On 21 March 2020, the Luxembourg Parliament voted to approve the law implementing the Council Directive (EU) 2018/822 (commonly known as DAC 6, the “Directive”) which introduces disclosure obligations for intermediaries and taxpayers of certain reportable cross-border arrangements (the “Law”).
Arrangements targeted by the Law
In a nutshell, the Law introduces reporting obligations for some cross-border arrangements deemed to bear a potential risk of tax avoidance involving either (i) EU Member States or (ii) EU Member States with non-EU countries. The Law provides a list of features (the so-called “hallmarks”) to identify the reportable arrangements.
Cross-border arrangements meeting a certain category of hallmarks will only be reportable if, in addition, the main benefit test is met (“MBT”). The MBT is satisfied if, considering all facts and circumstances, it is established that the main or one of the main benefits a person may reasonably expect to derive from an arrangement is the obtaining of a tax advantage. At least one hallmark (whether subject or not to the MBT) should be met in order to trigger reporting obligations.
The hallmarks can essentially be divided into five categories:
- Generic hallmarks subject to the MBT;
- Specific hallmarks subject to the MBT;
- Specific hallmarks related to cross-border transactions;
- Specific hallmarks concerning automatic exchange of information and beneficial ownership; and
- Specific hallmarks concerning transfer pricing.
Intermediaries liable for the reporting
Reporting obligations will essentially lie on intermediaries involved in designing, marketing, organizing, making available for implementation or managing the implementation of reportable cross-border arrangements as well as intermediaries providing aid, assistance or advice in respect with the above-mentioned activities. The obligations will concern intermediaries with specific EU-nexus and will thus not be imposed on intermediaries established and acting outside of the EU for the time being.
In line with the flexibility permitted by the Directive, Luxembourg has decided to exempt from any reporting obligation certain intermediaries that would have otherwise fallen within the scope of the standard reporting. This exemption applies to (i) lawyers governed by article 35 of the amended law of 10 August 1991 on the lawyer profession, (ii) chartered accountants governed by article 6 (1) of the amended law of 10 June 1999 on the chartered accountant profession and (iii) audit professionals governed by article 28 (1) of the amended law of 23 July 2016 on the audit professionals. The scope of the exemption was highly debated during the legislative process, as it was initially proposed that only lawyers would benefit from the derogatory regime to protect the legal professional privilege. Practically speaking, the exempt intermediaries will be required to notify other intermediaries (or, if there is no such intermediary, the taxpayer itself) of their obligation to perform the reporting within 10 days.
It should be noted that it is possible for a taxpayer to mandate an exempt to perform the reporting on its behalf.
Information to be reported
The information to be transmitted by reporting intermediaries are of a general nature and include inter alia the identification of the intermediary, the name of the taxpayer, its tax number, details of the hallmark and a brief description of the arrangement. The practical details pertaining to the reporting are to be specified at a later stage through a Grand-ducal Regulation.
Timing for reporting
Reporting obligations come into force as from 1 July 2020. The reporting has to be performed within 30 days after the day during which (i) the reportable cross-border arrangement is available for implementation to that relevant taxpayer, or (ii) the reportable arrangement is ready to be implemented by the relevant taxpayer, or (iii) the first step in relation to the implementation of the arrangement is made, whichever occurs first. In addition, reportable cross-border arrangements implemented since 25 June 2018 (date of adoption of the Directive (EU) 2018/822) must also be reported by 31 August 2020 at the latest.
Penalties for non-compliance
Luxembourg introduced a penalty of up to EUR 250,000 in case of non-compliance with the reporting obligations on both intermediaries and taxpayers. In addition, intermediaries exempt of reporting obligations (such as lawyers) not complying with their notification obligation could also be subject to the aforementioned penalty.