Automatic exchange of information: can Luxembourg stand the heat?

While Switzerland has implemented FATCA through an intergovernmental agreement (IGA) that prevents disclosure of the names of account holders (IGA Model 2 for those in the trade), Luxembourg has gone for IGA Model 1 and automatic exchange. In other words, in order to comply with international requirements for fiscal transparency, Luxembourg has signed away banking secrecy for non-residents.

Luxembourg applies FATCA on the following basis: financial institutions must identify and report to both Luxembourg and US fiscal authorities all accounts held with them by individuals considered as American from a fiscal point of view (“US persons”). The exchange is automatic because it does not require the consent of the reported persons. The same principle applies for CRS, as the reported persons are also tax residents in a jurisdiction where CRS applies.

By opting for IGA Model 2, Switzerland believed it would be able to maintain banking secrecy. In fact however, IGA Model 2 has turned into a major headache for Swiss banks with mandatory procedures, the need to obtain the permission of US persons etc. And the end result is less than perfect since information on accounts held by US persons is still exchanged - but without the names of the account holders. The US tax authorities can then request more detailed information from their Swiss counterparts (exchange of information on demand), in which case banking secrecy can no longer be invoked.

Swiss (fiscal) banking secrecy therefore exists only in theory. And indeed Switzerland is now renegotiating its IGA model and moving towards IGA Model 1, partly because when the CRS that Switzerland has already signed up to comes into force in 2017 the country's banks will have to exchange information automatically.

Luxembourg's selection of IGA Model 1 has proved prescient. This is the model chosen by almost all countries, including countries often considered tax havens, such as the Cayman Islands, the Bahamas, British Virgin Islands, Guernsey etc., which have also signed up to CRS. Luxembourg is now competing with countries with the same laws and tax regulations - one point in favour of Luxembourg’s competitivity.

The international groups now fear that their reputations will be damaged in the public opinion if they choose to invest in countries such as Luxembourg. With the automatic exchange of information, in Luxembourg they find a renowned international financial centre that advocates transparency. Far from the capital outflows predicted by some, Luxembourg is consolidating its position as a leading centre of financial excellence for international groups.

For Luxembourg, the automatic exchange of information will mean transparency and the fight against tax evasion and will send a strong signal to the rest of the world, particularly to those who see us as just another tax haven. The political message is clear: those days are over.

Quentin Vialette - Manager Tax and Compliance Analysis

1 FATCA : Foreign Account Tax Compliance Act
2 Automatic Exchange Of Information