The US Internal Revenue Service (IRS) is increasing its efforts to ensure that non-US entities, including Luxembourg investment funds, comply with US tax rules.
Tax authorities seem particularly focused on the following implications:
- Making US investments may lead to US tax compliance obligations:
- A company claiming treaty benefits should not only be a resident of the tax treaty partner, but must also satisfy the limitation on benefits (LOB) provision included in most US income tax treaties. Appropriate LOB analysis should, therefore, be made prior to claiming treaty benefits.
- In the particular case of a partnership (e.g. SCSp), you may need to assess the possibility of making the “check the box election” – to simplify documentation requirements – or issuing K-1 statements to your US and non-US investors.
- Generally, non-US persons are not required to file a tax return to obtain WHT refunds, but rather may obtain them from the withholding entity/Qualified Intermediary (QI). However, if your bank/QI is unable to reclaim the amount, you have to make the reclaim by filing the relevant US tax return on Form 1120-F.
- When a corporate investment fund (e.g. SICAV-S.A.) is a Passive Foreign Investment Corporation (PFIC), you may need to provide your investors with the PFIC statements required for their tax returns. Since a PFIC meets either the income test (75% passive income) or asset test (50% passive assets), all Luxembourg corporate investment funds with US investors could be impacted.
- All Luxembourg entities (including SCSp and GPs) – irrespective of activities or shareholding structure – should be compliant with FATCA classification and, in certain cases, reporting requirements. Also, the Luxembourg tax authorities are issuing letters to many Luxembourg Reporting FIs, aimed at verifying the due diligence procedures and reporting processes put in place for FATCA/CRS purposes.
Our US tax experts are here to further clarify these developments or assist you in analyzing and complying with US tax rules.