Introduction to DAC6
On 25th of May 2018, the Council of the European Union adopted EU Council Directive 2018/822, also known as Directive of Administrative Cooperation (DAC6), in response to Action 12 of the Organisation for Economic Co-operation and Development (OECD) base erosion and profit-shifting (BEPS) project that provides recommendations for the mandatory disclosure rules for aggressive and abusive transactions, arrangements, or structures.
Although significant work in the field of tax transparency was already done with the CRS back in 2014, the European Union was asked to take tougher measures especially against intermediaries who assist in arrangements that may lead to tax avoidance and evasion.
In response to that, DAC6 requires mandatory disclosure by tax intermediaries involved in cross-border arrangements that contain at least one defined hallmark.
However, the reporting obligations are limited to cross-border situations, those involving either more than one member state or a member state and a third country. Arrangements between two domestic parties is outside the scope of DAC6.
The reporting regime further limits the number of reportable cross-border arrangements as some of the hallmarks trigger a reporting obligation only if an arrangement meets the main benefit test (MBT). Hallmarks that are linked with MBT are category A, B and some in category C. (see hallmarks table).
Purpose of DAC6
The aim of DAC6 is to improve the transparency, provide the appropriate information to the tax authorities to implement measures against harmful tax practises and discourage cross-border tax planning arrangements.
Intermediaries
As abovementioned the Directive required EU tax intermediaries and taxpayers to report the cross-border arrangements.
Intermediary means any person that organises, markets, design, makes available for implementation and manages the implementation for reportable cross-border arrangements.
Reporting will be done by taxpayers only if there is no Intermediary (i.e. the taxpayer designs and implements everything in-house).
Cross-border arrangements
In order for an arrangement to be categorized as cross-border, it must be an arrangement concerning either more than one EU Member State, or a Member State and a third party or country, whereby at least one of the following conditions is met:
- Not all participants in the arrangement are tax resident in the same jurisdiction.
- A permanent establishment linked to any of the participants is established in a different jurisdiction and the arrangement forms part of the business of the permanent establishment.
- At least one of the participants in the arrangement carries on activities in another jurisdiction without being resident for tax purposes or creating a permanent establishment situated in that jurisdiction.
- At least one of the participants has residency for tax purposes in more than one jurisdiction.
- Such an arrangement has a possible impact on the automatic exchange of information or the identification of beneficial ownership.
Hallmark’s overview
The Directive refers to five specific Hallmarks in order to determine whether the cross-border arrangement is reportable or not.
In category A, B and in some cases in C, the hallmarks have to satisfy the MBT in order to be disclosed to the authorities.
MBT is satisfied if it can be established, that the main benefit or one of the main benefits of entering into such an arrangement is the obtaining of a tax advantage.
The Hallmarks are divided into categories as follows:
| Category | Linked to MBT? | Hallmarks |
|---|---|---|
| A: Generic- Linked to MBT | Yes | A1: Confidentiality: An arrangement where the relevant taxpayer or a participant in the arrangement undertakes to comply with a condition of confidentiality which may require them not to disclose how the arrangement could secure a tax advantage vis-a-vis other intermediary or the tax authorities. |
| A2: Success fee: An arrangement where the intermediary is entitled to receive a fee for the arrangement which is fixed by reference to: a. The amount of the tax advantage; or b. Whether a tax advantage is derived from the arrangement. This would include an obligation on the intermediary to partially or fully refund fees where the intended tax advantage was not partially or fully achieved. |
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| A3: Standardised documentation or structure: An arrangement that has substantially standardised documentation and/or structure and is available to more than one relevant taxpayer without a need to be substantially customised for implementation. | ||
| B: Specific- Linked to MBT | Yes | B1: Acquiring a loss-making company: The acquisition of loss-making companies and entering into such arrangements for the purpose of benefiting through group tax relief, including the transfer of taxable losses to another jurisdiction or acceleration of such losses. |
| B2: Converting taxable income into capital or other lower taxed income: An arrangement that has the effect of converting income into capital, gifts or other categories of revenue which are taxed at a lower level or exempt from tax. | ||
| B3: Circular or offsetting transactions: Circular transactions resulting in the round-tripping of funds, namely through involving interposed entities without other primary commercial function or transactions that offset or cancel each other or that have other similar features. | ||
