The Foreign Account Tax Compliance Act (FATCA) could fundamentally change the way funds are distributed, and involve a long and costly implementation process for European investors according to the Association of Luxembourg Funds Industry (ALFI).

FATCA, a new disclosure and withholding regime introduced in the United States, is due to be implemented on 1 January 2013. ALFI said it affects funds invested in the US market and requires Foreign Financial Institutions to report investors who are taxable in the US to the country’s tax authorities or suffer a 30% withholding tax on interest, dividends and even gross proceeds.

ALFI said that complying with FATCA could mean reorganising the distribution system, creating a new flow of information that could cost up to $40 per investor. Further, implementation could mean hundreds of thousands of Foreign Financial Institutions will have to sign agreements with the IRS.

Deputy director general at ALFI Charles Muller said European investors are likely to bear the cost of the regime, as US investors are “very rarely” invested in European funds.

The association aims to find ways to accommodate the law, helping the US achieve their goal of catching tax evaders whilst finding ways to lighten the administrative burden.

“Whatever happens evading FATCA is not an option for the European fund industry – or elsewhere in the world - firstly because the law has been passed, and secondly because the net has been cast so wide that it is hard to escape. Unless you never want to invest in the US again,” Muller said.

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