OUR INSIGHTS AT A GLANCE

  • On 13 June 2022, a draft law implementing the 7th version of the Directive on Administrative Cooperation in the field of taxation ("DAC7") into domestic legislation was presented to the Luxembourg parliament.
  • DAC7 introduces new reporting obligations for digital platform operators and brings clarifications and improvements to the existing rules on administrative cooperation. To this effect, it introduces notably a definition of the "foreseeable relevance" of the information requested by foreign tax authorities about one taxpayer individually or a group of taxpayers. In addition, it provides a framework for the competent authorities of two or more member states to conduct joint audits.
  • DAC7 will require Luxembourg to exchange information on an automatic basis for at least four categories of income and capital relating to taxable periods beginning on or after 1 January 2025.
  • The draft law introduces these measures into Luxembourg law.

On 13 June 2022, a draft law (the "Draft Law") implementing Council Directive (EU) 2021/514 of 22 March 2021 amending Directive 2011/16/EU on administrative cooperation in the field of taxation (so-called "DAC7") into domestic legislation was presented to the Luxembourg Parliament. DAC7 amends the Directive 2011/16/ EU on administrative cooperation in the field of taxation ("DAC") for the sixth time notably to create an obligation for digital platform operators to report the income earned by sellers of goods and services who make use of their platforms and for member states to automatically exchange this information.

DAC7 also brings clarifications and improvements to the existing rules on administrative cooperation and introduces notably, for that purpose, a definition of the "foreseeable relevance" of the information requested by foreign tax authorities on a taxpayer individually or on a group of taxpayers. In addition, the new rules provide a framework for the competent authorities of two or more member states to conduct joint audits and update the list of income that will be subject to mandatory automatic exchange of information from taxable periods beginning on or after 1 January 2025.

The Draft Law introduces these measures into Luxembourg law and will come into force as of 1 January 2023.

Platform operators subject to new mandatory automatic exchange of information

The Draft Law extends the scope of the automatic exchange of information with respect to the information to be reported by digital platform operators.

For that purpose, the Draft Law provides for:

  • an obligation on Luxembourg reporting platform operators to collect and verify information in line with due diligence procedures.
  • an obligation on Luxembourg reporting platform operators to report information on the reportable sellers that use the platform on which they operate, to sell their goods and provide their services.
  • an obligation on the Luxembourg authorities to communicate the reported information to the competent authority of appropriate member states.

Scope of the digital platform operators reporting under the Draft Law

a) Who will bear the burden of the new reporting duties?

DAC7 targets the digital platform economy through platform operators, which makes the traceability and detection of taxable events by tax authorities very difficult. Under the Draft Law, "platform" means any software, including a website or a part thereof and applications, including mobile applications, accessible by users and allowing sellers to be connected to other users for the purpose of carrying out a targeted activity, directly or indirectly, to such users.

It also includes any arrangement for the collection and payment of a consideration in respect of the relevant activities. A software that exclusively allows the processing of payments in relation to a targeted activity, users to list or advertise a relevant activity, or the redirecting or transferring of users to a platform, without any further intervention in carrying out a relevant activity, is not a platform under the Draft Law.

"Sellers" are defined by the Draft Law as platform users, either individuals or entities, who/which are registered at any moment during the reportable period on the platform and carry out, for consideration, activities which include the rental of immovable property, the provision of personal services, the sale of goods (i.e., tangible properties) and the rental of any mode of transport (the "Relevant Activities").

A "personal service" is a service involving time- or task-based work performed by one or more individuals who act either independently or on behalf of an entity. This service is carried out at the request of a user, either online or physically offline after having been facilitated via a platform.

A "Platform Operator" is an entity that contracts with sellers to make available all or part of a platform to such sellers.

Under the Draft Law, the reporting obligation will fall on a "Reporting Platform Operator" described as any platform operator which is:

  • either a tax resident in Luxembourg or is incorporated under the laws of Luxembourg or has its place of management (including effective management) or a permanent establishment in Luxembourg (referred to as "Lux Platforms").
  • neither resident for tax purposes, nor incorporated or managed in a member state, nor has a permanent establishment in a member state, but facilitates the carrying out of a Relevant Activity by reportable sellers or the rental of immovable property located in a member state (referred to as "Foreign Platforms Operators").

