Through its new CSSF Circular 20/744 of 3 July 2020, the CSSF brings an additional contribution to the CSSF Circular 17/650 of 17 February 2017 which aims to provide guidance on the extension of the offence of Money Laundering to aggravated tax fraud and tax evasion.
The new CSSF Circular 20/744 thus expands the guidance with new indicators to be taken into account in risk assessment duties and risk mitigation measures of professionals providing services in the collective investment industry.
Although these new specific recommendations and indicia illustrations should not come as a surprise in a context of increased tax transparency, operators within the collective investment field will nevertheless need to take prompt and appropriate action to confirm or reach the expected compliance level based on the latest tax developments and also considering these additional examples provided in the CSSF circular.
The CSSF Circular 17/650 published in February 2017 provided general guidance for all entities falling under the supervision of the CSSF to raise suspicions of tax evasion or money laundering through a non-exhaustive list of 21 common indicators set out under Annex 1 to the Circular.
The new CSSF Circular 20/744 issued by the CSSF on 3 July 2020 has amended Annex 1 by listing additional indicators more specific to the context of collective investment activities, still with the aim of detecting possible cases of money laundering offences relating to aggravated tax fraud or tax evasion.
The new indicators are the following:
· Complex investment structuring: recourse to one or several interposed entities or structures located in jurisdictions not complying with international transparency standards
· Tax base erosion: use of cross-border transfers to significantly erode the tax base of the investment manager (e.g. through base erosion strategies involving management or marketing commissions and/or retrocessions but also interest or dividend flows, and cross-border transfers of intangible assets)
· Investment transactions: use of investment transactions on unregulated markets with intermediaries located in jurisdictions not subject to the automatic exchange of information, use of transactions that do not have apparent rationale in a specific context, and recurring use of loss-making transactions
· Efficient portfolio management techniques: recourse to securities lending transactions which may create tax arbitrage or tax refunds that have been or could be considered as aggravated tax fraud or tax evasion.
· SICAR: illegal recourse to the SICAR status that would not be in line with the “risk capital” concept and the requirements of CSSF Circular 06/241 in this field
· Subscription tax: the collective investment fund or the investment fund manager is not able to file subscription tax returns that are in line with the Luxembourg requirements, due to the lack of information on the investors
· Investor tax reporting: the collective investment fund or the investment fund manager does not comply with the local laws of the country of distribution.
Taking into consideration this guidance and the practical examples provided by the CSSF and bearing in mind the simultaneous occurrence of further tax developments, such as ATAD and MDR, Luxembourg financial center operators will have to demonstrate increased vigilance with respect to specific and sometimes highly complex areas of taxation, in order to ensure appropriate compliance. Such operators should therefore take appropriate steps to ensure that their tax governance is fully in line with the latest developments in the tax environment and to adapt their impact assessment, training, processes and procedures accordingly.