The Council of the European Union has adopted the Directive 2018/822 for amending the Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation.
Genesis
UE Member States find it increasingly difficult to protect their national tax bases from erosion as tax-planning structures have evolved to be particularly sophisticated. Such structures commonly consist of arrangements which are developed across various jurisdictions and move taxable profits towards more beneficial tax regimes or have the effect of reducing the taxpayer’s overall tax bill. As a result, Member States often experience considerable reductions in their tax revenues, which hinder them from applying growth-friendly tax policies. It is therefore critical that Member States’ tax authorities obtain comprehensive and relevant information about potentially aggressive tax arrangements. Such information would enable those authorities to react promptly against harmful tax practices and to close loopholes by enacting legislation or by undertaking adequate risk assessments and carrying out tax audits. However, the fact that tax authorities do not react to a reported arrangement should not imply acceptance of the validity or tax treatment of that arrangement.
On 18 March 2021 the Cyprus Parliament voted into law the provisions of the EU Council Directive 2018/822.
Who is required to report?
DAC6 requires EU intermediaries and taxpayers to submit information to the tax authorities with which they have an EU nexus, depending on whether the cross-border arrangement meets at least one of the “hallmarks”.
An intermediary is defined in Article 3(21) of the DAC 6 directive as follows: “Any person that designs, markets, organizes or makes available for implementation or manages the implementation of a reportable cross-border arrangement”. In certain cases, however, the reporting obligation shifts from the intermediary to the relevant taxpayer.
The Hallmarks
The DAC6 Hallmarks are broad categories setting out characteristics identified as potentially indicative of aggressive tax planning. Precisely, if a transaction or an arrangement contains at least one of the five hallmarks, then it must be reported to the relevant regulatory authority.
In certain cases, the hallmarks have to satisfy a Main Benefit Test in order to be disclosed to the authorities.
Main Benefit Test is met if it can be established, having regards to all relevant facts and circumstances, that the main benefit or one of the main benefits of entering into such an arrangement is the obtaining of a tax advantage.
Tax Advantage includes the following:
1. Tax Relief or increased tax relief;
2. Tax refund or increased tax refund;
3. Tax avoidance or reduction of tax liability;
4. Postponement of tax or acceleration of tax refund;
5. Avoidance of withholding tax.
The Hallmarks are divided into categories as follows:
Category A: Generic Hallmarks Linked to Main Benefit Test – these include the following provided that they fulfil the “Main Benefit Test”:
1. An arrangement where the taxpayer or a participant, undertakes the obligation to comply with a condition of confidentiality that may require him not to disclose the manner in which the arrangement could secure a tax advantage to other intermediaries or to the Tax Authorities;
2. An arrangement where the Intermediary receives a fee for its services proportionate to the amount of the tax advantage received by the tax payer or a success fee in case that a tax advantage is obtained;
3. An arrangement that has substantially standardised documentation and/or structure and is available to more than one relevant taxpayer without a need to be substantially customised for implementation;
Category B: Specific Hallmarks Linked to Main Benefit Test – these include the following provided that they fulfil the “Main Benefit Test”:
1. The acquisition of loss-making companies and entering into such arrangements for the purpose of benefiting through group tax relief, including the transfer of taxable losses to another jurisdiction or acceleration of such losses;
2. Conversion of income into exempt or lower-taxed revenue streams (such as capital, gifts etc);
3. Circular transactions resulting in the round-tripping of funds, namely through involving interposed entities without other primary commercial function or transactions that offset or cancel each other or that have other similar features;
Category C: Specific Hallmarks Related to Cross-Border Transactions
1. Arrangements that involve deductible cross-border transactions between associated enterprises in cases where:
a) the recipient is not resident for tax purposes in any jurisdiction, or
b) the recipient is resident for tax purposes in a jurisdiction:
i. charging corporate income tax at the rate of 0% or almost 0%, or
ii. the recipient is resident for tax purposes in a jurisdiction of third-country jurisdictions which is assessed as non-cooperative by the EU or the OECD;
c) the payment benefits from full exemption from tax in the jurisdiction where the recipient is resident for tax purposes, or
d) the payment benefits from a preferential tax regime in the jurisdiction where the recipient is resident for tax purposes;
2. Tax deductions for the same depreciation of assets are claimed in more than one jurisdiction;
3. Tax relief is claimed for the same income/capital in more than one jurisdiction;
4. Arrangement that includes transfer of assets where there is a material difference in the amount being treated as payable in consideration for the transferred assets in the jurisdictions involved.
In respect of the above hallmarks, the “Main Benefit Test” has to be taken into account for points 1(b)(i), (c) and (d).
For the rest of the hallmarks the Main Benefit Test does not have to be fulfilled.
Category D: Specific Hallmarks Concerning the Automatic Exchange of Information and Beneficial Ownership
1. Arrangements that undermine the EU reporting obligations or of equivalent significance reporting obligations in relation to the exchange of Financial Account information, including obligations raised from conventions with 3rd countries;
2. Arrangements involving a non-transparent legal or beneficial ownership chain with the use of persons, legal arrangements or structures;
Category E: Specific Hallmarks Concerning Transfer Pricing
1. Arrangements that involve unilateral safe harbour rules;
2. Arrangements that involve transfer of hard-to-value intangibles, subject to conditions;
3. An arrangement involving an intragroup cross-border transfer of functions and/or risks and/or assets, if the projected annual earnings before interest and taxes (EBIT), during the three-year period after the transfer, of the transferor or transferors, are less than 50 % of the projected annual EBIT of such transferor or transferors if the transfer had not been made;
What is reported?
The intermediary or relevant taxpayer must disclose information relating to the filer and all other parties to the cross-border arrangement, a summary of the arrangement and specifics of its implementation, as well as a description of the relevant business activities or arrangements.
Reporting process
Information on reportable cross-border arrangements has to be filed with the CTA through the Government Gateway Portal “Ariadni”. Intermediaries/taxpayers are able to register in Ariadni and upon validation, information can be submitted by uploading an XML file.
Deadlines
The Tax Department informs on 21 September that there will be no imposition of administrative fines for overdue submission of DAC6 information that will be submitted until the 30 November 2021, in the following cases:
• Reportable cross-border arrangements that have been made between 25 June 2018 and 30 June 2020 and had to be submitted by 28 February 2021.
• Reportable cross-border arrangements that had been made between 1 July 2020 and 31 December 2020 and had to be submitted by 31 January 2021.
• Reportable cross-border arrangements made between 1 January 2021 and 31 October 2021, that had to be submitted within 30 days from the date they were made available for implementation or were ready for implementation or the first step in the implementation has been made, whichever occurred first.
• Reportable cross-border arrangements for which secondary intermediaries provided aid, assistance or advice, between 1 January 2021 and 31 October 2021 and had to submit information within 30 days beginning on the day after they provided aid, assistance or advice.
• The first periodic report for marketable arrangements that had to be submitted by 30 April 2021.
Complementary information
When it comes to ensuring compliance with the legislation, the competent authority may require that the intermediary or the relevant taxpayer provide information in writing within 14 days.
Exemptions
Practicing lawyers are excluded from the obligation to file information to the CTA, where such information falls within the scope of “legal professional privilege”. They are nevertheless required to notify, within 10 days, any other intermediary involved in the RCBA, or if there is no such other intermediary, the relevant taxpayer of their reporting obligation.
Penalties
Administrative fines for non-compliance vary depending on the infringement, with a maximum of €20.000 per arrangement.
