U.S. Federal income tax consulting & compliance services for Luxembourg funds

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U.S. Federal income tax consulting & compliance services for Luxembourg funds

Luxembourg is one of the most important fund investment centre in the world. Many funds invest in the United States of America or have U.S. investors. This unique situation creates unexpected complexities for funds, asset managers, administrators and potentially for the investors.

This should be addressed from the beginning in order to address and protect the expected return of the investment. To be sophisticated and aware of those considerations may increase the opportunity to attract new U.S. Investors.

U.S. Federal income tax considerations for Luxembourg funds

Does your fund invest in the United States?

  • What is the type of investment and legal entity your fund is investing in?
    For example, what are the U.S .federal income tax considerations if the Luxembourg fund invests in a U.S. partnership that owns U.S. Real Estate?
  • What is the legal entity form of the Luxembourg fund?
    For example, what are the U.S .federal income tax considerations if the Luxembourg fund is a Société Anonyme?
  • In what jurisdiction(s) are the investors located and the type of investor?
    For example, what are the U.S. federal income tax considerations if the investor is a governmental organization located in the Middle East?

=> Any U.S. investment has some degree of U.S. tax reporting (some may be at the level of the Luxembourg fund)

Does your fund has United States Investors?

  • What is the type of investment and legal entity your fund is investing in?
    For example, what are the U.S .federal income tax considerations if the Luxembourg fund invests in passive activities or if the investment is in the U.S.? 
  • What is the legal entity form of the Luxembourg fund?
    For example, what are the U.S .federal income tax considerations if the Luxembourg fund is a Société Anonyme? 
  • What is the U.S. federal income tax status of your U.S. Investor?
    For example, what are the U.S .federal income tax considerations if the U.S. investor is a tax exempt entity or an individual?

=> Any U.S. investor requires some type of U.S. tax reporting

Those basic questions (and additional ones) should be addressed from the beginning to ensure the desired return on the investment could be obtained.

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For all structures and funds there is a three step lifecycle, Deloitte Professionals in Luxembourg and via the Network can help with each step. However, a local contact is key for a swift and adequate response.

Step 1: Pre-investment structuring & analysis

Review of structure from a U.S. centric point to address, but not limited to:

  • FIRPTA withholding
  • U.S. withholding considerations – treaty analysis; portfolio debt exemption
  • FATCA analysis and reporting
  • Type of income for U.S. purposes, e.g. CAI or UBTI
  • Entity classification – under the so called “check-the-box” regime
  • PFIC classification and elections
  • ECI and USTB analysis
  • Permanent Establishment considerations

Step 2: During the holding of the investment

Tax consulting

  • Determination of the type of distribution for U.S. investors.

Tax reporting (includes, but not limited to):

  • EIN application
  • Entity classification
  • W-8BEN
  • FIRPTA withholding U.S. withholding reporting
  • FATCA reporting
  • Income tax reporting – Federal and State (of ECI income)
  • PFIC analysis and reporting
  • Partnership reporting – so called K-1 equivalent reporting
  • Reclaim of withholding taxes

Note: Depending on the investment and investors, other reporting may be needed / required.

Step 3: Exit

Tax consulting

  • Determination of the type of distribution for U.S. investors.

Final tax reporting (includes, but not limited to):

  • FIRPTA withholding reporting
  • U.S. withholding reporting
  • FATCA reporting
  • Income tax reporting – Federal and State
  • PFIC analysis and reporting
  • Partnership reporting – so called K-1 equivalent reporting
  • Reclaim of withholding taxes

Note: Depending on the investment and investors, other reporting may be needed / required.

Our approach to tax compliance services is straightforward and pragmatic. We will analyze the tax compliance requirements and assign teams responsible for the compliance services. We will establish good working relationships with you and monitor the compliance process using existing tools and processes we developed specifically for tax compliance engagements for the fund industry, which is unique in the market.

Our approach will be centered on regular and consistent dialogue and an open, collaborative approach to discussing issues and opportunities. Teamwork is second nature to us.

