporting Financial Institutions while also qualifying as an entity presenting a low risk of being used to evade tax as prescribed by Annex I, Section VIII. Paragraph B.1) C) of the Luxembourg CRS law.
b) The FAQ prescribes that even though the definition of “Investment Entity” under the FATCA rules and the CRS rules are not strictly similar, the definitions refer to the same entity types. As a consequence, entities that are treated as Investment Entities under the FATCA rules are to be treated as Investment Entities under the CRS rules as well.
The FAQ emphasises that an entity will only qualify as Investment Entity if it conducts its activities with a “commercial purpose” and “for or on behalf of a customer.”
Under the CRS rules, the activities of an Investment Entity include trading or other activities of investing, administering, or managing Financial Assets or money on behalf of other persons. Furthermore, an entity that is managed by another Entity qualifying as a Financial Institution under the Luxembourg CRS law qualifies as an Investment Entity if its gross income is primarily attributable to investing, reinvesting, or trading in Financial Assets.
However, if an entity with assets under management by another entity does not fall within the scope of the definition of “Financial Institution” in the Financial Action Task Force Recommendations, such an entity should qualify as a Non-Financial Entity (“NFE”) under the Luxembourg CRS law. The FAQ also refers to Section II.h of the administrative circular ECHA N°2, which was published in the context of FATCA implementation, as a section providing further guidance for SOPAFRIs in particular.
The FAQ finally mentions that the definition of “Investment Entity” should be interpreted in a manner that ensures the proper implementation of the CRS framework. The Luxembourg entities, persons, or intermediaries should not implement policies or procedures to circumvent the applicable due diligence and reporting obligations..
c) When applying the definition of “Investment Entity” to an investment fund, the investors in the fund are considered customers.
d) Furthermore, the FAQ points out that the issuing of electronic money as well as the receipt of deposits to provide payment services are not considered as qualifying for the activity of accepting deposits. Therefore, these service providers should not fall within the scope of the definition of “Depository Institution.” Nevertheless, if such an entity exercises other activities that might be considered to be the activity of a Financial Institution under the Luxembourg CRS law, the entity should be treated as a Financial Institution and should comply with the relevant due diligence and reporting procedures for these other activities.
a) The FAQ refers to the published Grand-Ducal Decree for the list of Accounts that are “Excluded Accounts,” which should be updated in due course. The FAQ nevertheless points out that the reading of the legal references linked to these “Excluded Accounts” should be done broadly. In particular, it is not foreseen to limit the definition of “Excluded Accounts” exclusively to those accounts that respect the limits of fiscal deductibility under the Luxembourg tax law.
The list of accounts that are to be treated as “Excluded Accounts” and thus accounts that are not subject to reporting are, to date:
b) The FAQ states that derivatives (such as interest Rate Swaps or Cross Currency Swaps) qualify as Financial Assets under the Luxembourg CRS law, but not as Financial Accounts. These instruments are only subject to reporting if they are deposited/held on a custodial account. However, the accounts in which the initial margin is deposited, and any subsequent margin calls in relation with the derivative structure in the form of cash amounts or financial assets, should be considered Depository/Custodial Accounts under the Luxembourg CRS law, if ownership of these cash amounts or financial assets has not been transferred to the benefit of the counterparty of the transaction.
a) The Luxembourg tax authorities have decided to impose the so-called “Wider Approach” to the Reporting Luxembourg Financial Institutions when complying with due diligence and reporting obligations.
In other words, Reporting Luxembourg Financial Institutions are obliged to apply the relevant due diligence procedures on all accounts held by the Financial Institution.
Thus, when a foreign Jurisdiction becomes a Reportable Jurisdiction, the Financial Institution may base its assessment that the Account is a Reportable Account on the results of the due diligence procedures applied.
Reporting Luxembourg Financial Institutions are obliged to determine which Financial Accounts are reportable Financial Accounts. Only Reportable Accounts should be reported to the Luxembourg tax authorities.
b) The FAQ prescribes that, with regard to new accounts, the Reporting Luxembourg Financial Institutions should mandatorily collect the tax identification number (“TIN”) of the account holders that are resident in a Reportable Jurisdiction, if the Reportable Jurisdiction issues TINs.
In cases where it has been established that an account holder is not resident in a Reportable Jurisdiction, the Luxembourg Reporting Financial Institution may request, at its own discretion, in addition to the date and place of birth, the TIN of the account holder in that [KPMG comment: the FAQ mentions “reportable”, which is obviously a drafting mistake] jurisdiction, provided the jurisdiction issues TINs.
c) Reporting Luxembourg Financial Institutions may opt to apply the following policies or procedures:
These options are just a reminder, as they had already been implemented in the Luxembourg CRS law.
d) Furthermore, the FAQ details the manner in which Question 20 of the CRS-related FAQ by the OECD has to be interpreted: it emphasises that Reporting Luxembourg Financial Institutions have to ensure that they receive and validate the self-certifications of the account holders in a time span that allows them to comply with the relevant due diligence and reporting obligations for the reporting period during which the account has been opened.
By the same logic, the Reporting Luxembourg Financial Institutions have to put policies and procedures in place to ensure that further actions are taken, if the 90-day grace period is not respected (e.g. account closure, application of limits on transactions, or blocking of access to the account until valid self-certification has been obtained).
Failure to put such policies and procedures in place could expose the Reporting Financial Institution concerned to the penalties defined in the Luxembourg CRS law.
It is currently unclear how this 90-day grace period is to be interpreted in relation to Question 20 of the FAQ of the OECD.
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