Common Reporting Standards

Common Reporting Standards

Capital V #8 | by Benoit Dewar, Head of Regulatory Services, Deputy Head of Depositary Services, Alter Domus

CRS is in essence very similar to FATCA, the main difference being that CRS covers over 95 jurisdictions while FATCA only covers the US.

What is CRS?
International co-operation in tax matters and global tax transparency have been a concern since the end of the 90’s, but this has taken a step up following the global financial crisis and the implementation of FATCA (Foreign Account Tax Compliance Act) between 2010 and 2014.

The need for a more global exchange system became apparent and it is in this context that the OECD released the Common Reporting Standard (CRS) on 15 July 2014, to ensure an effective automatic exchange of information between participating countries.

In October 2014, 51 countries willing to participate, including Luxembourg, signed a CRS Multilateral Competent Authority Agreement (CRS MCAA), which put into effect this automatic exchange of information.

As of 30 June 2016, over 95 jurisdictions have signed the CRS MCAA (the “Partner Jurisdictions”).

Financial Institutions in these Partner Jurisdictions have to automatically exchange through their respective tax authorities, “bulk” taxpayer information from the source country to the residence country concerning various categories of assets and income (account balances, dividends, interest etc.).

Furthermore, bilateral agreements have to be signed between the Partner Jurisdictions for the exchange of information to become effective.

Why do we have to comply in Luxembourg?
In December 2014, the EU adopted the text of the CRS via the Directive 2014/107/ EU amending Directive 2011/16/EU with regards to the mandatory automatic exchange of information in the field of taxation (Directive on Administrative Cooperation –DAC). Directive 2014/107/EU is also called DAC 2 and entered into force on 1 January 2016. DAC 2 was transposed into Luxembourg law on 18 December 2015.

What do we have to do?
CRS is in essence very similar to FATCA, the main difference being that CRS covers over 95 jurisdictions while FATCA only covers the US.

The first step to take for each entity will be to determine its CRS status. It is almost impossible nowadays to open a new bank account in Luxembourg without providing this status.

Entities which are categorised as Financial Institutions will have to:

• Identify their account holders (i.e. shareholders and debt holders) by obtaining a self-certification, disclosing their CRS status (for entities) or their tax residency (for individuals).
• Report to the Administration des Contributions Directes (ACD) any entity which is classified as PNFE (Passive Non-Financial Entity) with controlling persons located in a country within the CRS scope and any individual located in a country in the CRS scope.
• The ACD will then dispatch this information to the relevant local tax authorities. Since 1 January 2016, Financial Institutions are under an obligation to identify their new account holders.

As of 31 December 2016, existing accounts (i.e. accounts opened before 1 January 2016) of individuals with value above EUR 1,000,000 will also have to be identified. The first reporting date will be in June 2017.

As of 31 December 2017, all other existing accounts (i.e. lower value individual accounts + entity accounts) will also have to be identified.

What are the challenges?
The main challenges are caused by the scope of CRS, as it covers almost 100 countries.

Consequently, reports will no longer only target US reportable accounts, but reportable accounts from several different countries.  Blank reports will become less frequent and report content will often be more consequential.

This will also have an impact on the disclosure of controlling persons. It was quite common, under FATCA, that a Passive NFFE (Non-Financial Foreign Entity) did not disclose any of its controlling persons as there were not usually any US ones.

However, under CRS, it is expected that controlling persons are disclosed on the self-certification of the PNFE (Passive Non-Financial Entity) even though it ends up to be the senior management of this entity.

Finally, given the sensitivity of the topic, adopting an integrated approach with other KYC requirements and being instructive with investors regarding this new regulation will be key.

Benoit Dewar

Head of Regulatory Services,  Deputy Head of Depositary Services, Alter Domus.

GP Workshop: Automatic Exchange of Information (FATCA and CRS) (7/11/2016)

GP Workshop: Automatic Exchange of Information (FATCA and CRS; 7/11/2016)

– sharing practical experiences, lessons learnt, technical aspects and Q&A

LPEA represents a growing community of investors in Luxembourg (General Partners/ Limited Partners) and has for many years promoted networking between its professionals (GP Club Meetings).

The upcoming GP Workshop will be the first training/ Q&A session dedicated exclusively to GPs with a format focused in the clarification of grey areas and exchange of experiences. PE professionals and guest experts will meet to improve practice and better understand how regulation is being applied today.