Compliance brings together people, processes, technology, and data in a recurring cycle. We can achieve efficiencies from year to year as we work together to address process and quality improvements. Local teams help with the centralization of the compliance process.

U.S. reporting and compliance requirements (for illustration only; additional reporting requirements may exist)

U.S. investment and no U.S. investors

  • U.S. withholding reporting
  • Reclaim of U.S. Withholding
  • U.S. Federal and State Tax returns (if required)

None U.S. investment and U.S. investors

  • PFIC reporting / CFC reporting (if required)
  • K-1 equivalent reporting (if required)

U.S. investment and U.S. investors

  • U.S. withholding reporting
  • Reclaim of U.S. withholding
  • U.S. Federal and State tax returns (if required)
  • K-1 equivalent reporting (if required)

Note: FATCA reporting is required in each situation.

Tax

Why is U.S. Federal income tax consulting and reporting important?

  • U.S. Federal and State analysis regarding the investment structure
    A sound investment structure is key for your and your investor’s success. The “wrong” type of income may have adverse impact on your investor.
  • U.S. withholding analysis and reporting assistance
    Unexpected withholding issues may result in a lower return 
  • U.S. Federal and State reporting (as applicable)
    Being in compliance with U.S. Federal and State tax reporting is key for your reputation
Tax

Terms of Art

FIRPTA:
The Foreign Investment in Real Property Tax Act rules of IRC § 897 provide in effect that gain or loss from the disposition of U.S. real estate is subject to tax in the U.S.

UBTI:
Too much Unrelated Business Taxable Income (UBTI) may prompt the U.S. Internal Revenue Service to revoke IRC § 501(c)(3) tax-exempt status of the organization – the Luxembourg fund has a U.S. tax exempt investor and due to the transparency for U.S. tax purposes income flows to the investor.

CAI:
Under IRC §892, certain income earned by foreign governments and controlled entities thereof may qualify for an exemption from U.S. taxation. An excess of commercial activity income (CAI) can disqualify the foreign government entity from exempting otherwise qualified U.S. income – Important if the Luxembourg fund invests in the U.S. and is considered transparent for the investor – the foreign government entity.

FATCA:
Foreign Account Tax Compliance Act (FATCA) became law in March 2010 and imposes certain reporting requirements to most / all Luxembourg funds

PFIC:
A Luxembourg fund or the underlying investment could be considered a Passive Foreign Investment Company. A PFIC is a foreign corporation (none U.S.) in which during the taxable year (a) 75% or more of its income is passive, or (b) 50% or more of its assets are held for production of passive income (measured based on FMV).

ECI / USTB:
Effectively connected income with a U.S. trade or business is generally subject to U.S. federal and U.S. state taxes under IRC § 871(b). Thus, in order to be compliant, the Luxembourg fund or ultimate investors may be required to file a U.S. tax return. Investments in MLPs fall generally under this category.

Check-the-Box Regulation:
Certain entities (U.S. and none U.S.) can be treated as transparent or none transparent for U.S. Federal Income tax purposes. A Luxembourg fund (other than an S.A.) could elect to be treated as transparent for U.S. federal income tax purposes

CFC:
A foreign corporation is a Controlled Foreign Corporation (CFC) if during the taxable year “United States shareholders” own (directly, indirectly, or constructively) more than 50% of the total combined voting power of all classes of voting stock, or more than 50% of the total value of the stock (IRC § 957(a)). In general, a Luxembourg fund should not be considered a CFC for U.S. federal income tax purposes.

Tax

Contacts

Christian Bednarczyk

Christian Bednarczyk

Partner | International Tax

Christian has over ten years of international tax experience in the oil and gas industry. He has consulted for major multinational and private equity companies engaged oil and gas, renewable energy, a... More

Eric Centi

Eric Centi

Partner - IM Tax Leader

Eric is an expert in Operational Taxes where he assists financial institutions on topics such as: Aberdeen Tax Reclaims: Filing of withholding tax reclaims on behalf of investment funds on the basis o... More