DAC6 is the EU Directive that aims to prevent aggressive tax planning and to strengthen transparency on cross-border tax arrangements. The "mandatory disclosure rules" under DAC6 require that cross-border arrangements involving at least one EU member state have to be reported to the competent tax authorities if they have specific tax-related hallmarks.
The Directive has been in force since 25 June 2018 and the EU member states were required to transpose it into national laws by the end of 2019. Another important date is 1 July 2020, when the mandatory reporting rules were initially intended to come into force. As a result of COVID-19, the EU Commission had proposed to defer the reporting deadlines. In the meantime and deviating from the Commission’s initial proposal, political agreement has apparently been reached by the 27 ambassadors to the EU in the Council’s COREPER II (the body preparing the Council meetings) to postpone the filing deadlines on an optional basis as follows (subject to formal adoption by the EU-27 Finance Ministers in the ECOFIN Council):
- for reportable cross-border arrangements the first step of which was implemented between 25 June 2018 and 30 June 2020 the filing deadline would be by 28 February 2021
- for where the triggering event for the reporting took place between 1 July 2020 and 31 December 2020, the period of 30 days for filing information would start on 1 January 2021
- for marketable arrangements: the first periodic report would have to be made by the intermediary by 30 April 2021
- finally, the amendment proposal would delay the first automatic exchange of information which would have to take place by 30 April 2021
For further details, please see our EU Direct Tax Newsalert dated 11 June 2020.
The European Commission’s press release which accompanied the publishing of the proposed Directive indicated that the date on which DAC6 will start to apply will remain 1 July 2020.
Every individual Member State will have to decide on whether they will implement the deadline postponement or stick with the original DAC6 timelines. A few countries have already announced their endorsement once final agreement is reached at EU level.
For more on this and other DAC6 updates in key countries, see the overview below.
France
France has adopted relevant DAC6 legislation by ordinance in October 2019. A first draft of regulations was released at the end of 2019, and a new draft was published for comments in March 2020 (and completed with the interpretation of hallmarks).
The French government has not officially commented regarding its position on the postponement but it should be favourable to it.
Some of the key features of the French tax transposition and interpretations so far:
- legal privilege is interpreted very widely and includes professionals protected by professional secrecy such as banks or asset managers; in practice, those professionals must request the approval of their client before reporting; if they do not obtain such approval, they must notify their clients of all the information they need to proceed to reporting by themselves;
- intermediaries are considered as participants whatever their role for the time being, which is highly contended;
- no reporting is due if the tax benefit (which can be French, EU or non-EU, contrary to the first indications given by the tax authorities) derives from a tax incentive scheme used in line with the legislator's intent.
Interestingly, the draft regulations provide that widely held funds may meet hallmark A3 since they may rely on standardised documentation, but they usually do not meet the “main benefit” test.
Germany
Germany has adopted relevant DAC6 legislation and a draft guidance document has been released. Current understanding in the market is that Germany would execute the option to postpone the effective start date to 1 January 2021.
The asset management industry is currently discussing how it applies to individual fund and transaction types, which poses a number of challenges. Key challenges include discussions around the disclosure of investors vs. reporting at fund level, security lending and derivative transactions, and the relevance of distribution activities. The expectation is that mutual funds should have good reason to report (if at all) at fund level, while alternative and closed-end fund structures would be expected to disclose their investors. Reporting would have to be done by the advisors/ManCos/investment managers.
Ireland
Ireland adopted DAC6 into legislation in the Finance Act 2019, which came into force in December 2019. The legislation follows the Directive. Ireland has existing domestic reporting obligations. Irish Revenue have issued partial draft guidance for comment. A number of submissions have been made, including by the Irish Funds Industry and PwC. While no official announcement has been made to date, it is expected that Ireland will defer the reporting obligations until 1 January 2021.
Luxembourg
Luxembourg adopted the DAC6 legislation on 21 March 2020. Although Luxembourg’s competent authorities have not yet release detailed guidance, they published some clarifications on 13 May 2020. These clarifications do not give interpretations on the hallmarks but refer to some practical aspects.
Furthermore, the Luxembourg Ministry of Finance confirmed on its website its willingness to follow the EU proposals regarding a possible postponement of relevant due dates, and to issue a draft bill once final agreement is reached at EU level. This would result in the effective date still being 1 July 2020, but the deadline for filing historical data would be 28 February 2021 (instead of 31 August 2020), and the 30-day period for reporting new arrangements would start on 1 January 2021 (instead of 1 July 2021). A law implementing the extended deadline is not expected to be voted on before 1 July 2020. In its press release, the Ministry of Finance therefore announced that while waiting, no penalties would be issued for late filing.
