It is becoming relatively easy for a Luxembourg company to fall under the scope of US tax rules—for example, if it makes investments in the US or has American investors/clients then it must comply with US tax compliance obligations. These obligations typically take the form of obligatory due diligence, withholding, and/or reporting. Read on for a (non-exhaustive!) list of questions that you should be asking yourself.

The realm of US investments

Are you caught up on the basics?

Non-US persons' income is divided by the US's international tax rules into two broad categories:

ECI: income that is effectively connected with the conduct of a trade or business in the US

FDAP: income that is "fixed and determinable annual and periodical income" such as dividend or interest payments.

Do you have to file a US tax return?

The answer is yes if you're a corporation or an individual who is engaged in a trade or business in the US (you must report your ECI), or if you're making a claim for the refund of an overpayment of US tax (regarding your FDAP income).

Are you sure your Luxembourg entity doesn't receive ECI income?

If a Luxembourg entity invests through tax-transparent entities that are doing business in the US, then it does. Such tax-transparent entities are obliged to report the beneficiary's income, losses, or dividends on the Schedule K1 document to all of the shareholders or partners individually, since the K1 is needed to prepare and to file the beneficiary's personal tax return.

Should you impose a tax blocker?

In light of the above obligations, and if suitable, there might also be a need to impose a tax blocker (to convert ECI into FDAP income). If you don't, the pass-through entity, if eligible, can make the so called "check-the-box election" to be treated as a corporation instead.

What withholding tax are you subject to?

US-source FDAP income is generally subject to a 30% withholding tax or lower (depending on the documentation on file or treaty access). In cases of overwithholding, a tax reclaim can be made either at investor level or withholding agent level, depending on the time span between the overwithholding and the claim for tax refund.

The realm of tax reporting obligations

Does your institution have to carry out a FATCA reporting?

Certain financial institutions in Luxembourg must do so. The scope of financial information to be reported covers different types of investment income (interests, dividends, similar type of income) and information on account balances.

How about PFIC reporting?

Nobody said tax reporting would be a walk in the park! Luxembourg entities with US investors may also face PFIC Reporting. In the US taxation system, a foreign corporation qualifies as a passive foreign investment company ("PFIC") if 75% or more of the corporation’s gross income for its taxable year is passive income (income test), or at least 50% of the average percentage of assets held by the foreign corporation during the taxable year are assets that produce passive income or that are held for the production of passive income (asset test). There are further obligations for any US person who is a direct or indirect shareholder of a PFIC.

Additional obligations for banks

Do you have to worry about the "QI regime"?

Luxembourg banks face the most challenges when it comes to US Tax compliance on account of their participation in the US QI (qualified intermediary) regime. This means that, in addition to the documentation and withholding obligations, Luxembourg banks acting as QIs have to complete a rigorous electronic reporting. Only banks are affected.

Do you have to adopt a QI compliance program?

If your bank is a QI, then yes. Under the recently revised QIA, the QI's compliance program needs to include policies, procedures, and processes sufficient for the QI to satisfy the documentation, reporting, and withholding requirements derived from the QIA. They must also be sufficient for a responsible officer of a QI to make the periodic certifications required under the QIA.

The above list of US tax obligations is not even a complete one. You can see why Luxembourg entities should closely monitor evolutions in the US tax legislation in order to become and remain compliant.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.