Reporting Platform Operators which have demonstrated upfront and on an annual basis to the satisfaction of the Luxembourg tax authorities, that their entire business model is such that it does not have Reportable Sellers, are nevertheless considered as excluded Reporting Platform Operators.

Every Reporting Platform Operator and every excluded Platform Operator is required to register with the Luxembourg tax authorities.

For the sake of simplification and mitigation of compliance costs, DAC7 provides that platform operators can report income earned by sellers through the use of the digital platform in one single member state. For that purpose, according to the Draft Law, a Reporting Platform Operator can choose a member state other than Luxembourg to fulfil its reporting obligations there. In such case, it shall notify the member state of its choice to the Luxembourg tax authorities. In that case, the Reporting Platform will be exempted from registration in Luxembourg.

The Reporting Platform Operator must register in Luxembourg or notify its choice to register in another member state by 31 December 2023 at the latest.

b) What will be reportable?

Under the Draft Law, a Reporting Platform Operator will need to collect and report information on any Seller other than an excluded Seller (i.e., a governmental entity) which, during the reportable period, either carries out a Relevant Activity or is paid or credited consideration in connection with a Relevant Activity, and is resident in Luxembourg or in a member state or rented out immovable property located in Luxembourg or in a member state ("Reportable Seller").

A Reportable Seller is considered resident in a member state if, during the reportable period, it had its primary address in a member state, it had a TIN or VAT identification number issued in a member state or, for a Seller that is an entity, it had a permanent establishment in a member state. Notwithstanding these criteria, a Reporting Platform Operator shall consider a Seller resident in each member state confirmed by an electronic identification service made available by a member state or the EU to ascertain the identity and tax residence of the Seller.

Governmental entities, or entities (or related entities thereof) whose stock is regularly traded on an established securities market, and entities for which the platform operator facilitates more than 2,000 Relevant Activities by means of the rental of immovable property in respect of what is called a "property listing" during the reporting period are nevertheless excluded from any reporting under the Draft Law. The Draft Law defines property listing as all immovable property units located at the same street address, owned by the same owner, and offered for rent on a platform by the same seller.

The Draft Law also sets up a threshold for being considered as a Reportable Seller. As a result, Sellers for which the platform operator facilitates less than 30 Relevant Activities by means of the sale of goods and for which the total amount of consideration paid or credited does not exceed EUR 2,000 during the reporting period are out of the scope of the reporting under the Draft Law.

New duties for Reporting Platform Operators

a) Due diligence procedures

According to the Draft Law, a Reporting Platform Operator will have to carry out due diligence procedures to identify Reportable Sellers. For that purpose, the Reporting Platform Operator will have to collect information for each Seller (individuals and entities) and will then have to determine whether or not the information collected is reliable, using all information and documents available to the Reporting Platform Operator in its records, as well as any electronic interface made available by a member state of the EU free of charge to ascertain, for example, the validity of the TIN and/or VAT identification number.

Where the Reporting Platform Operator has reason to know that any of the information may be inaccurate, it will have to request the Seller to correct information items which were found to be incorrect and to provide supporting documents, data or information which are reliable and of independent source, such as a valid government-issued identification document or a recent tax residency certificate.

Where a Seller is engaged in a Relevant Activity involving the rental of immovable property, the Reporting Platform Operator will have to collect the address of each property listing and, where issued, respective land registration number. If a Reportable Seller does not provide the information required to the Reporting Operating Platform after two reminders following the initial request but not prior to the expiration of 60 days, the platform will have to close the account of such Seller and prevent it from re-registering on the platform for a six-month period or withhold the consideration payment to that seller as long as it does not provide the information requested.

Reporting Platform Operators will have to collect the required information, verify its accuracy and make it available by 31 December of the calendar year in respect of which reporting is being completed (the "Reportable Period"). As the Draft Law provisions will apply as from 1 January 2023, the first Reportable Period will be the 2023 calendar year and the first due diligence duties will have to be completed by 31 December 2023. In that case, for Sellers that were already registered on the platform as of 1 January 2023 or as of the date on which an entity became a Reporting Platform Operator, the due diligence procedures will have to be completed by 31 December of the second Reportable Period for the Reporting Platform Operator (i.e., 31 December 2024 in this case).

