Implementation of DAC 6 into Luxembourg national law

On 21 March 2020, the Luxembourg parliament passed the law n° 7465 (“the Law”) transposing the Council Directive (EU) 2018/822 of 25 May 2018 (“DAC 6”) as regards mandatory exchange of information in the field of taxation in relation to reportable cross-border arrangements. The primary objective of DAC 6 is to strengthen tax transparency through a mechanism of mandatory exchange of information on potentially aggressive tax planning arrangements between the EU Member States. As expected, the wording of the Law closely follows the wording of DAC 6.

DAC 6

DAC 6 aims to increase tax transparency and exchange of information at the EU level as means of combatting aggressive tax planning.

The directive entered into force on 25 June 2018 and introduced the obligation for the intermediaries (or, in certain cases, the taxpayers) to disclose the information on cross-border arrangements that meet certain criteria. The Law implementing DAC 6 should, in principle, be applicable as from 1 July 2020, however, there is a possibility that postponement will be granted by the EU Commission due to the Covid-19 crisis.

The following aspects of the implementation of DAC 6 in Luxembourg will be addressed:

1. Background
2. Obligation to disclose the information
3. Our observations

1. Background

DAC 6 was introduced as a response to the Final Report on Action 12 of the OECD’s Base Erosion and Profit Shifting project, which provided recommendations regarding the design of mandatory disclosure rules (“MDR”).

The directive addresses the arrangements developed across various jurisdictions that move taxable profits towards more beneficial tax regimes or have the effect of reducing the taxpayer's overall tax bill. By discouraging the use of aggressive cross-border tax planning arrangements, it ensures proper functioning of the internal market. While the directive provides for a minimum standard in MDR, EU Member States are free to broaden their scope.

On 26 July 2019, the Luxembourg Government approved the draft law transposing DAC 6 into national law. The draft law has recently been subject to opinions of the State Council and the Luxembourg Bar Association. Following the comments provided, some provisions of the initial draft law were amended. Subsequently, the State Council and the Chamber of Commerce issued their opinions on the revised version of the draft. Finally, the Luxembourg parliament passed the draft law on 21 March 2020.

2. Obligation to disclose the information

Reportable cross-border arrangements

Reporting obligations approved by the legislator do not go beyond the requirements of DAC 6. Thus, arrangements may be reportable if they are: i) implemented cross-border and; ii) they meet at least one of the generic or specific hallmarks set out in the Law.

Cross-border arrangements are defined as those involving either more than one Member State or a Member State and a third country. Hallmarks refer to a characteristic or feature of a cross-border arrangement that presents an indication of a potential risk of tax avoidance. The list of hallmarks in the newly adopted legislation is identical to the one contained in Appendix IV of DAC 6.

Generic hallmarks, and a number of specific hallmarks, need to be considered for reporting only if they meet the so-called main benefit test (“MBT”). MBT will be satisfied if it can be established that the main benefit or one of the main benefits which, having regard to all relevant facts and circumstances, a person may reasonably expect to derive from an arrangement is the obtaining of a tax advantage. According to the Law, the advantage may either be obtained in the EU or in a third country.

It is important to note that the tax treatment of a cross-border payment at the level of the recipient does not in itself mean that an arrangement satisfies the MBT. Thus, even if the jurisdiction of the recipient of a payment does not impose any corporate tax or imposes corporate tax at a rate of zero or almost zero, or if the payment benefits from a full exemption or a preferential tax regime, the MBT is not considered to be satisfied immediately.

Finally, only arrangements pertaining to direct taxes must be disclosed. Arrangements regarding VAT, stamp duties or excise duties are outside of the scope.

Persons in charge of reporting the arrangements

Cross border arrangements, fulfilling the abovelisted conditions, will generally be reported to the Luxembourg tax authorities (“LTA”) by intermediaries.

For the purposes of both DAC 6 and the Law, an intermediary is defined broadly and includes:

i) Any person that designs, markets, organises, makes available for implementation, or manages the implementation of a reportable cross-border arrangement (so-called “Promoters”); and

ii) Any person that knows or could reasonably be expected to know (based on facts, circumstances, available information and the relevant expertise and understanding) that they have undertaken to provide – directly or by means of another person – aid, assistance or advice in relation to the services described above (so-called “Service providers”).

Persons who act as intermediaries can be, for example, tax consultants, banks, auditors and accountants.

Additionally, the intermediary has to have an EU nexus – be a resident for tax purposes in a Member State, or have a permanent establishment in a Member State from where the services related to the arrangement are provided. If the  intermediary does not have an EU nexus, the disclosure obligation is transferred to other intermediaries or the relevant taxpayer

Under DAC 6, a Member State may give an intermediary the right to waive their reporting obligations where they would breach the legal professional privilege under the national law of the respective Member State. The initial draft law provided a clarification by stating that legal professional privilege applies to Luxembourg qualified lawyers, who are thereby waived from disclosing arrangements.

Due to the comments provided by the State Council and the Luxembourg Bar Association, the waiver was later extended to auditors and accountants, provided that they are subject to the Luxembourg laws governing these professions and are acting within the boundaries of their profession. Furthermore, the requirement for the intermediaries benefiting from the privilege to provide basic information to the tax authorities was removed.

In situations where an intermediary covered by professional secrecy provides a service that involves a reportable arrangement, he must notify other intermediaries or the taxpayer of their reporting obligation. In the latter case, the intermediary must provide the taxpayer with all information that must be reported. The notification must occur within 10 days after the arrangement is made available for implementation to the taxpayer or when the first implementation step has occurred, whichever comes first.

In addition to the reporting form filed by the intermediary or the relevant taxpayer, the taxpayer is required to file information about the use of the arrangement in each of the years in which it is used. This information is shared with the LTA via the corporate tax return.

Temporal application

The Law will be applied retroactively. The first reportable transactions are planned to be those first implemented between 25 June 2018 and 1 July 2020. This information will have to be reported to the LTA, possibly by 31 August 2020.

As of the entry into force of the Law, reportable arrangements must be reported to the LTA within 30 days, beginning on the day after which:

i) The reportable cross-border arrangement is available for implementation, or

ii) The reportable cross-border arrangement is ready for implementation, or

iii) The first step in the implementation of the reportable cross-border arrangement has been made.

A Grand Ducal Decree aimed at dealing with the filing process with the LTA was approved by the Luxembourg Government on 28 February 2020.

Penalty

The Law stipulates the penalty of up to EUR 250,000, to be determined on a case-by-case basis, for breaching the reporting obligation. When determining the amount, the intention of the taxpayer will be taken into account. Under the Law, an appeal against the fine before the Luxembourg Administrative Tribunal is allowed to the intermediary or the relevant taxpayer.

3. Our observations

Considering that many businesses in Luxembourg operate cross-border, transposition of DAC 6 could lead to significant reporting obligations towards the LTA. Even though the date of entry into force of the Law is currently uncertain, Luxembourg intermediaries and taxpayers should be ready to start reporting as from 1 July 2020.

It seems that it will be necessary for the persons in charge of reporting to establish whether a particular arrangement has to be reported on a case-by-case basis. This will inevitably increase their administrative burden. On the other hand, the reporting obligations can be seen as an encouragement for the taxpayers to emphasize the valid commercial reasons driving their cross-border activities.

Finally, it is interesting to look at the resemblance between the MBT, the general anti-abuse rule (“GAAR”) found in Article 6 of the Anti Tax Avoidance Directive and the principal purpose test (“PPT”) implemented through the multilateral instrument. Therefore, where the arrangement is found to be reportable under the MBT, it can be recommended to establish whether the conditions of the GAAR and the PPT are met as well.