Council Directive 2018/822

Directive 2018/822, also known as DAC6, is an amendment to the European Union’s Directive on Administrative Cooperation in the field of taxation (DAC). Effective from June 25, 2018, DAC6 mandates the reporting of certain cross-border tax arrangementsCross-border tax arrangements refer to any financial, operational, or structural plans designed by entities with activities or investments across multiple countries. These arrangements often leverage international tax laws and treaties to optimise tax liabilities and ensure compliance in each jurisdiction. Cross-border tax arrangements are crucial for multinational corporations (MNCs) as they help balance tax efficiencies with regulatory adherence across diverse... to ensure transparency, combat aggressive tax planningAggressive tax planning (ATP) refers to strategies employed by individuals or corporations to minimise their tax liabilities, often by exploiting legal loopholes, discrepancies between tax jurisdictions, or complex structures in tax law. While not always illegal, ATP can push the boundaries of acceptable tax behaviour, as it may compromise the intent of the law. ATP is commonly characterised by arrangements..., and prevent tax avoidanceTax avoidance refers to the practice of legally structuring financial activities to minimise tax liability, reducing the amount of tax owed without violating laws. Unlike tax evasion, which is illegal and involves concealing income or misreporting, tax avoidance operates within the framework of the law. Multinational enterprises (MNEs) and individuals often engage in tax planning strategies that reduce tax liabilities.... This directive focuses on specific arrangements that may present potential tax risksTax Risk refers to the uncertainty surrounding the potential financial or reputational impact of tax-related decisions and events on a business or individual. This risk arises due to various factors, such as complex tax regulations, inconsistent tax authority interpretations, or evolving international tax laws. Effective tax risk management involves identifying, assessing, and mitigating potential tax-related threats to prevent financial penalties,..., requiring intermediariesTax intermediaries are entities or individuals who act as facilitators between taxpayers and tax authorities, assisting with various aspects of tax compliance, planning, and dispute resolution. Their role spans from offering advisory services, ensuring compliance with tax regulations, to supporting clients in filing tax returns and navigating complex tax legislation. These intermediaries often include tax advisors, consultants, lawyers, accountants, and... like tax advisorsA Tax Advisor is a professional who provides specialised advice to individuals, businesses, and organisations on various tax-related matters. They play a crucial role in guiding clients through complex tax laws and ensuring compliance with the latest regulations while identifying opportunities for tax efficiency. Tax Advisors must stay updated on legislative changes and understand the impact of international tax treaties,..., lawyers, and accountants to report to national tax authorities.

Scope and Key Requirements of Directive 2018/822

DAC6 outlines a range of tax arrangements that must be reported if they exhibit certain “hallmarks” linked to tax advantages, such as cross-border tax benefits and transactions lacking a clear economic rationale. The directive requires Member States to exchange this information, enabling EU countries to monitor cross-border tax planningTax planning is the process of organising and structuring one’s financial affairs in a manner that legally minimises tax liabilities while ensuring compliance with relevant tax laws. The primary objective of tax planning is to reduce the amount of taxes paid, optimise the use of available tax benefits, and preserve wealth. It can be applied at various levels, including personal..., prevent tax base erosionTax Base Erosion refers to the process through which a country’s taxable income base is reduced due to the shifting or minimising of income, often by multinational entities (MNEs). This can occur via several mechanisms, such as transfer pricing, income shifting, and utilising tax incentives. Erosion of the tax base impacts national revenue, reducing the funds available for public spending..., and harmonise responses to aggressive tax planningAggressive tax planning (ATP) refers to strategies employed by individuals or corporations to minimise their tax liabilities, often by exploiting legal loopholes, discrepancies between tax jurisdictions, or complex structures in tax law. While not always illegal, ATP can push the boundaries of acceptable tax behaviour, as it may compromise the intent of the law. ATP is commonly characterised by arrangements....

• Hallmarks and Cross-Border Criteria: DAC6 categorises reportable tax arrangements based on hallmarks, divided into five categories (A-E), each focusing on a different aspect of tax arrangement characteristics. For instance, hallmark A includes schemes that bypass reporting or exploit confidentiality agreements.
• IntermediariesTax intermediaries are entities or individuals who act as facilitators between taxpayers and tax authorities, assisting with various aspects of tax compliance, planning, and dispute resolution. Their role spans from offering advisory services, ensuring compliance with tax regulations, to supporting clients in filing tax returns and navigating complex tax legislation. These intermediaries often include tax advisors, consultants, lawyers, accountants, and... and Obligations: IntermediariesTax intermediaries are entities or individuals who act as facilitators between taxpayers and tax authorities, assisting with various aspects of tax compliance, planning, and dispute resolution. Their role spans from offering advisory services, ensuring compliance with tax regulations, to supporting clients in filing tax returns and navigating complex tax legislation. These intermediaries often include tax advisors, consultants, lawyers, accountants, and..., or in some cases, the taxpayers themselves, must disclose arrangements within 30 days of their implementation or significant modification.
• Penalties for Non-Compliance: Non-compliance with DAC6 carries penalties that vary by Member State, aimed at enforcing transparent, compliant reporting.

Practical Examples of Directive 2018/822 in Action

Example 1: Intellectual Property (IP) Rights and Tax Advantages

An intermediary structures a cross-border arrangement that allows a multinational to transfer IP rights to a low-tax jurisdiction. DAC6 would likely require reporting due to hallmark C, which involves cross-border payments between associated enterprises in jurisdictions with beneficial tax regimes. The intermediary must disclose the arrangement if there is potential for tax base erosionTax Base Erosion refers to the process through which a country’s taxable income base is reduced due to the shifting or minimising of income, often by multinational entities (MNEs). This can occur via several mechanisms, such as transfer pricing, income shifting, and utilising tax incentives. Erosion of the tax base impacts national revenue, reducing the funds available for public spending... in the Member State of the IP’s origin.

Example 2: Use of Hybrid Mismatch Arrangements

DAC6 specifically targets “hybrid mismatches,” where a taxpayer utilises differences in national tax rules to achieve tax benefits, such as dual tax deductions. For instance, if a cross-border arrangement allows a deduction in both the Member State and another country, hallmark B would apply. The intermediary would be obligated to report this under DAC6, enabling authorities to assess the arrangement’s impact on tax collection.

Example 3: Circumventing Reporting Requirements in Multiple Jurisdictions

A cross-border arrangement designed to take advantage of confidentiality agreements, ensuring the transaction details remain undisclosed in both Member States, triggers hallmark A. An intermediary using multiple jurisdictions to obfuscate beneficial ownership information must report this under DAC6. This hallmark aids tax authorities in scrutinising tax advantages obtained through secrecy.

Prominent Cases and Judgments on DAC6

Case: Danish Beneficial Ownership Test

One case where DAC6 principles came into play is the “Danish Beneficial Ownership” series, where the European Court of Justice evaluated cross-border dividend payments. Though primarily about beneficial ownership, the judgments highlighted DAC6’s focus on transparency in cross-border arrangements, with Member States leveraging DAC6 hallmarks to increase scrutiny of transactions bypassing reporting requirements.