Industry organisations have been working on FAQ documents, which are expected to be published soon. Key challenges for the asset management industry include securities lending and derivatives transactions, assessment of arrangements at investor or investment level, and communication with other market players, in particular as certain intermediaries bound by professional confidentiality (including lawyers and audit firms) are exempt from reporting. Asset managers are notably currently reviewing arrangements implemented during the transitory period.
Netherlands
In line with the provisions of DAC6, the new rules regarding the mandatory disclosure regime are applicable as of 1 July 2020. However, it should be noted that any cross-border arrangements where the first step of implementation has been or will be made between 25 June 2018 (date on which DAC6 came into force) and 30 June 2020 must reported between 1 July 2020 and 31 August 2020. The Dutch government did not yet comment on whether it intends to endorse the EC’s proposal to postpone the first DAC6 reports. The next steps are that the deferral needs to be unanimously approved by ECOFIN. It should be noted that a European Parliament opinion is required (the Parliament cannot amend the proposal) and is expected by 30 June 2020. Furthermore, the opinion of the European Economic and Social Committee is expected by 14 June 2020. In addition, the Dutch Ministry of Finance has to decide whether to grant a postponement and, if so, for how long. It is not yet know when this decision can be expected.
Sweden
On 3 June 2020 the Swedish parliament adopted a legislation that is an implementation of EU Directive DAC6. However, the parliament did not include in its resolution when the legislation would come into force but instead entitled the Swedish government to resolve timing of the enforcement. The government has since announced that it is considering implementing the legislation as of 1 July 2020, but with reference to discussions within the EU it has also been stated that the timing of first reporting and exchange of information may possibly be postponed due to COVID-19. The next step will be for the government to issue an ordinance to implement the legislation as of 1 July 2020 and then make possible changes to the deadlines for reporting and exchanging information.
United Kingdom
On 13 January 2020, final regulations (the International Tax Enforcement (Disclosable Arrangements) Regulations 2020) to implement DAC6 were enacted; these follow the Directive closely. Revised UK HMRC draft guidance was published in March 2020 for further consultation. Final guidance is expected before July.
One key change made in the UK regulations from DAC6 is in relation to the main benefit test. Under the UK regulations, the meaning of “tax advantage” is restricted to “where the obtaining of the tax advantage cannot reasonably be regarded as consistent with the principles on which the relevant provisions that are relevant to the reportable cross-border arrangement are based and the policy objectives of those provisions”. The definition of “tax advantage” is also expressly restricted to taxes to which DAC6 applies (i.e. EU direct taxes). As a result, it is not expected that, in practice, many arrangements will need to reported to UK HMRC in respect of those hallmarks that are subject to the main benefit test.
Welcome clarifications in the draft UK HMRC guidance in the context of asset and wealth management include:
- Meaning of “concerning” – helpful guidance is included explaining that HMRC only considers an arrangement to “concern” a territory if that territory is of “material relevance” to the arrangement, and provide a number of examples to illustrate the concept. Specifically, HMRC includes an example of a CIV established for investors from any jurisdiction and confirm that the fact that investors could be from different jurisdictions does not inherently make this a cross-border arrangement assuming that the location of the investors is not material to the establishment of the CIV.
- Hallmark A3 – HMRC has confirmed that industry-standard framework agreements (such as an ISDA) should not normally satisfy this hallmark, on the assumption that they are usually subject to significant contract-specific customisation.
- C Hallmarks – “Recipient” – HMRC has confirmed that the recipient for the purposes of these hallmarks will generally be the person/people who is/are taxable on the receipt. In the case of transparent vehicles such as partnerships, it would be the partners who are the recipients for the purposes of judging whether this hallmark is met.
- Hallmark C1(a) – HMRC has confirmed that an entity incorporated in a jurisdiction without corporate tax (such as the Cayman Islands) should be considered under the other C1 hallmarks and not under C1a which applies to recipients not resident anywhere (and where the main benefit test does not apply).
- Hallmark Cb(ii) – the draft HMRC guidance has clarified that it is necessary to consider whether the territory is on either of the EU’s or OECD’s lists of uncooperative tax jurisdictions both at the time of the first step of implementation and on 1 July 2020, to determine if an arrangement is disclosable under this hallmark. It follows that relevant arrangements involving the Cayman Islands that were implemented before the Cayman Islands was added to the “blacklist” earlier this year may not be reportable under this hallmark (although other hallmarks will need to be considered).
