The Foreign Account Tax Compliance Act (“FATCA”) was introduced in the US in order to tackle non-tax compliance by US taxpayers with foreign accounts. In short, FATCA imposes foreign financial institutions (“FFIs”) to report to the US Internal Revenue Service (“IRS”) information about US accountholders and certain US investors. A 30% withholding tax will apply on US sourced income paid to FFIs if FFIs do not comply with FATCA reporting obligations.
The US department of treasury has issued two model agreements in order to implement FATCA. These agreements serve as a base for the negotiations between the US and the country implementing FATCA. The fundamental difference between model 1 and model 2 is that, under model 1, FFIs will report information to their domestic tax authorities which will then convey such information to the IRS whilst under model 2, the FFIs must report directly to the IRS. On May 21st 2013, Luxembourg chose model 1 to exchange the information required under FATCA.
On February 27th 2014, Luxembourg and the US agreed on the content of the model 1 agreement (“IGA Model 1”) and, on March 28th 2014, the IGA Model 1 was signed.
IGA Model 1 is now subject to Luxembourg parliamentary approval.
The text of the IGA Model 1 should be made available shortly.