A Reporting Platform Operator will be allowed to rely on the due diligence procedures conducted in previous Reportable Periods, provided that the required information has been collected or verified within the last 36 months, and it does not have reason to believe that the information collected has become unreliable or incorrect. A Reporting Platform Operator will also be allowed to designate another Platform Operator or a third party to assume the obligations with respect to due diligence procedures, but such obligations shall still remain the responsibility of the Reporting Platform Operator. Upon election, a Reporting Platform Operator will finally be allowed to complete the due diligence procedures for active Sellers only.

Pursuant to the Draft Law, Reporting Platform Operators shall not engage in practices designed to circumvent reporting.

They shall keep records of the steps taken and any information used to ensure the performance of due diligence procedures and reporting obligations for a period of ten years after the end of the Reporting Period to which the information relates. They shall establish policies, controls, procedures, and computer systems to ensure the performance of their reporting and due diligence obligations.

b) Reporting duties

According to the Draft Law, the information, as collected and verified, will have to be reported within one month following the end of the Reportable Period in which the Seller is identified as a Reportable Seller (i.e., no later than 31 January 2024 if the Seller is identified as a Reportable Seller in 2023).

Reporting will only be made in one member state (i.e., single reporting). A Reporting Platform Operator will report to the competent authority of the member state where it is registered, whether Luxembourg or another member state.

Where there is more than one Reporting Platform Operator, any of those Reporting Platform Operators shall be exempt from reporting the information if it has proof that the same information has been reported by another Reporting Platform Operator.

The information to be reported, as listed in the Draft Law, will provide member states' tax administrations with sufficient information to correctly assess and control gross income earned in their countries from commercial activities performed with the intermediation of digital platforms. This information includes income earned by Sellers of goods and services that make use of the platforms. Information about the consideration paid and other amounts will have to be reported based on the quarterly figures of each Reportable Period in which the consideration was paid or credited. The definition of the "consideration" under the Draft Law excludes any fees, commissions or taxes withheld or charged by the Reporting Operating Platform.

The Reporting Platform Operators will have to inform each individual concerned that information will be collected and reported to the competent authorities and to provide all information the data controllers are required to provide under the General Data Protection Regulation ("GDPR") before the information is reported.

Automatic exchange of information reported by Reporting Platform Operators

According to the Draft Law, the information reported in Luxembourg by Reporting Platform Operators will have to be exchanged by the Luxembourg authorities with the member states where the Reportable Seller is a resident and/or the immovable property is located within two months following the end of the Reportable Period (i.e., by the end of February).

Penalties for non-compliance at Luxembourg level

Reporting Platform Operators will be subject to penalties applied by Luxembourg if the obligations laid down in the Draft Law are not respected.

The Luxembourg tax authorities may charge a fine of 5,000 euros against Reporting Platform Operators which have not registered or notified their choice to register in another member state within the legal deadline, or which have provided incomplete or incorrect information or which have not updated such information when required within the legal deadline. Likewise, a fixed fine of 5,000 euros may be charged to Platform Operators that did not file their reports within the legal deadline. Such offences are established as soon as the legal deadline is not respected, independently of any intentional element.

Finally, a fine of up to 250,000 euros may be charged, following an audit, when Reporting Platform Operators fail to comply with their obligations under the Draft Law, except for obligations relating to registration, notification, and reporting in due time, as well as the obligations regarding the protection of personal data. The intentional nature of the offence will be taken into account when setting the amount of the fine. Currently, in Luxembourg, the penalties for noncompliance with the Common Reporting Standard ("CRS") and the mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements ("DAC6") regulations also amount to a maximum of 250,000 euros.

Other clarifying measures included in DAC7 and implemented by the Draft Law

The Draft Law also brings various amendments to existing provisions on exchange of information and administrative cooperation, notably to clarify some requirements. For that purpose, the Draft Law proposes for example to amend the law dated 29 March 2013 on the administrative cooperation in the tax field (the "2013 Law") but also the Luxembourg law implementing DAC6, the Country-by-Country Reporting ("CbCR") or the CRS.

