Within the framework of administrative cooperation in the field of taxation, the European Union has adopted directives so-called “DAC” (Directive on Administrative Cooperation), the aim of which is to set up exchanges of information between the various Member States in the field of direct taxation.
These directives, of which there are 6 to date, are intended to ensure that Member States are able to tax their taxpayers regardless of the country in which they work, retire, have a bank account, invest or do business, and to combat tax fraud and tax evasion. As direct taxation is not harmonised at EU level, each Member State retains its sovereignty in this area and is therefore free to establish its own tax rules. As a result of this freedom, some taxpayers are able to avoid or evade tax in their country of residence.
The European Union has therefore put in place a certain number of rules that have been given concrete form by the adoption of directives “DAC” requiring Member States to exchange, as appropriate, spontaneously, automatically or on request, information in the tax field concerning taxpayers.
Each of the six directives covers information in a particular field. The latest to date, Directive (EU) 2018/822, known as directive “DAC 6”, was adopted on 25 May 2018 by the European Union. It imposes an automatic and mandatory exchange of information in the tax field in relation to cross-border arrangements potentially aggressive tax planning (the “Directive“).
The main purpose of the Directive is to address the evolving complexity of tax planning arrangements by requiring an exchange of information between all Member States on some of these potentially aggressive cross-border arrangements in order to provide Member States’ tax administrations with complete and relevant information on tax planning transactions undertaken by taxpayers and thus enable Member States to react quickly against harmful tax practices and to remedy any deficiencies identified.
In this context, the Luxembourg Parliament adopted on 21 March 2020 bill n°7465 transposing the Directive into Luxembourg law (the “Law“).
The Law introduces an obligation for intermediaries (as defined in point 1. A. below) who design, market or organise a cross-border arrangement, as well as in certain cases for the relevant taxpayer himself (as defined in point 1. B. below), to transmit to the Administration des Contributions Directes (“ACD“) certain information listed by the Law related to cross-border arrangements which is of a potentially tax aggressive nature, due to the presence of at least one characteristic element referred to in the Law.
I. The relevant persons
A. The intermediaries
According to the Law, an intermediary is defined as any person who designs, markets or arranges a reportable cross-border arrangement, makes it available for implementation or manages its implementation. The Law also adds that an intermediary may also be any person who, considering the facts and relevant circumstances and on the basis of available information as well as the relevant expertise and understanding necessary to provide such services, knows or could reasonably be expected to know that it has undertaken to provide such services, directly or through other persons, aid, assistance or advice concerning the design, marketing or organisation of a reportable cross-border arrangement, or concerning its availability for the purpose of implementation or the management of its implementation.
The Law further specifies that, in order to be an intermediary subject to the reporting obligation, a person must meet at least one of the following conditions:
- Be resident in a Member State for tax purposes ;
- Possess a permanent establishment in a Member State through which services related to the arrangement are provided ;
- Be incorporated in a Member State or governed by the law of a Member State ;
- Be registered with a professional association in connection with legal, tax or advisory services in a Member State.
It results from these conditions that an intermediary must have a link with one of the Member States and that therefore an intermediary from a third country has no obligation to make a declaration. In this case, it is the responsibility of the relevant taxpayer himself to declare the cross-border arrangement. This is also the case where the relevant taxpayer has himself designed and implemented a such arrangement or where the intermediary can rely on professional secrecy (see below).
The definition of an intermediary by the Law is therefore very broad and may include, inter alia, banks, accountants, law firms, tax and financial advisers, consultants or insurance companies as well as all service providers who are sufficiently knowledgeable about the context of the transaction in which they are involved.
As a direct consequence of this large panel of persons potentially considered as intermediaries, it is likely to be frequent to see several intermediaries involved in the implementation of one and the same cross-border arrangement. In this situation, the obligation to report information will fall on all the intermediaries concerned. Nevertheless, in such a case, an intermediary could be exempted from its reporting obligation if it proves that another intermediary has already transmitted the information related to the relevant cross-border arrangement.
By way of exception, the Law provides for an exemption from the reporting obligation for intermediaries who are subject to the law of 10 August 1991 as amended on the legal profession, the law of 10 June 1999 as amended on the organisation of the accountant profession and the law of 23 July 2016 as amended on the audit profession when these persons act within the limits applicable to the exercise of their profession. The members of these professions are subject to professional secrecy. However, where this derogation is applicable, the intermediary is required to notify, at the latest within ten days to any other intermediary, and in the absence of another intermediary to the relevant taxpayer, their reporting obligations and to make available to the relevant taxpayer, where applicable, the information necessary to comply with the declaration obligation.
B. The relevant taxpayer
The relevant taxpayer is defined as any person to whom a reportable cross-border arrangement is made available for the purpose of its implementation, or as any person who is ready to implement such an arrangement or who has implemented the first stage of such an arrangement.
II. The relevant Cross-border arrangements
The arrangements concerned by the intermediary’s reporting obligation or, where appropriate, the relevant taxpayer, are cross-border arrangements having as their object a direct tax, excluding value added tax, customs duties, excise duties covered by other Union legislation related to administrative cooperation between Member States and compulsory social security contributions and including at least one of the hallmarks listed in the Annex to the Law.
