DAC6: Focus on the new clarifications of the Frequently Asked Questions issued by the Luxembourg Tax Authorities

In detail

The FAQ provides additional information to certain definitions regarding the scope of application of DAC 6, as outlined below.

Transparent entities as a potential participant and taxpayer

The FAQ clarifies that a transparent entity could be a taxpayer subject to DAC 6 reporting obligations. In other words, the LTAs consider such transparent entities as a "relevant taxpayer", which are defined under the DAC6 Law as any person to whom a cross-border reportable arrangement is made available for implementation, or who is ready to implement a cross-border reportable arrangement, or who has implemented the first step of such arrangement. 

Intermediary in light of in-house arrangements

Regarding situations where the arrangement has been designed, marketed, organised, implemented or made available for in-house implementation ("in-house arrangement"), the FAQ reminds that, in such cases, there is no intermediary and therefore the obligation to declare remains with the taxpayer concerned who benefits from the cross-border arrangement subject to declaration. 

The LTAs mention the case where an in-house tax team, employed by one entity within a multinational enterprise, designs a reportable arrangement for another entity within the same group and where the entity employing the in-house tax team is not itself involved in the arrangement. In that situation, the entity for which the in-house tax team works should be considered as an intermediary.

Concept of Main Benefit Test 

Regarding the concept of MBT, section 10.1 of the FAQ formally includes a couple of clarifications, which should however not have a significant impact. The FAQ also mentions that the relevant Hallmark should be considered in the assessment of the MBT. The wording of the FAQ also suggests that the LTAs consider that MBT should not be automatically considered as met, solely because the conditions of the Hallmark are fulfilled.

Proof of reporting and exemption

The FAQ confirms that, where there is more than one intermediary, the obligation to report the information falls on all intermediaries involved in the same cross-border arrangement which is subject to reporting. 

An intermediary is, in this case, exempted from the obligation to report to the LTA if he can prove, upon request of the LTA, that the same information has already been transmitted by another intermediary in Luxembourg or in another Member State.

Evidence that the same information has been provided in the same, or another, EU Member State by another intermediary or the taxpayer shall be provided by any means upon request of the LTAs. Although the indication of the reference number should in principle be considered as sufficient evidence, the LTAs reserve the right to make an assessment on a case-by-case basis, based on the facts and circumstances.

Reporting in the annual tax returns

The LTAs refer to the obligation of the relevant taxpayer to declare the use of the arrangement in its tax return by providing the arrangement ID received. 

This obligation is applicable for the taxpayer as long as there is tax advantage arising from the arrangement.

The FAQ also provides additional information and confirmations pertaining to certain Hallmarks. The main ones are outlined below.

Hallmark A3 – Standardised documentation and marketable arrangement

The FAQ provides several clarifications regarding Hallmark A.3. 

For other arrangements, the FAQ confirms that the term "standardised" should be understood as including documentation and structures that can be easily made available to multiple affected taxpayers without having to be significantly adapted. It is also stated that the beneficiary of the arrangement does not need significant support in the form of professional advisory services to set up such a structure.

Hallmark B.2. – Conversion of income

The FAQ indicates that the LTAs currently consider that a “conversion” in the meaning of Hallmark B.2. can take place from the point of view of the payer, or the beneficiary, or both.

The FAQ further states that one needs to look at the level of the beneficiary of the arrangement to determine if the income is taxed at a lower rate (or not taxed) and that taxes in all jurisdictions concerned should be considered in this respect. 

Hallmark C.1.a) – Specific Hallmarks related to deductible cross-border payments between associate enterprises

Regarding the possibility for a transparent entity to be seen as a covered recipient under Hallmark C.1.a), the FAQ indicates that it should first be determined whether such a transparent entity is considered tax resident in the foreign jurisdiction, under the meaning of the relevant double tax treaty, or, in the absence of such treaty, under the principles of article 4 of the OECD model treaty. If the entity is not recognised as resident, then in principle it should not be seen as beneficiary of the payments, and its shareholders, partners or owners are to be considered as beneficiaries. The analysis of transparency should be made under the principles of §11 of the Steueranpassungsgesetz. 

The FAQ further indicates an exception to that principle. In the situation where the foreign jurisdiction would deny transparency of the foreign entity under an anti-abuse rule, then Luxembourg should also consider the entity as opaque (i.e., not “look through”) and see it as beneficiary of the payment. 

Hallmark D.1. – Automatic exchange of information  

The FAQ clarifies that the taxpayer's intention should not be taken into consideration in determining whether "an arrangement is likely to have the effect of prejudicing" reporting obligations within the meaning of Hallmark D.1.

Hallmarks E.3. – Cross-border transfers 

Several clarifications have been provided regarding the interpretation of the LTAs regarding cross-border mergers and liquidations. More specifically, the FAQ indicates that liquidations and mergers fall in principle within the scope of the Hallmark E.3. unless a permanent establishment would be maintained in the relevant jurisdiction