The European Directive 2018/822 of 25 May 2018 (Directive on Administrative Co-operation, DAC 6) on the mandatory automatic exchange of information in tax matters in relation to cross-border agreements entered into force on 25 June 2018. With the introduction of this Directive, the European Union is introducing an additional level of transparency to identify potentially aggressive tax agreements.
The DAC6 is an amendment to Directive 2011/16/EU on the automatic and mandatory exchange of information in the tax area in relation to notifiable cross-border arrangements and will have far-reaching consequences for tax advisors, service providers and taxpayers themselves.
What is the DAC6?
The DAC6 provides for the obligation to notify the tax authorities of those "cross-border mechanisms" involving several Member States or a Member State and a third country where certain conditions are met. Any person who develops, markets, organises, makes available or operates such cross-border mechanisms has a reporting obligation (i.e. both intermediaries and taxpayers who are natural or legal persons). The automatic exchange of such information between Member States only takes place when the agreements fall within certain "distinguishing features" mentioned in the Directive and in certain cases where the main or intended benefit of the agreement is a tax advantage. There will therefore be a mandatory automatic exchange of information on such cross-border mechanisms notifiable through the Common Communications Network (CCN) to be established by the EU.
Which and what are the distinguishing features?
The distinguishing features are those criteria which, if met, oblige the intermediary or taxpayer to notify the various authorities of the cross-border mechanism (and related details).
The 5 categories of hallmarks are the following:
- Generic hallmarks linked to the main advantage criterion
- Specific hallmarks linked to the principal benefit criterion
- Specific hallmarks related to cross-border transactions
- Specific hallmarks concerning the automatic exchange of information and effective ownership
- Specific transfer pricing hallmarks
These distinctive features include, for example:
- The conversion of income into less taxed or exempt categories of capital (dividends, donations, etc.);
- Deductible cross-border payments between associated enterprises;
- The transfer of assets with a substantially different valuation;
- Intra-group transfers that reduce the expected annual EBIT by more than 50%; etc.;
When will the DAC6 enter into force and how will it be implemented by EU countries?
The Directive came into force on 25 June 2018 and provides for its transposition and subsequent publication in the official gazette of the Member States by 31 December 2019 with the subsequent obligation to notify the authorities from 1 July 2020. To date only 19 States have transposed and legislated and only Poland is already operational from the point of view of communication to the authorities. The timeline, due to Covid-19, has been delayed, to be discussed here.
Who is affected by the DAC6 Directive?
These new EU rules can potentially have an impact on any individual or entity involved in the design, marketing, organisation, or management of the implementation of tax planning agreements with an EU cross-border element, as well as on those providing assistance or advice. On the other hand, taxpayers, both businesses and individuals may also be potentially affected.
As far as Switzerland and Liechtenstein are concerned, both do not comply with the directive but will have to diligently inform their clients and provide targeted advice in order to ensure compliance by other intermediaries and/or clients resident in the EU.
Fidinam Group
The Fidinam Group, through its widespread network, is ready to provide you with assistance in different locations and cities to accompany you in fulfilling your obligations under the directive and to provide you with direct advice on your potential impact of the DAC6 directive. Contact us today.
