LuxCitizenship

This article explains FATCA – a financial law from the Obama administration that is negatively affecting dual citizens trying to make it abroad.

FATCA

As a dual citizen, you might feel that one of your first steps in your new country would naturally be to open a bank account. Unfortunately, if you are a dual citizen who is also an American citizen, you are not going to be able to do so. At least, not unless you personally move to and set up permanent residence in Luxembourg AND create a business or obtain a job with an indefinite term contract. This might sound both outrageous and very disappointing to you. You probably want to know why. This is because of FATCA or what was originally supposed to be called the FAT CAT LAW.

What Is FATCA?

FATCA stands for the Foreign Account Tax Compliance Act. It’s an American law that was passed by Congress in 2010 and signed into law by President Obama. The purpose of the law was to target money laundering, fiscal paradises, and the hiding of assets abroad by U.S. taxpayers using overseas bank accounts. 

How Does FATCA Work?

According to the U.S. Department of the Treasury, “FATCA requires foreign financial institutions (FFIs) to report to the IRS information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.” The truth of the matter is that the law was written to hit hard on an intended target. This target included countries that were accused of helping people hide assets outside the USA because of their banking secrecy and other laws. It is undeniable that, in the past, Luxembourg numbered among these countries. 

President Obama signed FATCA into law in 2010.

FATCA is different than most laws, though. It is an American law that affects banks in other countries who also trade in United States dollars. Just about any bank in the liberal part of the world does some trade valued in US dollars. Therefore, it affects practically every such bank. It affects them even if they aren’t a normally operating bank in the USA.

Congress may not have fully thought through how these banks that don’t operate in the United States might react to having a US law imposed on them. One specific of FATCA is that it imposes a huge reporting burden on overseas banks for each and every transaction an American citizen customer makes with the bank. If the overseas bank does not correctly comply with FATCA, the banks would face exorbitantly high penalties.

FATCA: Roadblock to American Citizens Opening Bank Accounts Abroad

The results are clear. Banks across the world closed their American citizen bank accounts. And now it is extremely difficult to open a bank account abroad if you have US citizenship. It is just too much of a burden for foreign banks to keep American citizens’ bank accounts open. This is because there aren’t usually that many American people working in the country.

This has meant heartache for millions of middle-class Americans abroad. This is because FATCA is not just about bank accounts. It’s also about all financial instruments. Since FATCA came into force, millions of hard-working Americans who contributed to foreign pension systems received letters telling them to provide wiring instructions for a bank account in the USA. The foreign financial institutions decided to close the Americans’ local retirement account early and send the money to the USA.

LuxCitizenship Founder Daniel Atz gives an interview to Luxembourg public television about FATCA

The price of compliance with FATCA was too high for the overseas retirement fund. Furthermore, because these American laws tie the foreign financial institution’s hands, the US citizens had to accept all pension early withdrawal penalties written into the overseas country’s law without the ability to appeal. Foreign countries often have much higher early withdrawal penalties than those written into US law.

What Now?

This might all sound very distressing and set off alarms for you. You should know that FATCA is a huge challenge to any American citizen with a dream of working abroad, whether dual citizen or not. It has even more significant implications for Americans considering retirement abroad. That said, there are ways to deal with all of this, but they do all take work.

Over the next weeks, we will be providing more content about FATCA and how it affects Luxembourg dual citizens. We will also be discussing what we can do to communicate to our American elected officials and beyond that this situation must change. So, please stay tuned, as it is very personally important to you.