Exchange of information upon request: Conditions of the request

a) Foreseeable relevance and exhaustiveness – individual and Group requests

The "foreseeable relevance" of the information requested by one member state to Luxembourg conditions whether Luxembourg shall be required to comply with the request for information, and thus constitutes one of the legal bases of the information order addressed by the Luxembourg authorities to a relevant person in Luxembourg and of the penalty imposed on that person for failure to comply with the information order.

DAC7 delineates the standard of foreseeable relevance, to ensure effectiveness of the exchanges of information and prevent unjustified refusals of requests, as well as to provide legal clarity and certainty to both tax administrations and taxpayers. For those purposes, the Draft Law transposes the DAC7 definition of the standard of foreseeable relevance. It introduces the following definition in the 2013 Law: "The requested information is foreseeably relevant where, at the time the request is made, the requesting authority considers that, in accordance with its national law, there is a reasonable possibility that the requested information will be relevant to the tax affairs of one or several taxpayers, whether identified by name or otherwise, and be justified for the purposes of the investigation".

The Draft Law also lays down procedural requirements which the requesting authority must observe. Thus, "with the aim to demonstrate the foreseeable relevance of the requested information, the requesting competent authority shall provide at least the following information to the Luxembourg authorities:

  • the tax purpose for which the information is sought; and
  • a specification of the information required for the administration or enforcement of its national law".

Considering that there is sometimes a need for issuing requests for information that concern groups of taxpayers which cannot be identified individually but are instead described by a common set of characteristics, the Draft Law addresses, by providing for the possibility for tax administrations to make group requests for information, the issue of group requests in the context of a request for information. In such a case, the requesting authority must provide the Luxembourg authority with a set of information including a comprehensive description of the characteristics of the group and an explanation of the applicable law and of the facts and circumstances which led to the request.

As per DAC7, the Draft Law details in this respect the information which the requesting authority shall provide where a request relates to a group of taxpayers who cannot be identified individually:

  • a detailed description of the group;
  • an explanation of the applicable law and of the facts based on which there is reason to believe that the taxpayers in the group have not complied with the applicable law;.
  • an explanation how the requested information would assist in determining compliance by the taxpayers in the group; and
  • where relevant facts and circumstances related to the involvement of a third party that actively contributed to the potential non-compliance of the taxpayers in the group with the applicable law.

Automatic exchange of information: Extension of the list of income subject to mandatory automatic exchange between member states

DAC7 requires member states to exchange information on an automatic basis for at least four categories of income and capital and relating to taxable periods beginning on or after 1 January 2025. For the time being, Luxembourg exchanges information in the following three categories of income: employment income, directors' fees, and pensions.

The Draft Law aims to amend the 2013 Law to propose the introduction of automatic and mandatory exchange of information for a new and fourth category of income and capital. As from taxable periods on or after 1 January 2025, Luxembourg will exchange automatically information relating to the ownership of real estate in addition to the three categories of income mentioned above.

With a view to the automatic exchange of information, the Administration du cadastre et de la topographie shall provide to the Luxembourg tax authorities in charge of the exchange, the information available in the land registers relating to individuals and legal entities who/that are resident in a member state and who are owners of real estate located Luxembourg.

Joint audits

The Draft Law also provides for the possibility for a competent authority of one or more member states to request the Luxembourg authorities, or vice versa, to conduct joint audits.

That request may however be rejected on justified grounds. To ensure legal certainty, joint audits should be conducted in a pre-agreed and coordinated manner, and in accordance with the laws and procedural requirements of the member state where the activities of a joint audit take place. The audited person(s) shall be informed of the outcome of the joint audit, including a copy of the final report within 60 days of its issuance. To ensure legal certainty, the final report of a joint audit should reflect the findings the competent authorities concerned agreed on. Moreover, the concerned competent authorities could also agree that the final report of a joint audit includes any issues where an agreement could not be reached.

For the purpose of exchanging information that is foreseeable relevant for the administration and enforcement of the domestic laws of the requesting member state, the Draft Law also provides that officials authorised by a requesting state may, at the request of the latter:

(a) be present in the offices where the Luxembourg administrative authorities carry out their duties.

(b) be present at administrative investigations carried out on the territory of the Grand Duchy of Luxembourg.

(c) participate in administrative enquiries conducted by the Luxembourg requested authority using electronic means of communication, where appropriate.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.