Amendments to the FATCA and CRS legislations: what's the impact on the Luxembourg investment funds market?

The new law provides for an increase in filing and other compliance obligations that apply to Reporting Financial Institutions. It also revamps the penalties system and clarifies/reinforces the investigation powers of the Luxembourg tax administration. The latter clarified the impact of the new law in a newsletter dated 10 July 2020.

Filing of "nil returns": a new requirement under CRS – EUR10,000 lump-sum penalties may apply

Luxembourg investment funds and investment fund managers that qualify as Reporting Financial Institutions under FATCA are required to file “nil returns” with the Luxembourg tax administration if they do not maintain U.S. Reportable Accounts. This has been the case since FATCA was introduced into Luxembourg law in 2015. 

The original CRS legislation did not impose “nil return” filing obligations on Reporting Financial Institutions in the absence of Reportable Accounts. The option to file “nil returns” with the Luxembourg tax administration under CRS, however, was provided for in the CRS FAQ published on the Luxembourg tax administration's website. 

From 1 January 2021, the filing of “nil returns” will become a requirement for Reporting Financial Institutions under CRS if they do not maintain Reportable Accounts. The change in the law is likely to impact a number of Luxembourg investment funds and investment fund managers that qualify as Reporting Financial Institutions. For instance, unregulated Luxembourg investment funds that qualify as Reporting Financial Institutions and whose investor base is exclusively composed of Financial Institutions acting as nominees for other investors will be required to file “nil returns” in the future as a result of the change in the law.

Some investment fund managers qualify as Non-Reporting Financial Institutions under FATCA and as Reporting Financial Institutions under CRS at the same time. For 2020 and previous reporting years, such investment fund managers were not required to file “nil returns” under FATCA because of their Non-Reporting Financial Institution status, or to make any filing under CRS if they did not maintain Reportable Accounts (which is generally the case for investment fund managers). The same investment fund managers will be required to file “nil returns” in 2021 in compliance with the revamped CRS legislation. The Luxembourg tax administration specifically draws the attention of investment fund managers qualifying as Luxembourg Investment Advisors and Investment Managers under FATCA (i.e. a sub-category of Non-Reporting Financial Institutions) to the fact that they may be required to file nil returns in the future as there is no equivalent status under CRS. 

The new law provides that the Luxembourg tax administration may impose a EUR10,000 lump-sum penalty if no information or, as the case may be, no “nil return” is filed by 30 June of each relevant tax year, with 2021 being the first reporting year in scope. The Luxembourg tax administration reassured Reporting Financial Institutions by stating that they will always be given the opportunity to provide explanations (e.g. a change of FATCA/CRS status) before a penalty is imposed.

Policies, controls, procedures, IT systems, registries of actions: the new law increases Reporting Financial Institutions' compliance obligations 

The new law explicitly provides that each Luxembourg investment fund and investment fund manager qualifying as a Reporting Financial Institution will be required to implement policies, controls, procedures and IT systems that allow it to comply with FATCA and CRS due diligence and reporting obligations. Such measures shall be proportionate to both the size and specificities of the relevant entity.

In addition, Luxembourg investment funds and investment fund managers qualifying as Reporting Financial Institutions will need to keep registries reflecting actions taken and other pieces of evidence used to comply with the due diligence and reporting obligations provided for under the FATCA and CRS legislations. Such registries need to be kept for a period of ten years, which coincides with the statutory time limit within which the Luxembourg tax administration may request access to policies, controls, procedures, IT systems as well as the registries.

In the case where a Reporting Financial Institution delegates its due diligence and reporting obligations to a third party service provider, these obligations shall remain the responsibility of the Reporting Financial Institution. Therefore, it will be important for delegating Reporting Financial Institutions to ensure that third party service providers satisfy the increased compliance obligations (this could be achieved via the inclusion of appropriate representations and undertakings in the relevant service agreements). In addition, Reporting Financial Institutions may have to implement their own policies, controls, procedures, IT systems and registries to ensure compliance with due diligence and reporting obligations under FATCA and CRS.

Other penalties 

In addition to the EUR10,000 lump-sum penalty, the Luxembourg tax administration may impose penalties of up to a maximum amount of EUR 250,000 if it detects non-compliance with obligations imposed under the FATCA and CRS legislations. 

Penalties may be increased by an amount corresponding to 0.5% of the amounts that should have been reported in respect of Reportable Accounts, but were not so reported by Reporting Financial Institutions.

The Luxembourg tax administration stated that penalties imposed should be coercive, dissuasive and proportionate.