| C: Relating to Cross-border transactions | Note: only points b(i), c and d under Hallmark C1 are linked to MBT | C1: Deductible cross-border payments: An arrangement that involves deductible cross-border payments made between two or more associated enterprises where at least one of the following conditions occurs : a. The recipient is not a resident for tax purposes in any jurisdiction; b. Although the recipient is resident for tax purposes in a jurisdiction, that jurisdiction either: i. Does not impose corporate tax or imposes corporate tax at the rate of zero or almost zero (linked to MBT) or ii. Is included in a list of third-country jurisdictions assessed by Member States collectively or within the framework of the OECD as being non-cooperative; c. The payment benefits from a full exemption from tax in the jurisdiction where the recipient is resident for tax purposes (linked to MBT); d. The payment benefits from a preferential tax regime in the jurisdiction where the recipient is resident for tax purposes (linked to MBT). |
| C2: Deductions for depreciation on the same asset claimed in more than one jurisdiction: Deductions for the same depreciation on the asset are claimed in more than one jurisdiction. | ||
| C3: Double tax relief claimed in more than one jurisdiction: Relief from double taxation in respect of the same income or capital is claimed in more than one jurisdiction. | ||
| C4: Transfer of assets where the amount payable is materially different in each jurisdiction: There is an arrangement that includes transfers or assets where there is a material difference in the amount of treated as payable in consideration for the assets in those jurisdictions involved. | ||
| D: Relating to automatic exchange of information and beneficial ownership | No | D1: Arrangements frustrating disclosure of information under CRS or automatic exchange if information: Arrangements designed to, or having the effect of, circumventing the Common Reporting Standard (CRS) (e.g. transferring funds to an entity or jurisdiction which is not within the scope of the automatic exchange of information) (i.e relevant for banks and CRS advisors). |
| D2: Arrangements frustrating disclosure of information under registers of ownership: Arrangements involving entities which do not carry on a substantive economic activity and the identity of the beneficial owners is made unidentifiable (i.e mean using holding companies’ jurisdictions who will not share details about beneficial ownership with other tax authorities and jurisdictions). | ||
| E: Relating to transfer pricing | No | E1: Arrangements involving unilateral safe harbour rules.(i.e simplification measures of 2% in Cyprus). |
| E2: Arrangements involving the transfer of hard to value of intangibles ( between associate companies). | ||
| E3: Cross-border transfer of functions/risks/assets subject to 50% EBIT test: An arrangement involving an intra-group cross-border transfer of functions and/or risks and/or assets, if the projected annual earnings before interest and taxes (EBIT), during the three-year period after the transfer, of the transferor or transferors, are less than 50% of the projected annual EBIT of such transferor or transferors if the transfer had not been made(between associate companies). |
Reporting disclosures as per directive
- Identification of intermediaries and relevant taxpayers including their name, date and place of birth, residence for tax purposes and tax number.
- Information of persons who are associated enterprises to the relevant taxpayer.
- Hallmarks which are satisfied.
- Describe the reportable cross-border arrangement.
- Dates and values of arrangements
- Member States of relevant taxpayers and details of other Member States who are likely to be concerned.
- Identification of any other person in a Member State likely to be affected by the arrangement.
- Any national provisions that form the basis of the arrangement.
DAC6 in Cyprus
On 18th of March 2021 the Cyprus Parliament voted into law the provisions of the EU Council Directive 2018/822, known as “DAC6”.
In general, the Law is aligned to the minimum standards set by the Directive with minor deviations.
The Directive is intended to increase transparency in the area of direct taxation, with a view of combating tax avoidance and tax evasion in the EU. On that account, the obligation to report potential aggressive tax planning aims to balance the asymmetry of information between Tax Authorities and taxpayers, thus enabling EU Member States to prevent harmful tax practices and close any loopholes.
The Cyprus Tax authorities announced the extension of reporting deadlines and that there would not be any imposition of administrative fines for overdue submission of DAC6 information that will be submitted until 30 June 2021 for reportable cross-border arrangements that were implemented between 25 June 2018 and 31 May 2021.
From 1 June 2021 and after the reportable cross-border arrangements should be filed within 30 days.
The reporting in Cyprus will be through Ariadni portal via XML format.
The relevant penalties are substantial and the fine to intermediaries for failure to submit information vary from €10.000 to €20.000. Furthermore, there are fines for the overdue submission of information which range from €1.000 to €5.000 for late submission up to 90 days from the relevant deadline, and €5.000 to €20.000 for late submission that is over 90 days from the deadline.
It is noted that while the domestic Law reflects the spirit of the Directive, in many areas’ uncertainty remains. The Cyprus Tax Authorities recognise the complexity and intend to issue further guidance to provide clarification.
Our Partners and team are at your disposal for any assistance.
