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FATCA compliance - EY

FATCA complianceA challenge for Luxembourg financial institutions By enacting FATCA , the US intends to initiate a worldwide exchange of information on US persons with the objective of preventing the use of non-US entities by US individuals to evade US taxes. FATCA rules, which become applicable in 2013, will impact the financial sector worldwide. For Luxembourg financial institutions, FATCA represents a major challenge, in terms of strategy as well as operational processes and WintgensTo fight against the avoidance of United States tax by US persons holding securities with non-US financial institutions, the foreign Account Tax compliance Act ( FATCA ) provisions were enacted on 18 March 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act of 2010. Most of the world s major banks have entered into Qualified Intermediary (QI) agreements with the US Internal Revenue Service (IRS) since 2001 to identify US persons holding US securities and report their income coming from such US securities.

Requirements FATCA represents a huge challenge for non-US financial institutions. Luxembourg entities will either be considered i) Foreign

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Transcription of FATCA compliance - EY

1 FATCA complianceA challenge for Luxembourg financial institutions By enacting FATCA , the US intends to initiate a worldwide exchange of information on US persons with the objective of preventing the use of non-US entities by US individuals to evade US taxes. FATCA rules, which become applicable in 2013, will impact the financial sector worldwide. For Luxembourg financial institutions, FATCA represents a major challenge, in terms of strategy as well as operational processes and WintgensTo fight against the avoidance of United States tax by US persons holding securities with non-US financial institutions, the foreign Account Tax compliance Act ( FATCA ) provisions were enacted on 18 March 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act of 2010. Most of the world s major banks have entered into Qualified Intermediary (QI) agreements with the US Internal Revenue Service (IRS) since 2001 to identify US persons holding US securities and report their income coming from such US securities.

2 While the current regulation will remain in place, the FATCA rules go far beyond the QI requirements. Indeed, FATCA rules cover income arising from non-US securities, as well as income from both US and non-US securities received by foreign entities with substantial US owners7, which used to go unreported under the QI August 2010, the IRS issued Notice 2010-60 (the Notice) which provided preliminary guidance on the implementation of FATCA . The Notice is the first piece of guidance helping entities implement the systems and processes necessary to comply with the new withholding, documentation and reporting obligations of FATCA . Further details on how the information collection and due diligence obligations should be executed are expected to be issued at the end of the spring DawsSt phanie Aknin7 Substantial United States owners include US persons owning any stock of or interest in a foreign investment vehicle or more than 10% of the stock of a corporation of another type or more than 10% of the profit interests or capital interests of a partnership of another Luxembourg Financial Connection Issue 15 | 1 RequirementsFATCA represents a huge challenge for non-US financial institutions.

3 Luxembourg entities will either be considered i) foreign Financial Institutions (FFIs), ii) in scope Non-Financial foreign Entities, or iii) may be out of scope according to exemptions expected to be issued by the IRS8. FFIs are entities which perform at least one of the following activities: Accept deposits in the ordinary course of a banking or similar business Are engaged in the business of holding financial assets for the account of others Are engaged primarily in the business of investing or reinvesting or trading in securities, partnership interests or commodities. Based on this definition, FFIs include non-US banks, custodians, brokers, wealth managers, insurance companies and investment funds. To what extent, if at all, investment funds will be affected is unclear; so far it seems that any specified US person9 who is a shareholder or unitholder of an investment vehicle may have to be Entities expected to be excluded from the scope of FATCA or to whom payments are expected to be exempted from FATCA include: Holding companies that are not investment funds and that hold only subsidiaries that are not financial institutions Start-up companies that intend to start non-financial institution businesses.

4 However this exclusion will expire after the first 24 months of the entity s organization Non-financial entities that are liquidating or in the process of reorganizing pursuant to bankruptcy Hedging or financing entities that service only a non-financial expanded affiliated group that does not include any financial institutions Retirement plans that qualify as retirement plans under law, that are sponsored by a non-US employer and do not allow US participants other than general employees that work for the non-US employerFurthermore, insurance companies that solely issue insurance or reinsurance contracts without cash value, such as most property and casualty insurance companies, reinsurance companies and life insurance companies that issue only term life insurance contracts, will not be treated as All US persons with the exception of entities such as corporations the stock of which is regularly traded on an established securities market, tax-exempt organizations, retirement plans, US state agencies, banks, real estate investment trusts, regulated investment companies and certain trusts10 The notion of financial account encompasses depositary and custodial accounts maintained by the FFI11 Any foreign entity which has one or more substantial United States owners12 Dividends, interest payments, rents, salaries, wages, premiums, annuities, compensations, remunerations Under FATCA , FFIs will have to enter into agreements with the IRS under which they will be bound by a number of reporting obligations.

