Why FATCA and CRS Still Matter
FATCA (Foreign Account Tax Compliance Act) and the Common Reporting Standard (CRS) are international reporting frameworks designed to improve tax compliance and prevent the use of foreign financial accounts to avoid taxes.
FATCA is a U.S. law that requires financial institutions worldwide to report information about accounts held by U.S. persons to the U.S. Internal Revenue Service (IRS). CRS, developed by the OECD, is a global standard under which financial institutions report information to their local tax authorities, who then exchange it with the tax authorities in the account holder’s country of residence.
These frameworks are designed to increase transparency and ensure that taxpayers report and pay taxes on income held abroad.
As two of Europe’s leading fund domiciles, Luxembourg and the Netherlands are fully engaged in implementing these standards. Financial institutions and fund managers in both countries are expected to comply with FATCA and CRS requirements, reflecting their roles as trusted and transparent financial centres.
Q1: What Are the Legal Obligations?
Under Luxembourg and Dutch laws, funds must:
– Identify reportable persons: U.S. persons under FATCA; tax residents of CRS-participating jurisdictions under CRS.
– Collect self-certification forms: Both individual and entity-level forms are required to determine tax residency and classification.
– Report annually to the Tax Authorities (Administration des Contributions Directes (ACD) for Luxembourg and Belastingdienst (DTA) for the Netherlands), which transmits the data to relevant foreign tax authorities.
Failure to comply can result in penalties and reputational damage.
Q2: Who Is Reportable Under FATCA and CRS?
Under FATCA, reportable persons include:
– Specified U.S. Persons: Individuals or entities that are U.S. taxpayers, excluding certain exempt entities (e.g., publicly traded corporations, banks, etc.).
– Non-U.S. Entities with Substantial U.S. Owners: Passive Non-Financial Foreign Entities (NFFEs) that have one or more substantial U.S. owners (generally defined as owning more than 10%).
Under CRS, reportable persons are tax residents of CRS-participating jurisdictions (CRS by jurisdiction – Organisation for Economic Co-operation and Development).
Q3: What Are the Operational Challenges and Audit Readiness Requirements?
The Tax Authorities conduct both off-site and on-site audits to verify compliance. These audits assess:
– The accuracy of submitted reports.
– Internal policies and procedures.
– The robustness of due diligence and documentation.
Institutions must maintain detailed records and be prepared to demonstrate their compliance framework during audits.
Q4: What Role Do Service Providers Play in FATCA/CRS Compliance?
Service providers, such as Taru, play a crucial role in supporting funds with their FATCA and CRS compliance obligations. They assist in:
– Collecting and validating investor information, ensuring that all necessary documentation is in place.
– Conduct due diligence and request documentation to assess the fund’s compliance posture.
– Maintain accurate records, facilitate timely reporting, and provide ongoing support to ensure that funds remain compliant with evolving regulatory requirements.
– Act as the Responsible Officer (RO) for FATCA purposes and handle the registration of the fund with the IRS
– Obtaining the Global Intermediary Identification Number (GIIN). This ensures that the fund is properly registered and recognized as a compliant financial institution under FATCA.
Q5: What Are the Best Practices for 2025 and Beyond?
Best practices for FATCA and CRS compliance include:
– Automating processes where possible to streamline validation and reporting.
– Implementing robust internal policies and procedures to ensure ongoing compliance.
– Regularly reviewing and updating compliance frameworks to reflect regulatory changes.
– Partnering with experienced service providers to leverage their expertise and technology solutions.
By following these best practices, funds can effectively manage their compliance obligations and reduce the risk of penalties.
Q6: How Can Compliance Become a Strategic Advantage?
While FATCA and CRS impose significant reporting obligations, they also present an opportunity for fund managers to demonstrate strong governance and a commitment to transparency. When managed effectively, compliance can become a strategic advantage—enhancing the fund’s reputation and attracting investors who value regulatory discipline.
At Taru, we are committed to staying at the forefront of regulatory developments. Our robust compliance framework is designed to adapt quickly to evolving standards, helping clients not only meet their FATCA and CRS obligations but also navigate broader regulatory requirements with confidence. By combining deep regulatory expertise with practical systems, we support our clients in turning compliance into a value driver, rather than a burden.
