TAX ALERT
CSSF CIRCULAR 15/609
DEVELOPMENTS IN THE AREAS OF
AUTOMATIC EXCHANGE OF TAX INFORMATION AND OF
SANCTIONS AGAINST MONEY LAUNDERING IN TAX MATTERS:
THE LAST CALL
APRIL 2015
©2015
On 27 March 2015 the CSSF released a short circular entitled “Developments in the
areas of automatic exchange of tax information and of sanctions against money
laundering in tax matters”. This Circular calls on Luxembourg financial sector
professionals to engage in a proactive review of their client accounts and investment
instruments in view of the tightening net of cross-border tax cooperation and
enforcement tools. Let us briefly review these developments and their concrete
implications.
AUTOMATIC EXCHANGE OF INFORMATION
In the coming twelve months, setting aside the known and relatively innocuous
exchange of tax information on employment income / director’s fees / pensions under
directive 2011/16/UE and under the directive on the taxation of savings income, no
less than three powerful look-through reporting tools will come into application.
FATCA, 2014 data to be reported in 2015
The original FATCA compliance deadline in U.S. law was 1 July 2014. As a result of
the execution of the Luxembourg IGA on 28 March 2014, all Luxembourg FFIs are
presumed compliant, unless and until a determination to the contrary would be
reached by the IRS. Exchange of information must be operational by 30 September
2015.
CRS reporting within the EU, 2016 data to be reported in 2017
CRS designates the Common Reporting Standard developed by the OECD to facilitate
cross-border automatic EOI of financial account information. Directly inspired from
FATCA, it is currently being implemented under different forms and legal bases.
Within the EU, Directive 2014/107/EU amends the administrative cooperation directive
2011/16/EU to provide for a significantly expanded automatic EOI, the terms and
structure of which are copied on FATCA to cover most forms of income and assets on
accounts. Data collection is set to start as of 1 January 2016, for reporting the
following year.
CRS reporting under the OECD multilateral convention
Separately, at OECD level, 51 jurisdictions (that is EU and non-EU countries) have
agreed to an automatic EOI on the basis of the CRS and most of them, including
Luxembourg, have even committed to performing a first EOI on this basis in 2017. The
legal basis for this exchange already exists in the OECD multilateral convention on
administrative assistance in tax matters.
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In all three cases, with marginal differences, the reporting will occur:
•
BY banks, depositaries, investment entities and insurers;
•
ON existing accounts (at least the significant ones) and all new accounts
•
LOOKING THROUGH any interposed entities up to the natural person
beneficial owner(s)
•
TO the tax authorities of the countries of residence of such beneficial
owners (via the Luxembourg tax authorities)
Life insurance no longer left out
In the original administrative cooperation directive 2011/16/EU, the Luxembourg tax authorities would only
share the information available to them out of several income categories. Life insurance products are one of
these categories, but they were excluded in practice from reporting because of the professional secrecy of
insurance companies, which rendered information on life insurance contracts unavailable to the Luxembourg
tax authorities. The CRS-based reporting introduced by Directive 2014/107/EU will trump this limitation and
capture notably:
•
any Cash Value Insurance Contract, that is any insurance contract (other than an indemnity
reinsurance contract between two insurance companies) that has a Cash Value; Cash Value is the
greater of (i) the contract value / redemption value, or (ii) the amount the policyholder can borrow
under or with regard to the contract, but excluding:
o
amounts due only because of the death of the insured under a life insurance contract;
o
personal injury or sickness benefit or other benefit providing indemnification of an
economic loss incurred upon the occurrence of the event insured against;
è (pure) damage insurance coverage is out of scope
•
o
a refund to the policyholder of a previously paid premium under an Insurance Contract
(other than under a life insurance contract) due to policy cancellation or termination,
decrease in risk exposure, correction of premium calculation error; or
o
a policyholder dividend based upon the underwriting experience of the contract or group
involved.
any Annuity Contract, that is a contract under which the issuer agrees to make payments for a
period of time determined in whole or in part by reference to the life expectancy of one or more
individuals.
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MONEY LAUNDERING
The fourth directive on the prevention of the use of the financial system for the
purpose of money laundering and terrorist financing is well on its way to final adoption,
having already been approved by a first unanimous vote by the Council of Ministers of
the EU on 21 April 2015.
