DAC6: EU Mandatory Disclosure Regime

According to the bill, not only those may participate in tax planning who expressly plan, distribute, organise or make cross-border deal structures available for execution, but also those who are aware based on relevant facts and information, or who are reasonably expected to be aware of providing support or advice for such deal structures. This may even include credit institutions and financial entities through their advisory and product development services. Therefore, it is certainly required that financial sector players review the affected areas and develop the processes necessary for disclousre or exemption from disclosure.

Cross-border deal structures that correspond to one of the characteristics listed in the bill are subject to the disclosure obligation. The occurrence of certain characteristics only results in actual disclosure obligation, if the deal structure also passes the so-called “primary benefit” test, which is the case when the primary purpose of the transaction or deal structure is to reach a tax advantage. This may not only occur if the transaction is directly carried out for the purpose of the tax advantage, but – raising many questions of interpretation – includes the case when, due to the realisation of the given deal structure, some of the players can reasonably expect a tax advantage. The assessment of this condition may raise many questions for participating advisors, as the objective assessment of the primary benefit is not always possible.

Disclosure may mainly affect cross-border deal structures that exploit the differences of the laws on the exchange of information regarding tax law, exchange of information, or financial accounts in different countries, or contain fictitious transactions. A separate group of characteristics targets transactions exploiting the cross-border differences of transfer pricing regulations, potentially aiming at tax evasion.

As information should be disclosed even about deal structures performed in the temporary period between 25 June 2018 and the entry into force of the disclosure obligation on 1 July 2020 if the deal structure was actually realised in this period, it is already necessary to assess transactions under disclosure obligation realised in the past year, and develop the internal processes regarding the assessment of future transactions. After 1 July 2020, the finalisation of the deal structure itself creates a disclosure obligation, i.e. the involved advisor may become obligated already after delivery to the client, regardless of whether the deal structure is realised.

In the case of financial and investment consultants and banks, it is recommended to review the product development and advisory processes as soon as possible, in order to comply with disclosure pursuant to the regulation. As part of this, the following are especially required:

• identification of the areas potentially affected by disclosure obligation,
• preparation of the necessary policies, information and training of the employees involved in disclosure,
• identification of deal structures realised in the temporary period,
• assessment of business processes and incorporation of the measures required by the disclosure obligation into processes,
• assessment of whether it is necessary to amend the agreements concluded with clients in order to comply with the disclosure obligation, and if so, how, and whether obtaining a disclosure declaration from the client is reasonable.

New specialised processes may be required in the case of such investment or other products prepared for clients, which fundamentally do not aim at tax planning, but where some other characteristics are found. Consequently, especially in the case of the financial sector, it is necessary to identify the cases and product types, where product development and approval processes need to be modified from no later than 1 July 2020 in order to comply with the disclosure obligation.