At a time of increasing global economic integration and cross-border transactions, tax authorities around the world are taking steps to enhance transparency and combat tax avoidance.
The compulsory disclosure regulations established by Council Directive (EU) 2018/822 on 25 May 2018, concerning obligatory automatic information exchange in the area of taxation related to reportable cross-border arrangements, also referred to as DAC6, represent one such effort to enhance the information exchange among Member States of the European Union (EU).
More specifically, DAC6 is a directive passed by the EU with the primary objective of fostering tax transparency and combating aggressive tax planning. It requires intermediaries, and in some cases, taxpayers themselves, to report specific cross-border arrangements to tax authorities and mandates automatic exchange of this information among Member States. The directive is part of the wider international effort to curb tax evasion and aggressive tax avoidance.
This article will delve deeper into DAC6 and its impact on Cyprus, shedding light on the importance of these rules for businesses operating in Cyprus.
DAC 6 in Cyprus
Cyprus, as an EU member state, is obligated to implement DAC6 into its domestic legislation. The directive came into effect in Cyprus on 1 July 2020, and from January 2022, all legacy reportable cross border arrangements subject to DAC6 in Cyprus, must be reported to the Cyprus Tax Department (CTD).
The DAC6 regime in Cyprus is governed by:
• the Council Directive 2018/822/EU of 25 May 2018, the original EU text introducing DAC6 to the EU – which amended Council Directive 2011/16/EC;
• the Cypriot Administrative Cooperation in Tax Matters (Amendment) Law 2021, which implemented the EU directive and amended and expanded the prior regime cooperation regime in Cyprus from 2012; and
• the Cyprus DAC6 Guidelines 2021, known officially as the Ministerial decree (Decree N. 438/2021) on the Cyprus DAC6 Law.
The key feature of DAC6 in Cyprus
Reportable cross-border arrangement
For cross-border transactions to be required to report to the CTD, they must meet at least one of the hallmarks. The hallmarks are detailed in the legislation on DAC 6, where five categories of hallmarks are foreseen, divided into generic and specific. The generic hallmarks and certain specific hallmarks can only give rise to reporting obligations if they fulfil so called ‘’main benefit test’’. This test met only if the main benefit or one of the main benefits that a person takes from an arrangement is to obtain a tax advantage.
The categories where the hallmarks are divided, and which are detailed in the DAC6 legislation, are the following:
• Category A: Generic Hallmarks Linked to Main Benefit Test;
• Category B: Specific Hallmarks Linked to Main Benefit Test;
• Category C: Specific Hallmarks Related to Cross-Border Transactions;
• Category D: Specific Hallmarks Concerning the Automatic Exchange of Information and Beneficial Ownership; and
• Category E: Specific Hallmarks Concerning Transfer Pricing.
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Persons responsible for reporting
DAC6 obliges intermediaries, such as tax advisors, lawyers, and financial consultants, to disclose certain cross-border arrangements that have the generic or specific hallmarks. In some cases, the obligation may shift to the taxpayer if there is no intermediary or if the intermediary is protected by legal privilege.
More specifically, the definition of intermediary includes:
• an individual who plans, promotes, coordinates, facilitates, or oversees the execution of a reportable cross-border arrangement (known as the promoter) or
• an individual who, considering the pertinent details and situations and relying on accessible data and the necessary skills and comprehension needed to deliver such services, is aware or could reasonably be anticipated to be aware that they have committed to offer, either directly or through other individuals, help, support or counsel regarding the design, coordination, promotion, provision for execution or overseeing the execution of a reportable cross-border arrangement.
Also, in order for a person to be considered as Intermediate, the following conditions must be met:
• be a tax resident in a member state of the EU;
• maintain a constant presence in a European Union Member State from which the services related to the arrangement are delivered;
• be established under, or subject to the regulations of an EU Member State; and
• must be a member of a professional organization associated with legal, tax, or consulting services in a European Union Member State.
Where a particular intermediary is located outside the EU or is exempt from disclosure due to legal professional privilege, the disclosure obligation lies with another intermediary or, in the absence thereof, with the taxpayer concerned.
3. Requirements for Reporting and their Timelines
Every intermediary or concerned Taxpayer must provide the CTD with the DAC 6 data on reportable cross-border arrangements that they are aware of, possess, or control. This information should be submitted within a 30-day period calculated as follows:
• starting the day after the date when the reportable cross-border scheme is ready for implementation; or
• starting the day after the date when the reportable cross-border scheme is prepared for execution; or
• upon the conclusion of the initial phase of implementing the reportable cross-border regulation, whichever happens first.
The information to be submitted includes, inter alia, the following:
• The identification information of the intermediary and involved taxpayers, such as name, birth date and location (for individuals), tax domicile, VAT identification number, and if relevant, individuals who are associated businesses of that taxpayer;
• details information on the hallmarks that generated the reporting obligation.
A synopsis of the reportable setup, including a mention of its commonly known name, if applicable, and a general overview of the pertinent business operations or agreements, without revealing any trade, industrial, or professional secrets or commercial procedures or information that, if disclosed, would violate public policy.
• the date when the initial action in executing the reportable cross-border arrangement was taken (or will be taken);
• details of the relevant domestic rules forming the basis of the reportable arrangement;
• the value of the reportable cross-border arrangement;
• the taxpayer’s Member State and any other Member State that may be affected by the reportable transnational arrangement; and
• any other individual in a Member State who may be impacted by the reportable cross-border arrangement and the Member State to which such individual is connected.
Non-adherence to the reporting obligations can lead to severe fines based on the rationale for such non-compliance. The fines are detailed below:
• a penalty of up to €20,000 can be imposed if the data for a Reportable Cross-Border Arrangement is not provided promptly or if it is delayed;
• a penalty of up to €20,000 for delay or negligence in reporting when seeking an exemption;
• a maximum of €10,000 for providing incorrect or incomplete information;
• a maximum of €10,000 for not supplying the required data within the set timeframes; and
• escalate up to €20,000 if the administrative charge remains unpaid and the breach persists by the intermediary or the respective taxpayer.
Also, the CTD issued the interpretative Circular 55 providing clarifications in relation to the imposition of DAC6 penalties. The Circular, among other details, includes the following provisions:
• an annual fine limit of EUR 120,000 will be imposed on reportable cross-border arrangements with a reporting deadline within a calendar year. This annual limit is not applicable if the fine is a result of a willful violation or fraud committed by the intermediary / relevant taxpayer;
• A 50% decrease in the penalty levied on a reportable transnational arrangement will be applicable when the intermediary or relevant taxpayer has undertaken ‘remedial measures’ prior to the deadline for filing the income tax return of the year in which the reporting obligation originated. The 50% reduction does not reduce the yearly penalty cap of EUR 120,000; and
• all relevant taxpayers or intermediaries are required to maintain books and any other documents that could be associated with a reportable cross-border arrangement for a minimum duration of six (6) years from the conclusion of the tax year that the cross-border arrangement pertains to.
DAC6 represents an important shift towards transparency and cooperation in cross-border tax arrangements within the EU. Cyprus, as an EU member state, has incorporated and implemented these rules, making it crucial for businesses operating in the country to comply with the reporting obligations.
Businesses are advised to seek professional advice to ensure that they fully understand the legal status regarding DAC6 and are ready to meet their reporting obligations, thus avoiding possible penalties and legal issues in the future.
Compliance with these rules will not only promote a transparent business environment but also contribute to the wider international effort to fight tax avoidance and evasion.