Upcoming FATCA - CRS Issues: What The Alternative Fund Industry Needs To Know

The world of alternative investment funds was not the primary target of the Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standard (CRS) norms. These regulations were aimed rather at the "wealth planning" industry, cross-border wealth management and the "offshore" economy. However, the widespread success of this type of investment fund along with the complexity and the number of structures put in place by industry actors have led alternative investment funds to be significantly impacted by these rules.

The Luxembourg tax administration has been increasingly monitoring the proper application of these rules, especially as regards financial penalties in the event of confirmed violations. In the last few months, we have witnessed exponential fines applied to late filings or the absence of FATCA and CRS reports. The amounts of the fines have become discouraging and have even captured the attention of industries which generate substantial cash flow such as alternative investment funds. Ensuring compliance with these rules is therefore a major reputational and financial issue for alternative investment funds managers.

Yet, despite the fact that these rules have been in place for many years, they still present certain "challenges" for managers, technical challenges but especially educational challenges towards clients and investors who do not always have a perfect understanding in terms of how the regulatory landscape is evolving.

The "due diligence" obligations of FATCA and CRS require financial institutions to have their clients complete self-certification forms. This seemingly simple task requires, from investors, the in-depth understanding of technical concepts as held by financial institutions or non-financial entities. The jargon used and relayed to investors makes this self-certification exercise complex, and often "laborious", for non-initiates.

In terms of reporting, FATCA and CRS rules require financial institutions to provide reports to the tax authorities. This implies having usable and accurate data on investment flows and on the investors concerned at their disposal. In our experience, the production of these reports is a real "stress test" for funds managers' organisational skills. Firms and institutions that are late in collecting the subscription documents may therefore find themselves in a difficult situation if they have not made the necessary provisions.

These rules were instituted between 2014 and 2015 in Luxembourg. Today, we have certain insights into the practical difficulties experienced by actors of the alternative investment funds industry. In a standard structure, the difficulties and the issues differ according to the entities and the level of the structure concerned.

Specific issues for financial institutions "General Partner" and "Funds"

In practice, most "holding" companies of alternative investment funds are considered financial institutions within the meaning of FATCA and CRS. General Partners of funds and the funds themselves are most often subject to all the requirements imposed by Luxembourg laws, in matters of reporting (i.e. all the mechanisms used to transmit information to foreign administrations adhering to AEI) and of "due diligence" (i.e. all the information collected...