Mandatory disclosure of cross-border arrangements with signs of aggressive tax planning (DAC6) in the European Union
Tax & Legal Alert
29 April 2020
Starting from 1 July 2020, the EU member states will start reporting cross-border arrangements to the EU tax authorities in accordance with the provisions of Council Directive (EU) 2018/822 (hereinafter, the “DAC6”). This Directive is aimed at insuring the greater tax transparency in the EU and combating aggressive tax planning.
Below you will find information on the consequences of applying DAC6 as well as our respective recommendations.
Disclosure as a primary responsibility
DAC6 imposes an obligation on EU intermediaries (see below) and, in the absence of intermediaries, on EU taxpayers (see below) to disclose cross-border arrangements that meet specific criteria (the so-called “hallmarks”) to the EU tax authorities. All EU tax authorities will now have access to the information disclosed under DAC6 as a part of the automatic exchange between tax authorities of the EU member states (plus, Switzerland and Liechtenstein).
The reports may also be disclosed to countries outside the EU (including Ukraine), either through initiative (spontaneous) exchange of information (with offshore jurisdictions) or under the standard on-demand information exchange procedure (through multilateral and bilateral conventions to which Ukraine is a party).
Essentially, the process entails monitoring of arrangements that involve obtaining of tax advantages. The start date of such monitoring (25 June 2018) is when the EU recognized the use of aggressive tax planning as unacceptable.
Specific legislation features
Provisions of DAC6 shall be transposed into the national legislation of the EU member states. Member states that had not yet done so (e.g. Cyprus), have already received formal notification from the EU to complete the legislative process by the end of 2020 with retrospective application of the requirements.
Mandatory disclosure requirements stipulated in local legislation of each country may be more rigid than those set by DAC6. For instance, Poland decided to introduce mandatory disclosure requirements not only for cross-border arrangements, but also for internal transactions. In addition, Poland will introduce an obligation for intermediaries and certain categories of taxpayers to develop, implement and use respective internal procedures.*
* Due to the spread of COVID-19, the Polish government has decided to suspend these rules for the duration of the pandemic – from 31 March to 30 June 2020.
On the contrary, Luxembourg has softened the requirements for resident intermediaries compared to the rules outlined in DAC6.
Intermediaries under DAC6
The obligation to disclose information and submit reports pursuant to DAC6 rests solely with intermediaries having an EU nexus, namely:
- any person who develops, sells, organizes, assists with or manages the implementation or of a reportable cross-border arrangement; or
- any person who knows that he/she provides assistance or advice in relation to a reportable cross-border arrangement or enables the implementation of such arrangement.
Therefore, the definition of an intermediary covers lawyers, consultants, advisors, and accountants. It will also apply to banks, trustees, insurance companies, financial advisors and other service providers.
It is especially important to note that an intermediary may also be a company of a group that prepares and implements a reportable cross-border arrangement for another company of the same group.
Taxpayers under DAC6
If an intermediary in a cross-border arrangement of an EU company is located outside the EU, or is entitled to waive the reporting obligation (e.g. legal or professional privilege of lawyers or auditors under the local legislation), the obligation to report will lie on the relevant taxpayer.
- 1 July 2020: DAC6 comes into effect
- 30 July 2020 (31 October 2020*): Deadline for the first reporting on cross-border arrangements
- 31 August 2020 (30 November 2020 **): Reporting deadline for cross-border arrangements implemented during the period from 25 June 2018 to 1 July 2020
- 31 October 2020 (31 January 2021 **): Deadline for the first exchange of information on cross-border arrangements between the EU member states
* Provided the European Commission suggestion on reporting deadlines’ change for the arrangements taken/ elaborated between 1 July and 30 September 2020 will be accepted
** Provided the European Commission suggestion on reporting deadlines’ change will be accepted
Please note that the reporting deadlines are very short: the reports should be submitted within 30 days of the intermediary's assistance to the taxpayer or the date when the arrangement or decision is ready to be implemented.
Reportable cross-border arrangements
Mandatory disclosure rules apply to cross-border arrangements (transactions that involve more than one EU country, or an EU country and a third country) that contain signs of tax avoidance (e.g. acquisition of a loss-making company or transactions involving round-tripping of cash flows and offsetting of claims, transactions with offshore or low-tax jurisdictions, operations allowing to reclassify income to a category that is taxed at a lower rate, etc.). Some of the hallmarks cannot indicate a potential tax avoidance and are linked to the so-called “main purpose” test.
A cross-border arrangement will be subject to disclosure if the hallmarks linked to the main purpose test indicate that one of the principal purposes of such an arrangement is to obtain a tax advantage. In practice, the application of the test is expected to be complicated due to its subjectivity (in fact, final decision in such cases will be made by court).
- Information about taxpayers and intermediaries
- Details of the hallmarks
- Summary of the arrangement
- The date on which the first step in implementing the arrangement was made or will be made
- Details of the legislative provisions forming the basis of the reportable cross-border arrangement
- Value of the arrangement
- Information about the EU countries that are likely to be concerned by the arrangement
- Information about any other person in the EU country likely to be affected by the arrangement
Thus, all EU intermediaries who are aware of actual arrangements containing hallmarks with regard to the EU companies (and in some cases, the companies themselves), have to report and disclose such arrangements to tax authorities starting from 15 June 2018. They will also have to maintain records of such transactions and ensure availability of the above documents.
Liability for non-compliance
Penalties for non-compliance with DAC6 requirements will be set out in local legislation. In some jurisdictions, such penalties may be as high as tens, hundreds of thousands and even millions of euros. For instance, in Cyprus such penalty can be up to EUR 20,000, while in Poland – up to EUR 4,400,000.
In the light of the new legislative changes, we recommend:
- Analyzing the position of your business to determine whether you may have reporting obligations as either a taxpayer or an intermediary under the local legislation.
- Checking whether your company's arrangements, implemented starting from 25 June 2018, contain any hallmarks that can be indicative of cross-border arrangements that are subject to disclosure.
- Implementing internal policies and procedures to monitor the compliance with DAC6 requirements by a company or a group. Such policies and procedures may be necessary both to detect the existence and to confirm absence of reportable cross-border arrangements that may occur in future periods.
It also means that you need to think through and establish a clear and effective communication with intermediaries regarding the obligation to disclose arrangements containing hallmarks to ensure that information is presented accurately during both automatic and spontaneous exchange and, more importantly, when working with Ukraine, during information exchange at the request of tax authorities.