The first session will focus on “FATCA and CRS– sharing practical experiences, lessons learnt, technical aspects and Q&A” and will be coordinated by Patrice Fritsch, Executive Director of EY Luxembourg.

The GP Workshop Automatic Exchange of Information (FATCA and CRS) was held at the EY premises on Monday,  November 7, 2016.

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FATCA’s second year declaration: less than a month for filing with Luxembourg tax authorities!

guest article by Patrice Fritsch, Christian Daws and Dan Zandona

FATCA’s second year declaration: less than a month for filing with Luxembourg tax authorities!


FATCA second year declaration

Since 2014, FATCA has introduced a complex framework in terms of account reviews, collection of additional client information, complex classification of entities and private equity organizations, monitoring of compliance and FATCA reporting in Luxembourg.

FATCA’s second reporting filing deadline is fast approaching. By 30 June 2016, reporting financial institutions in Luxembourg will have to submit their FATCA declaration regarding US reportable accounts and data for the fiscal year 2015 to the Administration des Contributions Directes (ACD). Therefore, many reporting financial institutions are in the process of resuming a cycle of reportable data search and collection, preparing their data and reporting forms, testing their data and files, testing their technical infrastructure and submitting to the local authorities.

On 18 February 2016, the ACD published the amended Circular ECHA n°3 that includes technical specifications in line with the evolving and more complex requirements for FATCA reporting. The following items are not exhaustive but should be highlighted.

Regarding the data to be reported, the new format of the declaration includes new challenges in comparison to the previous period. Whereas the main financial data reported for fiscal year 2014 was the account balance or value, this year, the FATCA reports will include additional information with respect to amounts paid or credited during the calendar year to the reportable account holder. For example, custodial institutions will have to report the total amount of dividends, the total amount of interest and the total amount of other income paid or credited to each reportable account. Investment entities,  often the case of Private Equity entities classified as reporting financial institutions, will have to report the aggregate gross amount paid or credited to each reportable account, including (but not necessarily limited to) dividends, interest and redemption proceeds.  The FATCA report can no longer state that a reportable account has an account balance that is equal to zero (0.00). Other approaches may exist to nevertheless allow the reporting of such accounts that do actually have an account balance equal to zero or negative.

As in the previous year and as defined in the local tax authority circular, all reporting financial institutions in Luxembourg are required to submit a report to the authorities, even if no reportable accounts are maintained. In such case, a nil report must be filed following the same process as for a FATCA report containing US reportable accounts.  The reports need to be filed through one of the two secured communication channels defined in the Luxembourg tax authority circular. Additionally, any FATCA report filing should be encrypted with a specific provider and technology.

If a reporting Luxembourg financial institution fails to comply with the due diligence procedures or fails to put in place the mechanisms to report information as required, the financial institution may be subject to a fine of up to EUR 250,000. If a reporting financial institution fails to report, provides incomplete or incorrect reports or reports late, the financial institution may be subject to a fine of 0.5% of the amounts that should have been reported and not less than EUR 1500.

While some entities may still struggle to file the FATCA report of fiscal year 2014, most entities are currently performing the reporting of the fiscal year 2015.  Many reporting financial institutions are also actively preparing the processes for reporting for the fiscal year 2016, which will further evolve for FATCA and, significantly, will include an additional declaration to comply with the Common Reporting Standard (CRS).

In order to significantly reduce the administrative and technical burden for reporting financial institutions, the law and tax authority circulars allow delegation of reporting tasks to third party service providers. The third party service provider acts thereby as a technical depositor of data while the reporting financial institution remains as the declarer. This service provider may also provide services such as assistance in becoming compliant with the legislation and regulations, FATCA report generation (under xml format), report encryption and transmission to the local authorities. Such service providers include EY Luxembourg, which has developed a reporting solution that is compliant with local requirements and allows scaling and streamlining of the process throughout for small and large entities and financial organizations.

In order to remain or become compliant with both FATCA and CRS requirements, reporting financial institutions, including investment funds and private equity organizations, must, by the end of June 2016, perform the FATCA annual reporting with respect to 2015 and finalize due diligence of pre-existing accounts for FATCA purposes; they should also begin or continue due diligence of pre-existing accounts in the context of CRS and consider whether to select a third party service provider in order to be supported in the execution of the tasks required, receive hotline support or benefit from a reporting compliance managed service.

Patrice Fritsch, Directeur associé, EY Luxembourg

Christian Daws, Executive Director, EY Luxembourg

Dan Zandona, Manager, EY Luxembourg