The hallmarks are defined by recital 9 of the Directive as features and elements of transactions that present a strong indication of tax avoidance or abuse. They are of two types, generic hallmarks which, in order to be taken into account, require the relevant arrangement to satisfy the main benefit test as detailed below, and specific hallmarks which, for one part, also require the main benefit test to be satisfied and, for a second part, impose a reporting obligation without the need for further investigation. These markers are also grouped into the following five categories:
- A. Generic hallmarks linked to the main benefit test
- B. Specific hallmarks linked to the main benefit test
- C. Specific hallmarks related to cross-border transactions
- D. Specific hallmarks concerning automatic exchange of information and beneficial ownership
- E. Specific hallmarks concerning transfer pricing
The Law provides that a number of hallmarks will trigger a reporting obligation only when they meet the ” main benefit test “. These hallmarks are the generic hallmarks falling under category A, the specific hallmarks falling under category B and the specific hallmarks falling under category C, paragraph 1(b)(i), (c) and (d) of the Law. This main benefit test will be met if it can be established that the main benefit or one of the main benefits that a person may reasonably expect to derive from an arrangement is the obtaining of a tax advantage within or outside the European Union.
In order to determine whether a relevant arrangement must be declared to the ACD on the basis of hallmarks requiring verification that it meets main benefit test, the value of the tax benefit obtained from the arrangement must be weighed against the value of other benefits derived from the same arrangement. Only if the tax benefit outweighs the other benefits, including in particular the commercial benefit, must the arrangement be declared.
The other hallmarks, those falling under categories D and E and those falling under paragraph 1(a) and paragraphs 2, 3 and 4 of category C will be sufficient in themselves and will automatically trigger the obligation to declare.
III. Declarations of the relevant information
The reporting requirement for cross-border arrangement will apply as soon as the Law will come into force (i.e. on July 1, 2020) with retroactive effect to 25 June 2018 for cross-border arrangement whose first step was implemented as of that date
Therefore, as of 1 July of this year, intermediaries will be required to report to the ACD the information as set out below that they are aware of, possess or control in relation to the cross-border arrangement to be reported within 30 days of the day on which the arrangement will be made available, is about to be implemented or when the first step has been implemented, whichever occurs first. With regard to the reportable cross-border arrangements with a first step was implemented between 25 June 2018 and 30 June 2020, the relevant reports must be submitted to the ACD by the intermediaries or, as the case may be, by the relevant taxpayers by 31 August 2020 at the latest.
In addition, in the case of marketable arrangements, intermediaries are required to prepare a report every three months providing an update containing new reportable information that has become available since the last report was submitted.
The form and modalities for the transmission of the information will be determined by Grand-Ducal regulation not yet available at this time.
In addition, each relevant taxpayer is required to declare in his annual income tax return the use he makes of the arrangement for each of the years in which he uses it.
The automatic exchange of information by the ACD to the tax authorities of the other Member States takes place within one month of the end of the quarter in which the information was transmitted. The first information shall be communicated by 31 October 2020 at the latest.
The information related to the cross-border arrangement to be transmitted to the ACD includes the following:
- a) Identification of the intermediaries and relevant taxpayers, including their name, date and place of birth (for individuals), tax residence and tax identification number.
Where an associated enterprise (*1) of the relevant taxpayer is involved in the cross-border reporting arrangement, the identification shall also include the name, date and place of birth (for individuals), tax residence and tax identification number of that associated enterprise;
- b) Details of the hallmarks set out in Annex of the Law that make the cross-border arrangement reportable;
- c) a summary of the content of the reportable cross-border arrangement, including a reference to the name by which it is commonly known, if any, and a description in abstract terms of the relevant business activities or arrangements, without leading to the disclosure of a commercial, industrial or professional secret or of a commercial process, or of information the disclosure of which would be contrary to public policy;
- d) The date on which the first step in implementing the reportable cross-border arrangement has been made or will be made;
- e) Details of the national provisions that form the basis of the reportable cross-border arrangement;
- f) The value of the reportable cross-border arrangement;
- g) The identification of the Member State of the relevant taxpayer and any other Member States which are likely to be concerned by the reportable cross-border arrangement;
- h) The identification of any other person in a Member State likely to be affected by the reportable cross-border arrangement, indicating to which Member States such person is linked.
The Directive requires Member States to provide in their national law for appropriate, effective, proportionate and dissuasive penalties against violations of the rules implementing the Directive. Luxembourg has therefore provided for a fine of up to 250,000, – euros against the intermediary or relevant taxpayer having an obligation to transmit or notify to the Grand Duchy of Luxembourg in case of failure to transmit information, late transmission or transmission of incomplete or inaccurate data, or in case of non-compliance by intermediaries with their obligations
*1 “associated enterprise” means a person who is related to another person in at least one of the following ways:
- i. a person participates in the management of another person by being in a position to exercise a significant influence over the other person;
- ii. a person participates in the control of another person through a holding that exceeds 25 % of the voting rights;
- iii. a person participates in the capital of another person through a right of ownership that, directly or indirectly, exceeds 25 % of the capital;
- iv. a person is entitled to 25 % or more of the profits of another person.