In the latest draft version of the directive, the eleventh point of the preliminary
“whereas” section reads:
“It is important expressly to highlight that ‘tax crimes’ relating to direct and
indirect taxes are included in the broad definition of ‘criminal activity’ in this
Directive, in line with the revised FATF Recommendations. Given that
different tax offences may be designated in each Member State as
constituting ‘criminal activity’ punishable by means of the sanctions as
referred to in point (4)(f) of Article 3 of this Directive, national law definitions
of tax crimes may diverge. While no harmonisation of the definitions of tax
crimes in Member States’ national law is sought, Member States should
allow, to the greatest extent possible under their national law, the exchange
of information or the provision of assistance between EU Financial
Intelligence Units (FIUs).”
Article 3(4), in turn, defines “criminal activity” predicate to money laundering as follows:
‘criminal activity’ means any kind of criminal involvement in the commission
of the following serious crimes:
(a) acts set out in Articles 1 to 4 of Framework Decision 2002/475/JHA;
(b) any of the offences referred in Article 3 (1)(a) of the 1988 United Nations
Convention against Illicit Traffic in Narcotic Drugs and Psychotropic
Substances;
(c) the activities of criminal organisations as defined in Article 1 of Council
Joint Action 98/733/JHA ;
(d) fraud affecting the Union’s financial interests, where it is at least serious,
as defined in Article 1(1) and Article 2(1) of the Convention on the
protection of the European Communities’ financial interests;
(e) corruption;
(f) all offences, including tax crimes relating to direct taxes and indirect
taxes and as defined in the national law of the Member States, which are
punishable by deprivation of liberty or a detention order for a maximum of
more than one year or, as regards Member States that have a minimum
threshold for offences in their legal system, all offences punishable by
deprivation of liberty or a detention order for a minimum of more than six
months;”
While the preliminary “whereas” seems to imply that tax crimes must necessarily be
considered as predicate offences to money laundering, in the actual operative
provision “tax crimes” remain included in the last catch-all clause and thus must be
mandatorily included by Member States only insofar as the standard prison term
threshold is met (although, of course, Member States have the possibility, and are
clearly strongly encouraged, to go beyond the requirements of the directive and
include tax crimes altogether).
The historical ambiguity over inclusion of tax crimes as predicate offences to money
laundering is thus not finally resolved, as it would have been if tax crimes had been
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included in a new, stand-alone point (f) in article 3(4), separate from the catch-all
clause which would have become point (g).
In Luxembourg, where aggravated tax fraud (escroquerie fiscale) is punishable by a
jail term of one month to five years per §396(5) of the Abgabenordnung, the minimum
prison term threshold of six months is not met and it will thus legally be a decision of
the Luxembourg legislator, when implementing the new directive, to include
aggravated tax fraud within the ambit of predicate offences to money laundering. This
circumstance does not, however, alter the fact that the inclusion of tax offences is
recommended by the FATF and could therefore separately be a point on which “peer
pressure” can be exerted politically.
More broadly, the new directive is expected to strengthen compliance requirements in
a variety of respects, including the establishment of a beneficial ownership register for
legal entities and certain trusts, and more severe penalties for professionals who
would fail to comply with the required customer due diligence obligations.
OTHER NOTEWORTHY EVOLUTIONS
Parent-subsidiary directive takes an anti-abuse turn
The EU “Parent-Subsidiary” Directive 2011/96/EU of 30 November 2011 was recently
amended by:
•
Directive 2014/86/EU of 8 July 2014, which aims at avoiding situations of
double non-taxation deriving from mismatches in the tax treatment of profit
distributions between Member States; and
•
Directive 2015/121 of 27 January 2015, which further adds a de minimis
General Anti-Abuse Rule (GAAR) to the EU Parent-Subsidiary regime.
This GAAR in effect reflects a choice by EU countries in favour of one of several
solutions proposed by the OECD in its works on Base Erosion and Profit Shifting
(BEPS) Action Plan 6 on Preventing Treaty Abuse, that is, in favour of a general
“motive test” to which it adds an economic reality check. The GAAR is targeted at:
“an arrangement or a series of arrangements which, having been put into
place for the main purpose or one of the main purposes of obtaining a tax
advantage that defeats the object or purpose of this Directive, are not
genuine having regard to all relevant facts and circumstances.”
bearing in mind that:
“an arrangement or a series of arrangements shall be regarded as not
genuine to the extent that they are not put into place for valid commercial
reasons which reflect economic reality”.
