On 9 August 2019, the Luxembourg government published a legislative proposal to implement the EU Mandatory Disclosure directive (the Directive, also known as 'DAC 6'). Under the mandatory disclosure rules, qualifying intermediaries (such as financial and tax advisers, lawyers, banks, accountants and domiciliation service providers) and – under certain circumstances – taxpayers need to report certain arrangements to the relevant tax authorities. The reporting obligations will apply as from 1 July 2020, but will also retroactively cover arrangements that started being implemented after 24 June 2018.
The Directive is the latest step taken by the EU to increase tax transparency and exchange of information. All EU Member States must implement the Directive by 31 December 2019. The reported information will be automatically exchanged with all other Member States on a quarterly basis. In our other EU home markets, the Netherlands have already released their legislative proposal (see our tax flash of 15 July 2019) and Belgium is expected to do so soon.
Reportable cross-border arrangements
A cross-border arrangement is reportable if it concerns at least one EU Member State and contains at least one of the hallmarks set out in the Directive. The term ‘arrangement’ is not further defined in the legislative proposal. An arrangement can notably be a transaction, action, agreement, loan, commitment, or a combination thereof.
The hallmarks are proxies supposed to characterise potentially aggressive tax planning arrangements and arrangements designed to circumvent reporting requirements such as the Common Reporting Standard and ultimate beneficial owner reporting. Some of the hallmarks only apply if the so-called ‘main benefit test’ is satisfied, i.e., if one of the main advantages that a person may reasonably expect to derive from an arrangement is a tax advantage in the EU or in a third country (the reference to taxes of third countries is an addition compared to the Directive). Arrangements concerning value added tax, custom duties and social security premiums are out of scope.
For more details about the hallmarks, please refer to our article dated 14 June 2018.
Intermediaries / taxpayers
The reporting obligation applies in Luxembourg to intermediaries (natural or legal persons) and in some cases to taxpayers. Foreign intermediaries without a link to Luxembourg will have no reporting obligations in Luxembourg under the proposed rules. Where the intermediary is a legal person, it is unclear whether the intermediary is only the legal person or also the individual employee(s) of such legal person working on the matter.
Fully in line with the Directive, in cases where:
- no intermediary is involved (i.e., the arrangement is fully developed in-house);
- the intermediary involved does not have a link to an EU Member State; or
- the intermediary is subject to legal professional privilege;
the obligation to report lies with the taxpayer.
Lawyers will be subject to limited disclosure obligations: they will have to report information of a general nature only. In addition, they will have to notify other intermediaries involved or, if there are no other intermediaries involved, the relevant taxpayer, that they have a reporting obligation. This notification will have to occur within 10 days after the arrangement is ready for implementation or when the first step in the implementation has occurred, whichever comes first. The explanatory notes expressly provide that a taxpayer subject to such reporting obligation may mandate his lawyer to do the reporting on his behalf.
Reporting process and sanctions for non-compliance
Information about reportable cross-border arrangements will have to be disclosed within 30 days after the arrangement is ready for implementation or the first step in the implementation has occurred, whichever comes first. The legislative proposal and explanatory notes do not exclude from the reporting obligation arrangements that are eventually not pursued. For the reporting of cross-border arrangements, the first step of which was implemented between 25 June 2018 and 30 June 2020, the reporting deadline is 31 August 2020.
In addition, each relevant taxpayer will have to annually disclose in his tax return how he has used the arrangement.
Intermediaries and taxpayers who infringe the national provisions may be subject to penalties up to EUR 250,000.
Taxpayers should organise themselves to be in control of the consequences of the Directive, not only in Luxembourg but in all EU Member States. Recommended actions include:
- discussing and streamlining with your advisers the information which potentially will have to be filed with the relevant tax authorities on arrangements, especially if more than one intermediary is involved; and
- reviewing cross-border arrangements which are developed in-house or where only non-EU advisers are involved to assess whether they are reportable under domestic legislation in an EU Member State. If so, or if the position is unclear, include information in a database to ensure that a future obligation to report can be properly fulfilled (given the retrospective effect).
The legislative proposal will now go through the parliamentary process. It may still be amended prior to enactment, which can be expected towards year-end.