On 8 August 2019, Luxembourg published its draft law for the transposition of the 6th Directive on Administration Cooperation, 2018/822, ("DAC 6")1.
This directive is the latest effort by the EU to increase tax transparency and information exchange as well as combat what the EU perceives as aggressive tax planning and tax avoidance, by means of mandatory disclosures to EU Member State's tax authorities and the creation of a central database of transactions.
DAC 6 requires intermediaries and in some cases even taxpayers (if there is no intermediary or if the intermediary is bound by professional secrecy) to report certain cross border arrangements to the Luxembourg tax authorities.
DAC 6 Reportable Cross Border Arrangements
A reportable cross border arrangement must involve at least one EU member state (with or without a third country), and meet one or more hallmarks which can be either 'generic' or 'specific' hallmarks.
The draft Luxembourg law follows closely the DAC 6's categories of reportable cross border arrangements.
Some of the categories require that the 'main benefit test' must be fulfilled with a combination of one of the listed hallmarks. The main benefit test is fulfilled if the main benefit or one of the main benefits of the arrangement is to obtain a tax advantage either in the EU or even in a non-EU jurisdiction. The draft law clarifies that each test shall only apply to direct taxes and excludes VAT and other indirect duties.
Intermediaries Broadly Defined
Intermediaries are broadly defined and include any person who designs, markets, organises, or otherwise makes available for implementation, a reportable cross border arrangement, as well as any person that, regarding all facts and circumstances, knows or could reasonably be expected to know that they have provided, directly or by means of other persons, aid, assistance or advice with respect to such arrangements. Intermediaries can include lawyers, accountants, trust management advisors, consultants, and bankers.
The draft law grants lawyers a limited waiver from the reporting obligation, when they would be in breach of their duty of professional confidentiality, but they are still bound to inform other intermediaries and the taxpayer of their reporting obligations.
If no intermediary is located in the EU, the reporting obligation is shifted to the taxpayer.
Timing of the Reporting
The first reporting must include all the reportable cross border arrangements that occurred on or after 25 June 2018. All reportable arrangements as from 25 June 2018 up to 1 July 2020 must be reported by 31 August 2020 (so called 'one off reporting'). After 1 July 2020, all 'reportable arrangements' must be reported within 30 days as from when the transaction is available, ready, or implemented (whichever is sooner).
Failure to Comply and Penalties
Failure to comply with the scope of the reporting obligations laid down by DAC 6 can result in penalties up to EUR 250.000, varying according to the intentional nature of the fault. Non-exhaustive possible causes of failure to comply include non-reporting, late, inaccurate or incomplete reporting, and failure of lawyers when limited by their duty of professional confidentiality to timely notify intermediaries or tax payers.
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.