On 3 July 2020, the CSSF published Circular 20/744 (“Circular 20/744”) complementing Circular 17/650 on application of the Law of 12 November 2004 on the fight against money laundering and terrorist financing and Grand-ducal Regulation of 1 February 2010 providing details on certain provisions of the AML/CFT Law to predicate tax offences (“Circular 17/650”). Circular 20/744 supplements Annex 1 of Circular 17/650 and adds to the list of indicators concerning the professional obligation to report suspicions regarding the predicate offence of laundering of an aggravated tax fraud or tax evasion specific to collective investment activities.
Following the amendment, Annex 1 of Circular 17/650 shall be supplemented with a list of nine (9) indicators specific to the collective investment activities and to professionals providing services in that sector (List II of Annex 1):
COMPLEX INVESTMENT STRUCTURING
A collective investment fund (“UCI”) has recourse to a complex investment structure, involving one or more legal entities or one or more legal investment structures interposed between the UCI and the ultimate target investment, located in different jurisdictions with some of them not complying with international transparency standards.
TAX BASE EROSION
The business model of an investment fund manager (“IFM”) results in a significant decrease of taxable earnings using cross-border transfers, triggering questions regarding compliance with transfer pricing rules or more generally Luxembourg laws implementing directly or indirectly the Base Erosion and Profit Shifting actions developed in the context of the OECD/G20 BEPS Project aimed at addressing tax avoidance.
- The UCI performs investment transactions on unregulated markets where the economic beneficiaries of the parties to the transaction or their intermediaries are located in a jurisdiction not subject to AEOI, CRS or FATCA reporting.
- The UCI transactions do not have an apparent economic rationale in a specific context.
- Frequent transactions result in losses for which the professional or the counterparty appears to have no concern.
EFFICIENT PORTFOLIO MANAGEMENT TECHNIQUES
The UCI uses efficient portfolio management techniques such as securities lending transactions which may create tax arbitrage or tax refunds that
have been or could be considered as aggravated tax fraud/tax evasion.
INVESTMENT COMPANIES IN RISK CAPITAL (“SICAR”)
A SICAR does not meet the requirement to invest in securities representing risk capital in accordance with the concept of the risk capital provided in CSSF Circular 06/241 leading to unauthorised use of SICAR status and potential tax implications.
The UCI or the IFM does not have adequate information on the quality and status of the investors allowing it to make the subscription tax declarations to Administration des Enregistrements et Domaines. It will not qualify as an indicator provided that the UCI or the IFM can justify that: (i) legal or tax statuses of the investors comply with the legal requirements governing the subscription tax, (ii) the investors’ status comply with the legal provisions of the country of residence of these investors.
INVESTOR TAX REPORTING
The UCI or the IFM distributes units in a country which has in place a set of obligations for investor tax reporting based on various requirements such as the registration with the tax authorities or the tax reporting of tax data and such requirements are used for investor’s tax returns or by the paying agents to deduct or levy withholding taxes that may be considered equivalent to tax advances to their personal or corporate tax return. It shall not qualify as an indicator provided that the UCI or the IFM can prove that it has taken the necessary steps to:
(i) ensure that actions undertaken by the parties involved comply with the rules and principles of the local tax laws, and
(ii) provide information to investors or foreign tax or regulatory authorities in a timely manner as required by the local laws of the country of distribution.
In case an indicator or combination of indicators included in Annex 1 raise doubts, the professional has to examine the business relationship transaction in order to verify if those doubts are justified given the context of the transactions and the knowledge of the customer’s situation. Where, regardless of the examination, doubts remain, the suspicion should be reported to the Luxembourg Financial Intelligence Unit.