March 2, 2023
Luxembourg financial institutions should consider impact of temporary relief from reporting US TINs for certain accounts
The US IRS has provided temporary relief (Notice 2023-11, released 30 December 2022) to certain FFIs from the requirement to report US TINs for certain accounts in existence before the effective dates of FATCA and associated IGAs. For background, see EY Tax Alert, IRS temporarily relieves foreign financial institutions from reporting US TINs for certain accounts, provided various requirements are satisfied, dated 18 January 2023.
On the 27 January 2023, the IRS issued a new series of codes to be used in the FATCA reports, in cases where the TIN has not been obtained in specified scenarios.
Luxembourg FIs should consider the impact of this temporary relief on their operations.
Under FATCA, FFIs must report information on certain US account holders, as well as accounts held by certain entities owned or controlled by US persons. In jurisdictions that have entered into Model 1 IGAs, which is the case for Luxembourg, FFIs report to their local tax authority, which shares the information with the IRS. Notice 2023-11 concerns only Model 1 jurisdictions.
Before FATCA, which became effective on 1 July 2014, most jurisdictions did not require a US account holder to provide its US TIN to open an account. Model 1 IGA countries, including Luxembourg, committed, by the beginning of 2017, to establish rules requiring their FFIs to obtain US TINs from US account holders. Nonetheless, many FFIs do not have US TINs for all reportable US account holders, which impairs the IRS's ability to use the reported information. The IRS has developed a series of "TIN Codes" for FFIs to use, in lieu of a US TIN, to provide additional information about those account holders.
On the 27 January 2023, the IRS issued an updated list of codes that can be used in case of missing US TINs, that help them to have a better understanding of the fact and circumstances behind the missing US TINs. Among this list, several codes were already existing, including:
In addition, the following codes have been added to the list:
The "666666666" code was already existing in the previous list, but the definition has been amended.
When one of the above codes is used, the IRS system will still generate an error notification to indicate the entry is invalid. The error notification will provide 120 days to correct the issues. If the TIN is not provided within the 120-days period, the IRS will evaluate the data received (including whether the reporting Model 1 FFI complies with the conditions set forth in Notice 2013-11) and whether there is significant noncompliance based on the facts and circumstances.
If a Model 1 FFI is deemed to be significantly noncompliant with the IGA by the IRS and fails to comply within 18 months, the FFI would be treated as a nonparticipating FFI and subject to 30% withholding tax under FATCA on US-source "withholdable payments". The IRS has continued to insist that FFIs obtain US TINs for all accounts to be reported, including pre-existing accounts.
While the new codes are already usable from the IRS point of view, they have not yet been confirmed by the Luxembourg Tax Authority.
Temporary relief for Model 1 FFIs
According to Notice 2023-11, the IRS will not treat Model 1 FFIs that follow the procedures described in the below section as significantly noncompliant solely because they failed to report a required US TIN for a pre-existing account, provided the Model 1 country also takes certain additional steps. The relief applies for calendar years 2022 through 2024.
What does it mean for Luxembourg FIs?
For each US reportable account missing a US TIN (including new accounts), Luxembourg FIs must take the following steps to be eligible for relief under the Notice 2023-11:
Luxembourg FIs requesting missing TINs may use whatever method of communication they deem most likely to reach the account holder. The request should include either:
Luxembourg FIs will be required to update their policies and procedures to adopt the new requirements. The updated policies and procedures must be retained until the end of calendar year 2028 to document that the FFI complied with the new requirements.
Requirements for Model 1 Jurisdictions, including Luxembourg
It should also be noted that Model 1 FFIs are eligible for relief for a calendar year only if their country makes "good faith efforts" within nine months after the end of the relevant year to:
Notice 2023-11 does not explain what "encourage" means.
To provide Luxembourg FIs with a transition period, the notice deems Luxembourg and other Model 1 jurisdictions to have satisfied these conditions for 2022.
As of today, no communication from the Luxembourg Tax Authority has been issued with regards to the temporary relief, and associated procedures.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Tax Advisory Services Sàrl, Luxembourg City