DAC 6 makes it mandatory for intermediaries (or taxpayers, if there is no intermediary, or if intermediaries are subject to professional secrecy as defined by the Member States’ domestic laws) to report certain cross-border transactions and arrangements to the domestic tax authorities. Reports that are made will trigger the subsequent automatic exchange of information between the tax authorities of all EU Member States, through access to a central directory.
The Luxembourg Government has opted to make a straightforward transposition of the Directive, i.e. the scope of the reporting obligation is not extended beyond what is required by the Directive. For example, no reporting will therefore be applicable in relation to purely domestic arrangements, the DAC 6 Law thus applies to all taxes except VAT, customs duties, excise duties, and compulsory social security contributions.
Cross-border arrangements may be reportable if they meet at least one of the “hallmarks”. Some of these “hallmarks” only have to be considered if they also meet the so-called “main benefit test” or “MBT”. Please refer to our previous Flash News for further details.
The report that included the text of the Bill in its final form to be voted contains one interesting comment in relation to the main benefit test. This indicates that the main tax benefit is not met (thus making an arrangement or transaction potentially not reportable) when the tax advantage concerned is obtained via an arrangement that is in line with the purpose or the aim of the applicable legislation and of the intention of the legislator. To determine if the arrangement is in line with this intention, all constitutive elements of the arrangement have to be taken into consideration in order to assess whether the arrangement, considered globally, corresponds or not to this intention. As a converse example, the main benefit test will be considered as met (and the arrangement or transaction therefore reportable) when it uses the nuances ("subtilités") of a tax system, or inconsistencies between two or several tax systems, in order to reduce the tax due.
As a matter of principle, DAC 6 reporting should apply first to intermediaries. For the purposes of DAC 6, and of the Luxembourg DAC 6 law, an intermediary is defined as :
- Any person that designs, markets, organises, makes available for implementation, or manages the implementation of a reportable cross-border arrangement (a so-called “Promoter”); and
- Any person that knows or could be reasonably expected to know (based on facts, circumstances, available information and the relevant expertise and understanding) that they have undertaken to provide – directly or by means of another person – aid, assistance or advice in relation to the services described above (a so-called “Service provider”). As a matter of example, the Commentary to the Draft DAC 6 Law confirms expressly that a bank may be an intermediary.
The Directive allows Member States to waive, and thus exempt, intermediaries from their reporting obligation where such an obligation would breach the rules of legal professional privilege that apply under the national law of that Member State. In any case where an intermediary is entitled to legal professional privilege, or does not have an EU nexus, the disclosure obligation is then shifted to other intermediaries, or to the relevant taxpayer (if the obligation to disclose is then not enforceable upon any intermediary).
Under the original Bill, lawyers acting within the limits applicable to the exercise of their profession were the only intermediaries initially benefiting from a waiver of their reporting obligations. On 14 January 2020, the State Council requested that the benefit of professional secrecy be extended to all intermediaries bound by professional secrecy, at least in the field of tax advisory services; thus, notably, also to firms of auditors and qualified accountants. The Bill was modified accordingly, and this will now be the position under the DAC 6 Law.
Intermediaries exempted from their reporting obligations however have an obligation to inform, within 10 days as from the key date (see “Timing of reporting” below), each other intermediary or the taxpayer, of their respective reporting obligations. The latter will then have to file, within 30 days as from the same key date, the report to the Luxembourg tax authorities.
Given that some of the most-commonly involved types of Luxembourg intermediary are now to benefit from a waiver of their reporting obligations, these reporting obligations thus shift to either other intermediaries not covered by any professional secrecy privilege, or (probably most frequently), to the relevant taxpayer itself.
Reportable cross-border arrangements whose first implementation step occurs between 25 June 2018 and 1 July 2020 are to be reported as from 1 July 2020, and by 31 August 2020 at the latest.
As from 1 July 2020, the required information has to be reported to the domestic tax authorities within 30 days of the “key date”, which will be the earliest of the following:
when the arrangement becomes available to the taxpayer for implementation; or
is ready for implementation; or
when the first step has been implemented.
The information to be reported is the same as that listed in DAC 6 as to be exchanged between tax authorities, and is as follows:
the identification of intermediaries and relevant taxpayers, including their name, date and place of birth (in the case of an individual), residence for tax purposes, TIN and, where appropriate, the same details in relation to persons that are associated enterprises of the relevant taxpayer and participating in the reportable cross-border arrangement;
details of the hallmarks that make the cross-border arrangement reportable;
a summary of the content of the reportable cross-border arrangement, including a reference to the name by which it is commonly known, if any, and a description in abstract terms of the relevant business activities or arrangements, without leading to the disclosure of any commercial, industrial or professional secret or of a commercial process, or of information the disclosure of which would be contrary to public policy;
the date on which the first step in implementing the reportable cross-border arrangement has been made or will be made;
details of the national provisions that form the basis of the reportable cross-border arrangement;
the value of the reportable cross-border arrangement;
the identification of the Member State of the relevant taxpayer(s), and any other Member States which are likely to be concerned by the reportable cross-border arrangement;
the identification of any other person in a Member State likely to be affected by the reportable cross-border arrangement, indicating to which Member States such person is linked.
The reporting form and other details are expected to be specified in a Grand-Ducal Decree.
Some of the most-commonly involved types of Luxembourg intermediary are now to benefit from a waiver of their reporting obligations. As a consequence, these reporting obligations thus shift to either other intermediaries not covered by any professional secrecy privilege, or (probably most frequently), to the relevant taxpayer itself.
In such cases, the final assessment of whether an arrangement should be reported, and as part of this the identification of the relevant hallmark(s), will be the responsibility of the taxpayer (or, less commonly, that of Luxembourg intermediaries not covered by professional secrecy).
No guidance was provided during the legislative process, or has been given to date by the tax authorities, on the interpretation and application of the hallmarks. There is no indication of whether any such guidance will be issued later on. A prudent approach should therefore be taken when tracking, analysing, and collecting information on transactions that are potentially reportable.
Lastly, in addition to the reporting process, each relevant taxpayer is also required to file, in the Luxembourg corporate tax return, information about the use of any arrangement that is reported, This must be done for each and every one of the years of its use.
If they not already done so, taxpayers need therefore to assess the potential impact of this DAC 6 Law, which will become effective as from 1 July 2020 but which is already triggering, in certain cases, reporting obligations in relation to transactions whose first implementation step occurs between 25 June 2018 and 1 July 2020. In this respect, penalties of up to EUR 250,000 per breach can potentially be applied by the Luxembourg tax authorities.
Our PwC team combines experts in tax, people, processes, data and technology. By bringing together these different skill sets, we can help you to understand DAC 6, and the broader tax policy context, and implement effective controls and processes to ensure that all reportable cross-border arrangements are proactively identified and managed.
1. Impact assessment: We can analyse your current and planned activities so that you understand the impact the DAC 6 legislation has on your reporting obligations.
2. Governance framework: We can help you to develop a comprehensively documented governance framework to define roles and responsibilities with respect to reporting obligations, and to identify and manage risks.
3. Data management: We can support you in the effective and efficient collation, analysis and storage of reportable data.
4. Reporting: Using technology, we can assist you to fulfil multiple reporting requirements using a consistent data set and a reporting mechanism in the required format, and with preparing the necessary paperwork.
DAC6 is an EU directive that introduces reporting obligations for a wide range of cross-border tax arrangements. Many EU countries have already aligned their national laws quite closely to the directive. Some countries went beyond it, adding extra requirements to their local laws. These differences may add complexity whenever international businesses set out to comply. Are you up for the challenge?
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