The Directive (EU) 2018/822 expand once more the provisions of the Directive 2011/16/EU - Directive on Administrative Cooperation (DAC), regarding mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements.
The Directive (EU) 2018/822 represents the 6th modification of DAC, and for this purpose it is called DAC6.
DAC6 reflects new initiatives in the field of tax transparency at the level of the EU, through the introduction of an early warning mechanism for tax avoidance schemes.
DAC6 is expected to be enacted in Cyprus within the following months.
The below is a summary of the provisions of the implementation of DAC6 in Cyprus, in accordance to the draft bill circulated by the Cyprus Tax Authorities.
B. WHO WILL REPORT?
Reporting will be done by Intermediaries to National Tax Authorities, or by the Taxpayers in certain cases.
The definition of Intermediary includes:
In order to be considered as an Intermediary falling in the above categories, the person needs to meet at least one of the following additional conditions:
The concept of Taxpayer is defined as any person to whom a reportable cross-border arrangement is made available for implementation, or who is ready to implement a reportable cross-border arrangement or has implemented the first step of such an arrangement.
Reporting will be done by taxpayers only if there is no Intermediary (i.e. the taxpayer designs and implements a scheme in-house) or the Intermediary qualifies for exemption under the confidentiality rule as mentioned below.
The draft bill provides for an exemption on the reporting requirements where the Intermediary is a lawyer who practice the profession as defined in the Lawyers Law and complies to the following requirements:
Legal Professional Privilege: Lawyers may in some situations be exempt from their reporting information if the disclosure of information under DAC6 could be in breach of the legal professional privilege. In such a case, lawyers will have an obligation to notify within 10 days from the triggering event any other intermediary or the taxpayer (if there is no other intermediary), that they will be invoking legal privilege and that the reporting obligation is transferred to the other intermediary of the taxpayer.
D. WHAT SCHEMES ARE REPORTABLE
A scheme or arrangement is reportable if the following apply:
In order for an arrangement to be categorized as cross-border, it must be an arrangement concerning either more than one EU Member State, or a Member State and a third party or country, whereby at least one of the following conditions is met:
F. THE HALLMARKS
The draft bill provides for five specific Hallmarks (i.e. characteristics or features of arrangements) in order to determine whether the cross-border arrangement is reportable or not.
In certain cases, the hallmarks have to satisfy a Main Benefit Test in order to be disclosed to the authorities.
Main Benefit Test is satisfied 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:
The Hallmarks are divided into categories as follows:
Category C: Specific Hallmarks Related to Cross-Border Transactions: these include:
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.
G. SUMMARY OF DISCLOSURE SCENARIOS
H. AUTOMATIC EXCHANGE OF INFORMATION
Automatic exchange of information amongst the relevant Authorities of all the Member States will be carried out through the common communication network (‘CCN’).
Automatic exchange of information by the authorities will occur within one month from the end of the quarter in which the information was submitted or the reporting was made. The first automatic exchange of information shall be made by 30 April 2021.
I. HOW AND WHAT INFORMATION WILL BE DISCLOSED?
It is expected that reporting will be made via a standard prescribed format, and the following details will be included in the mentioned-form:
The lack of response from relevant authorities or tax authorities of a member state against a reportable arrangement does not imply acceptance of the arrangement or its tax treatment.
J. TIME FRAMES AND DEADLINES
The following are some of the salient time-frames that were established via the Directive:
K. CONSEQUENCES OF NON-COMPLIANCE
Failure of compliance to the reporting requirements entails to heavy penalties, depending on the reasoning for such failure.
The penalties are as follows:
The relevant Authorities shall notify the person concerned before imposing the penalty, granting him the right to report/submit information requested within fifteen business days from on the day of notification.
The person concerned has the right to appeal within 30 days from the date of notification of the imposture of penalty.
Where the person concerned does not pay the penalty imposed, or continues the infringement, the penalty may be increased up to the maximum amount of EUR 20,000.
This publication has been prepared as a general guide and for information purposes only. It is not a substitution for professional advice. One must not rely on it without receiving independent advice based on the particular facts of his/her own case. No responsibility can be accepted by the authors or the publishers for any loss occasioned by acting or refraining from acting on the basis of this publication.
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The EU list of non-cooperative jurisdictions for tax purposes as of date of publication of this article are the following: