The United States: A Land Of Opportunity! But Also A Myriad Of Tax Compliance Challenges

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...