This article first appeared in International Tax Review.
DAC6, which has introduced reporting obligations for certain cross-border tax arrangements, may very well be the most unpopular piece of tax legislation in the EU.
Its broad scope and lack of guidance created a lot of headaches when the rules were first introduced in 2018. As DAC6 has been around for several years now, we reflect on ten lessons learned, which range from practical insights to best practices in the context of real estate funds.
In addition, an evaluation of the DAC6 hallmarks is currently being conducted by the European Commission. This publication also highlights the possible implications of this evaluation.
Lessons learned
Over recent years, Alvarez & Marsal has actively worked together with real estate fund managers, investment managers and asset managers (hereafter: real estate managers) to develop efficient and workable internal controls to manage DAC6 obligations.
Below, we list ten practical insights gained from numerous DAC6 implementation projects, as well as day-to-day tax advisory work.
1. Intermediaries
Due to the broad definition of 'intermediary', real estate managers are typically caught. This does require that such managers have a certain nexus to the EU.
It is recommended to have a clear view on the entities within a manager's corporate structure that can trigger reporting obligations. Such entities, even if another intermediary does the actual reporting, are fully subject to the DAC6 rules (e.g., are required to maintain a DAC6 administration).
2. Reporting
To mitigate duplicate and unnecessary reporting, early alignment with other intermediaries (i.e., typically tax advisers) is a best practice. Tax advisers will generally report and provide a copy of the disclosure and disclosure ID to the real estate manager.
It is recommended that real estate managers apply a standard procedure to ensure commitment and timely communications from other intermediaries.
In practice, reporting usually remains a joint effort as only real estate managers have access to certain pieces of information that need to be included in the disclosure (e.g., values and tax identification numbers).
3. Legal privilege
In Luxembourg, tax advisers are exempt from reporting due to legal privilege. In other EU member states, this exemption is generally applied to attorneys only. Practically speaking, this would then shift the actual reporting requirement to the real estate manager as another intermediary or even the relevant taxpayer.
In a cross-border context, intermediaries in other EU member states may be involved who can report and provide a copy of the disclosure and disclosure ID to the real estate manager.
It is recommended to coordinate the DAC6 analysis and reporting responsibilities early on when dealing with intermediaries with legal privilege.
We note that a case is pending before the Court of Justice of the EU (C-623/22 Belgian Association of Tax Lawyers e.a.) to, broadly, rule on the scope of the legal privilege exemption from reporting and whether it extends to tax advisers.
4. Penalty risk
Accidental non-compliance is a valid concern given the broad and complex nature of DAC6, and the 30-day rolling window.
In many EU member states, there needs to be some form of willful negligence or misconduct before penalties can be imposed, which means that proper internal procedures may create a threshold for tax authorities to impose a penalty. Such internal procedures would in any case be considered a moderating factor.
It is therefore recommended that real estate managers implement certain control measures, preferably documented in a DAC6 policy.
5. 30-day rolling window
The 30-day rolling window for reporting is challenging to manage. Internal controls to timely identify reportable arrangements are therefore essential.
Effective controls require a solid view on the business processes that can trigger reporting obligations. It is generally a best practice that individuals leading certain business operations are made responsible for the timely flagging of DAC6 risks to the 'DAC6 leads' within the real estate manager's organisation.
6. Hallmarks
Hallmarks are categories setting out characteristics identified by the EU as potentially indicative of aggressive tax planning or the avoidance of exchange of information or identification of beneficial owners.
For real estate funds, there are only a number of situations that are caught by the hallmarks. The effectiveness of internal DAC6 controls strongly depends on the quality of the DAC6 impact assessment on the real estate manager's funds and organisation.
A clear view on the impact is necessary to design targeted controls. Targeted controls are important to mitigate unnecessary protocols that may delay commercial business operations. This is especially true for business processes that do not necessarily involve external tax counsel require attention, as real estate managers may not be able to rely on other intermediaries to report.
7. Fragmentation
Notably, Poland and Portugal have implemented a much stricter framework beyond the minimum standard included in the DAC6 Directive. This also includes additional hallmarks.
This is recognised by the FISC Subcommittee of the European Parliament, which concluded that the absence of definitions and differences in domestic implementation of DAC6 impacts the intended level playing field across the EU.
Real estate managers are generally recommended to involve local experts due to the complex nature of the local deviations.
8. Side letters
It is common for investors to agree in a side letter that if their investment in a fund triggers a DAC6 reporting obligation, then the fund manager shall notify the investor and provide them with a copy of the disclosure and disclosure ID.
Investors typically do not qualify as intermediaries, but rather as relevant taxpayers, meaning there is no direct need to share the relevant disclosure within the 30-day rolling window.
This can be different for investment managers acting on behalf of institutional investors who do qualify as intermediary. Copies of disclosures would then formally need to be shared between all parties that qualify as an intermediary within the 30-day rolling window.
9. Fund documentation
Fund documentation can be updated to reflect the above approach to DAC6 in relation to investors, which mitigates the need for detailed tax side letters. When doing so, a process should be implemented by the real estate manager to ensure the timely sharing of disclosures and disclosure IDs.
10. Control framework
A prudent control framework for DAC6 includes internal controls to timely identify reportable arrangements, a governance structure with clear roles and responsibilities, awareness and knowledge management, and monitoring and reviewing mechanics.
The controls should be built around the cross-border arrangements that have been identified as possibly being reportable.
Although there are often other intermediaries that can report, real estate managers are themselves fully subject to DAC6.
Pending hallmark evaluation
The DAC6-Directive states that the European Commission and EU Member States shall evaluate the relevance of the hallmarks every two years. The first two-year period ended on 1 July 2022.
In this respect, the European Commission has sent out a questionnaire to the EU Member States and various associations of tax advisers to obtain their feedback. The European Commission shall present its findings to the Council of the EU in a report, if appropriate, accompanied by a legislative proposal.
It is noteworthy that the findings of the European Commission have not yet been published. Depending on whether amendments to the DAC6-Directive are proposed and ultimately adopted, this may warrant an assessment of the implications for existing control measures and policies applied by persons that are at risk of qualifying as an intermediary.
The real estate investment industry is hopeful that the European Commission will use the evaluation as an opportunity to ultimately amend and possibly reduce the hallmarks. The underlying reason being the current overkill in reporting.
How can A&M help?
A&M has extensive experience with DAC6 impact assessments for real estate fund and investment managers, as well as with the practical implementation of targeted DAC6 policies and control measures.
Originally Published 9 April 2024
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.
