On 25 May 2018, the ECOFIN Council adopted the 6th Directive on Administrative Cooperation, commonly called DAC6, which requires so-called tax intermediaries to report certain "cross-border arrangements" that contain at least one of the hallmarks (characteristics or features of cross-border arrangements) defined in the Directive.
DAC6 requires EU Member States to introduce, in their national law, mandatory disclosure rules for cross-border arrangements. The new Directive was inspired by the Final Report on Action 12 of the OECD Base Erosion and Profit Shifting, or BEPS Project, providing recommendations regarding the design of mandatory disclosure rules for aggressive and abusive transactions, arrangements or structures.
By nature, investments and business activities of Luxembourg companies often have a cross-border dimension. In all of these cases, the question remaining is whether a particular piece of advice, or involvement in implementation, is reportable or not. In this blog article, we will analyse the features of the new mandatory disclosure regime and provide clear, practical guidance as to when a specific arrangement is reportable or not. We will be giving a special consideration to the impact on Alternative Investments made from Luxembourg. Because DAC 6 requires reporting on transactions implemented after 25 June 2018, even though the implementing legislation is not yet available, the directive has essentially already taken effect, making the need to understand and prepare all the more relevant.
What arrangements are subject to mandatory disclosure?
Arrangements that come within the scope of at least one of the so-called "hallmarks" defined in Appendix IV to the Directive may need to be reported under the mandatory disclosure regime. These hallmarks describe characteristics or features of cross-border arrangements that might present an indication of a potential risk of tax avoidance.
Hallmarks are generally divided into two categories: generic and specific hallmarks. Generic hallmarks target features that are common to promoted schemes, such as the requirement for confidentiality or the payment of a premium fee. Generic hallmarks can be used to capture new and innovative tax planning arrangements as well as mass-marketed transactions that promoters may easily replicate and sell to a variety of taxpayers.
Specific hallmarks are used to target known vulnerabilities in the tax system and techniques that are commonly used in tax avoidance arrangements such as the use of loss creation, leasing and income conversion schemes.
The Directive sets out the following five categories of hallmarks:
General hallmarks linked...