Tax planning in Luxembourg: Directive 2018/822


lcmm@melchionnalaw.com
Tax planning in Luxembourg: Directive...

On July 1, 2020, the Directive 2018/822, commonly referred to as DAC 6 or Mandatory Disclosure for tax intermediaries, will be effective in Luxemburg. A bill implementing this Directive has been signed by the Luxembourg Parliament (Bill n. 7465).

The Directive DAC6 follows several initiatives to reduce cross border tax avoidance, some of which we have already dealt with in this previous note.

The Mandatory Disclosure introduces an obligation on tax intermediaries to report to the tax authorities “potentially aggressive cross-border tax-planning arrangements”. (Section 6 of the Recitals of the Directive). The Directive introduces a broad definition of “intermediary” (Article 1(b)(21)), which includes not only legal and tax advisors but also banks, trustee companies, insurance companies, asset management and other service providers usually involved in the development and management of cross-border transactions.

The Mandatory Disclosure obligation must be satisfied when the intermediary is facing a reportable cross border transaction with either an EU Member State or with a third-party country (Section 8ab).

Cross-border arrangements are reportable to the tax authorities if they contain at least one “hallmark,” which the Directive defines as a “characteristic or feature of a cross-border arrangement that presents an indication of a potential risk of tax avoidance” (Article 1(b)(20)). These hallmarks can be loosely described as either specific or generic.

Part II, Subpart A of Annex IV describes generic hallmarks. Among other characteristics, generic hallmarks include arrangements containing “conditions of confidentiality” or the prevision of a fee for the success of the tax arrangement.

Specific hallmarks are described in Part II, Subpart B and C of Annex IV. They include arrangements that take “contrived steps” aimed at the acquisition of loss-making companies, convert income into capital or gifts, or involve the deduction of cross-border payments between two or more related entities.

Part II, Subpart D of Annex IV lists specific hallmarks that are indicative of an arrangement capable of evading automatic exchange of Financial Account information or those that involve non-transparent beneficial ownership. Such arrangements might include, among other items, the use of an account that is not a Financial Account or the transfer of assets to a jurisdiction that is not required to exchange information.

Finally, Part II, Subpart E of Annex IV lists “hallmarks concerning transfer pricing.” These include, among other items, arrangements aimed at “the use of unilateral safe harbor rules” or the transfer of “hard to value intangibles.”

Part II, Subpart A of Annex IV lists examples of generic hallmarks. Some examples include “conditions of confidentiality” or the receiving of a fee for the success of the tax arrangement.  

Part II, Subparts B and C of Annex IV describes examples of specific hallmarks. They include arrangements that take “contrived steps” aimed at the acquisition of loss-making companies, convert income into capital or gifts, and involve the deduction of cross-border payments between two or more related entities.

Part II, Subpart D of Annex IV lists specific hallmarks undermining the reporting obligations existing for the automatic exchange of Financial Account information or those involving non-transparent beneficial ownership. Examples of such arrangements are the use of an account that is not a Financial Account or the transfer of assets to a jurisdiction that is not bound by the automatic exchange of information.

Finally, Part II, Subpart E of Annex IV describes “hallmarks concerning transfer pricing.” These include, for example, arrangements aimed at “the use of unilateral safe harbor rules” or the transfer of “hard to value intangibles.”

Some hallmarks are only triggered if the hallmark also meets the requirements of the “Main Benefit Test.” This test means that “having regard to all relevant facts and circumstances” (Annex IV, Part I), an arrangement can be reportable only if it is expected that from the arrangement an individual will derive a tax advantage.

The Mandatory Disclosure regime will enter into effect on August 31, 2020. The exchange of information provisions will become effective on October 31, 2019.