Mandatory disclosure rules are not something new for European Member States ("EU MS"). In fact, with the United Kingdom leading the race (from 2004), Ireland (in 2008) and then Portugal (in 2011) were the first -and only- EU MS to introduce mandatory disclosure rules in their local legislation. However, despite their success in combating aggressive tax planning schemes in advance, especially in the United Kingdom, such rules had differences between them, particularly in terms of design, thus resulting in diverging effects.

The aforementioned divergencies, along with the need to strengthen certain tax transparency aspects of the existing taxation framework set out by Council Directive 2011/16/EU (or "DAC1"), were the main reasons that led the EU Commission to the Directive Proposal for the sixth amendment of such framework regarding mandatory automatic exchange of information on reportable cross-border arrangements.

Considering the above, on 25 May 2018, the Council of the EU formally adopted Directive 2018/822/EU (the "EU MDR Directive" or "DAC6") amending DAC1 with the introduction of an EU mandatory disclosure regime ("EU MDR") providing for the filing of information related to reportable cross-border arrangements with the tax authorities of the EU MS and for the subsequent automatic exchange of such information among the EU MS. The EU MS should transpose the Directive into their domestic legislation by 31 December 2019, whereas the Directive will apply from 1 July 2020.

The EU MDR goes beyond the recommendations of Action 12 of the Base Erosion and Profit Shifting (BEPS) Project of the Organisation for Economic Co-operation and Development (OECD) / G20 of 2015 by prescribing a wider range of hallmarks and introducing the automatic exchange of information on reportable cross-border arrangements among the EU MS. The objective is to enable the tax authorities of the EU MS to take early action regarding potentially aggressive tax arrangements, in order to better target their audits or amend their legislation. This could also act as a deterrent for the promoters and users of aggressive tax planning schemes.

All taxes except of value added tax, customs duties, excise duties and compulsory social security contributions are included in the scope of EU MDR, while all arrangements must also present a 'cross-border element', i.e. to concern either more than one EU MS or an EU MS and a third country and satisfy an additional set of conditions.

Intermediaries which meet certain EU-nexus criteria are required to disclose to the national tax authorities certain cross-border arrangements which contain one or more of a prescribed list of hallmarks (referred to as "reportable cross-border arrangements"). For some of these hallmarks a gateway criterion needs to be met for them to apply, which is called the 'main benefit test' ("MBT") and relates to the main tax advantage or one of the main tax advantages that a natural (i.e. an individual) or legal person (i.e. a company), having regard to all relevant facts and circumstances, may reasonably expect to derive from an arrangement.

The hallmarks are divided into five thematic headlines: (i) generic hallmarks linked to the MBT, (ii) specific hallmarks linked to the MBT or (iii) related to cross-border transactions, (iv) specific hallmarks concerning automatic exchange of information and beneficial ownership and (v) transfer pricing.

The Directive is the first among its predecessors (being DAC1 on administrative cooperation in the field of taxation, DAC2 on automatic exchange of financial account information, DAC3 on automatic exchange of tax rulings and advance pricing agreements, DAC4 on automatic exchange of country by country reports and DAC5 on access to anti-money-laundering information by tax authorities) to place the reporting obligation on all actors of aggressive tax planning, tax avoidance, evasion and abuse, i.e. to both intermediaries who design, market, organise or manage the implementation of a reportable cross-border arrangement (otherwise called 'intermediaries-promoters'), as well as those who help or advise on such actions ('intermediaries-service providers') and to taxpayers as the recipients of such services.

Going even further, DAC6 defines and emphasizes, for the first time, on the role of 'intermediaries' giving them a reporting priority over taxpayers, as the latter are required to report only when no (qualifying) intermediaries are involved in a particular arrangement. In the opposite scenario, EU MDR reporting obligations lie with all intermediaries involved in the same arrangement.

Hence, where no intermediaries are involved in an arrangement (i.e. where all intermediaries involved have no EU-nexus or planning is developed "in-house" by the taxpayer) or an EU-based intermediary is exempt from disclosing due to legal professional privilege restrictions, the obligation to disclose shifts to the relevant taxpayer.

The disclosure includes details of intermediaries and relevant taxpayers, of any associated enterprises of relevant taxpayers and the reportable cross-border arrangement in question. The first disclosures will be filed by 31 August 2020 and communicated by 31 October 2020, but will cover reportable cross-border arrangements where the first step of implementation takes place between 25 June 2018 and 30 June 2020 (i.e. within the transitional period of the Directive).

Nevertheless, as from 1 July 2020, intermediaries and relevant taxpayers will only have 30 days beginning on the day after the arrangement is made available or is ready for implementation or when the first step in the implementation of the arrangement has been made, whichever occurs first, to file information that is in their knowledge, possession or control. Likewise, the automatic exchange of information will take place within one month of the end of the quarter in which the information was filed. 

On 19 March 2019, the Cypriot Ministry of Finance circulated a draft bill to transpose the Directive into Cypriot legislation, thus amending the existing Cypriot law on administrative cooperation in the field of taxation. Official guidance is expected to be issued by the Cypriot tax authorities for interpretation purposes, even though the draft bill appears to be fully aligned to the text and minimum requirements of the Directive.

For Cyprus, this effectively means that now, as opposed to the past, not only Cypriot taxpayers, but also Cypriot 'intermediaries' (i.e. such as tax advisers, accountants, lawyers, banks, professional services firms, etc.) are targeted by an(other) EU directive on administrative cooperation in tax matters (DAC), which may pose a significant risk for their everyday activities, especially in terms of (additional) compliance obligations. Let's hope that the fruits of EU MDR will outweigh the compliance costs to the benefit of a fairer taxation environment both at Cyprus-EU and global levels.

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