Given that this new GAAR will essentially if not exclusively have a bearing in a crossborder context, its implementation will need to take account of the long-standing caselaw of the Court of Justice of the European Union under which tax restrictions to the
freedom of establishment are legitimate only to the extent they target “wholly artificial
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arrangements” .
Arguably, there is a difference between a wholly artificial arrangement and an
arrangement that is not put into place for valid commercial reasons which reflect
economic reality.
1
ECJ 12 September 2006, Cadbury Schweppes plc & Cadbury Schweppes Overseas Ltd v Commissioners of
Inland Revenue, C-196/04. See also ECJ, 22 May 2008, aff. C-162/07, and 20 June 2013, aff. C-653/11.
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The presence of the qualification “valid” in the latter wording, together with the more
flexible condition that tax optimization be “one of the main purposes” of such
arrangement, concur in sliding towards a possibility for the tax authorities to revisit
management decisions, which some Member States accept (think of the French “acte
anormal de gestion”) and which others refuse (Belgium, Luxembourg, for example).
This could appear as a stretch vis-à-vis the classical notion of abuse of (tax) law,
which targets a setup that is put into place for the (one) main purpose of avoiding tax
and has little or no economic reality. Compatibility with domestic law definitions of the
abuse of law in tax matters may hence also be at issue.
Automatic exchange of information on tax rulings
The OECD’s Base Erosion and Profit Shifting (BEPS) project and current EU
legislation provide for spontaneous exchange of information on tax rulings, but only in
certain circumstances. In order to tackle corporate tax avoidance, the European
Commission presented on 18 March 2015 a package of tax transparency measures, of
which a key element is a proposal to introduce an automatic exchange of information
between Member States on their tax rulings through a Council Directive amending the
Directive 2011/16/EU as regards mandatory exchange of information in the field of
taxation.
The proposal sets a strict timeline: every three months, national tax authorities would
have to send to all other Member States a pre-defined set of reasonably detailed
information following a standard format on all cross-border tax rulings. This would
cover (i) the name of the taxpayer (and group, where this applies), (ii) a description of
the issues addressed in the tax ruling, (iii) a description of the criteria used to
determine an advance pricing arrangement, (iv) identification of the Member State(s)
most likely to be affected and (v) identification of any other taxpayer likely to be
affected (apart from natural persons). Member States would then be able to ask for
more detailed information on a particular ruling, where relevant.
In addition, Member States would have to provide every year statistics to the
Commission on the volume of information exchanged on tax rulings.
The proposal covers all advance cross-border tax rulings and all advance
pricing arrangements that Member States have issued to companies and entities
since 2005, to the extent still valid, but purely domestic tax rulings and tax rulings
issued to natural persons would be out of scope. In order to avoid divergent
interpretations of what constitutes a tax ruling, the Commission has included a clear
and very wide definition.
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ASSESSMENT
Beyond technicalities, it is fairly clear from the above developments that by the
beginning of 2016 paper-only, mailbox-type entities will cease to be of any meaningful
usefulness to corporate taxpayers in their operations with EU member countries, to
say the least.
Financial sector professionals are hence invited to take the necessary steps to avoid
exposure for themselves and, where possible, for their clients.
In this second case, those meaningful entities and clients where a dedicated effort at
ongoing compliance with these new tax rules is warranted must be identified and
warned. Such an effort should start with a thorough assessment of vulnerability to
legal risks and threats, so as to determine whether (and how) the operational reality of
the business concerned can be adjusted in due time and/or whether (and how) any
interposed vulnerable entities or structures need to be eliminated. In view of:
•
the rapidly changing tax legislation at both domestic and international levels,
•
the significant potential for inconsistent implementation of some of the
measures discussed above by the Member States,
•
the resulting increased risk of cross-border conundrums where a necessary
step for purposes of country A would trigger a significant issue in country B,
•
the time needed to accommodate operational reality in this exercise,
it is advisable to perform the above assessment and agree on actions required within a
fairly short timeframe.
Separately, corporate and individual clients who have frequently resorted to advance
tax agreements in the past may want to revisit such structures to identify which ones
are effectively still valid and which others no longer are.
For further information feel free to contact the following persons:
LIONEL NOGUERA [email protected]
ANNE SELBERT [email protected]
KATHARINA MÜLLER [email protected]
PATRICK ANDERSSON [email protected]
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BONN & SCHMITT
APRIL 2015
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