5 They will be required to determine whether an account is a US account (financial accounts10 held by a specified US person or by a US-owned foreign entity11) by obtaining sufficient information from account holders. FFIs will have to identify US account holders and report electronically on an annual basis information regarding their assets as well as the name, address and US taxpayer identification number (TIN) of all US persons, their account number, account balance, the net payments in favor of the account and the net withdrawals/payments from the financial account (US & non-US). Furthermore, FFIs must first obtain a waiver from each account holder if required by the law of the FFI s country ( , Luxembourg), so that they can report the required customer data to the US tax authority. In such cases, banking secrecy will be lifted and the exchange of information will then be terms of sanctions, from 1 January 2013, uncooperative FFIs and US account holders will incur penalties.

6 A 30% withholding tax will be deducted from all payments received from US sources by FFIs who have not entered into an agreement with the IRS. The 30% tax will also be withheld, from persons who did not sign a waiver, on US income12 and gains and proceeds from the sale of instruments which yield such income from US sources. However, under the grandfathering provisions, payments received under certain obligations outstanding on 18 March 2012 will not be taxed. The effective date for the new dividend equivalent rules, however, covers payments made as from 14 September | The Luxembourg Financial Connection Issue 15 ImpactsAs was the case with the implementation of the QI regime, Luxembourg financial institutions will have to make enormous efforts to implement FATCA . Indeed, current information and processes implemented under the QI regime will not be sufficient to identify all US accounts for FATCA purposes, and to provide the IRS with the required accurate data.

7 Luxembourg financial institutions considering non- compliance with FATCA first need to address the basic questions of whether they intend to: Keep US persons as (direct or indirect) clients in this case, institutions will need to enter into a participating FFI agreement with the IRS and to adapt their operating model accordingly Include US securities in their product portfolios for clients and/or for their own proprietary trading or investments in this case, institutions will need to retain their QI status and become participating , choosing to totally exclude US clients and US securities in order to avoid becoming a participating FFI not only impacts substantially the strategy and business model of an institution; it also carries reputational a back-office perspective, FATCA requires drafting and amending procedures, as well as putting together systems to Christophe Wintgens, Partner, is our Financial Services Advisory Leader+352 42 124 Daws is an executive director Financial Services Tax practice+352 42 124 phanie Aknin is a manager in our Financial Services Advisory practice+352 42 124 Includes all entities controlled, , in which at least 50% of the capital or interest or voting power is held, directly or indirectly.

8 Respond to the documentation, reporting, income processing and withholding obligations. For front offices, FATCA implies the preparation of detailed instructions for clients impacted. In a wider group context, any financial institution which is a part of an expanded affiliated group 13 and includes at least one non-US financial institution which has signed a participating FFI agreement with the IRS will be obliged to apply FATCA . Many group projects are managed primarily from corporate headquarters and organized around the bank s core services ( , wealth management, investment, corporate, and retail banking). Such FATCA group projects need to take account of each group entity and each function, as there are different issues at stake. Examples of where Luxembourg entities face specific issues include securities services for investment funds and the transfer agents role in supporting the distribution network s identification of the end is therefore a global project with a local dimension; the specificities of the Luxembourg market should not be underestimated.

9 Luxembourg entities may also consider engaging in local working groups on specific issues such as banking secrecy and data Luxembourg financial institutions have seriously started working around FATCA , despite its strategic and operational implications. Institutions have little time to adapt their business model and internal processes to the new requirements, which are coming into effect in entities should therefore consider setting up project teams now to get a firm grasp of the new requirements and perform a high level strategic impact analysis, followed by a gap analysis. As FATCA is far more about operations than about tax, filling any gaps identified should involve multidisciplinary teams made up of operations, compliance , back office and IT specialists, a FATCA technical expert, and a tax project manager. The Luxembourg Financial Connection Issue 15 | 3


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