Luxembourg publishes draft rules to implement DAC 6

On 08 August 2019, draft provisions implementing into Luxembourg domestic law the European Union (EU) Directive 2018/822 of 25 May 2018 (DAC 6) were published (the Draft Law).

This Directive provides for mandatory exchange of information in relation to certain reportable cross border arrangements which, broadly, involve tax avoidance arrangements. It amends EU Directive 2011/16/EU and must be transposed by EU member states by 31 December 2019.

The new provisions should enter into force with effect from 01 July 2020. This article sets out a high-level summary of the main points addressed in the Draft Law.

Scope

The Draft Law introduces an obligation to report to the Luxembourg tax authorities certain cross-border arrangements. The information reported will, in turn, be exchanged automatically with the tax authorities of the other Member States.
What needs to be reported?

Cross border arrangements that could lead to a potential risk of tax avoidance need to be reported. To qualify as a cross-border arrangement, an arrangements must (i) involve several Member States or a Member State and a third country and (ii) meet at least one hallmark (as described below).

The Draft Law provides for different kind of hallmarks which directly come from DAC 6. There are general and specific hallmarks linked to “the main benefit test” (see below), specific hallmarks linked to cross border operations, specific hallmarks concerning automatic exchange of information and beneficial owners and specific hallmarks regarding transfer pricing. All of these hallmarks are, in principle, aimed at highlighting a characteristic or feature of a cross-border arrangement that could be seen as giving rise to a potential risk of tax avoidance.

Certain hallmarks only give rise to an obligation to report where “the main benefit test” is met. This requirement will be met if it can be established that the main advantage or one of the main advantages that a person can reasonably expect to obtain from an arrangement, taking into account all relevant facts and circumstances, is the obtaining of a tax advantage within or outside the territory of the European Union.

The information to be transmitted to the Luxembourg tax is set out in the Draft Law and includes, for example, the identification of the intermediaries and taxpayers concerned, including their name, date and place of birth (for natural persons), tax residence, tax identification number and, where applicable, persons who are associated companies of the taxpayer concerned and detailed information on the hallmarks according to which the cross-border device must be declared.

Who needs to report?

Reporting is an obligation of the intermediary. An intermediary is defined as any person with a EU nexus, who designs, markets or organises a reportable cross-border arrangement, makes it available for implementation or manages its implementation or any person would could have known about such reportable cross-border arrangement.

However, an intermediary who is subject to legal privilege under the amended law of 10 August 1991 on the legal profession (i.e. lawyers) will not be required to report information covered by legal privilege. In that case, that intermediary must notify, within 10 days, any other intermediary who designs, markets or organises such reportable cross-border arrangement, or in the absence of such an intermediary, the taxpayer concerned of their reporting obligations under the Draft Law.

Nevertheless, lawyers are still required to report some general information (e.g. a summary of the content of the cross-border arrangement (not including disclosure of any commercial, industrial or professional secret) and information on the hallmarks according to which the cross-border arrangement is reportable).

When to report?

Intermediaries or taxpayers are required to transmit to the Luxembourg tax authorities the information of which they are aware, possess or control concerning the reportable cross-border arrangement within 30 days beginning on the day after the reportable cross-border arrangement is

• (i) made available or
• (ii) ready for implementation or
• (iii) when the first step in the implementation of the reportable cross-border arrangement has been made (whichever occurs first).

In addition, intermediaries will have to report, within 30 days, if they have provided, directly or by mean of other persons, aid, assistance or advice.

In the case of marketable arrangements (i.e. arrangement which do not need to be substantially customised), intermediaries will be required to prepare a report every 3 months providing an update containing any new information subject to reporting.

For reportable cross border arrangements implemented between 25 June 2018 and 30 June 2020, the deadline is 31 August 2020.

What happens in case of non-compliance?

Non-compliance would include the failure to transmit, late or incomplete or inaccurate transmission, or failure to notify or late notification to the Luxembourg tax authorities, of relevant information. In such a situation, the intermediary or the taxpayer could be liable to a fine up to EUR 250.000. However, an appeal is available against such fine before the administrative tribunal.

Next steps

The Draft Law will go through parliamentary process before being adopted into Luxembourg law which is expected at the end of the year.