What is DAC6?
The Council Directive (EU) 2018/822 (referred to as DAC6 or the Directive) is a EU directive and a transparency regime that imposes mandatory reporting of EU cross-border arrangements that meet one or more of certain characteristics called Hallmarks. The directive entered into force on 25 of June 2018. The regime's objective is to identify potentially aggressive tax planning schemes that involve EU taxpayers and have a cross-border element.
DAC6 Cyprus Deadline
From 1 January 2021, reportable transactions must be disclosed within 30 days of certain specified events.
The Cyprus Tax Authority has announced its intention to adopt any option to defer the DAC6 reporting deadlines.
- reportable arrangements where implementation starts between 25 June 2018 and 30 June 2020, must be disclosed by 28 February 2021; and
- reportable arrangements where the Bank provided aid, assistance of advice between 1 July 2020 and 31 December 2020, may need to be disclosed by 31 January 2021.
A further extension of the deadline for submission of information to 31 March 2021 was announced in February 2021 by the Ministry of Finance in Cyprus.
DAC6 Cyprus Hallmarks
“Hallmark” is defined in the Directive as a characteristic or feature of a cross-border arrangement that presents an indication of a potential risk of tax avoidance.
There are five categories of the relevant DAC6 Hallmarks in Cyprus, some of which are subject to the Main Benefit Test.
According to the Directive the Main Benefit Test will be satisfied if it can be established that the main benefit or one of the main benefits which, having regard to all relevant facts and circumstances, a person may reasonably expect to derive from an arrangement is the obtaining of a tax advantage.
Category A: Generic Hallmarks linked to Main Benefit Test - these include the following provided that they fulfil the Main Benefit Test
- Confidentiality clause - the clause in question need not contain express non-disclosure language, but merely result in limiting disclosure of the expected tax advantage
- Fees contingent upon successful receipt of tax advantage
- Substantially standardised documentation - the substantiality limit is met if the standardized characteristics affect the document’s (or the structure’s) fundamental design, and are not peripheral to how the arrangement operates
Category B: Specific Hallmarks linked to Main Benefit Test – these include the following provided that they fulfil the Main Benefit Test
- Acquisition of a loss -making company
- Income conversion - example: Share options turn wages into sales proceeds, but remain a legitimate mode of remuneration, not an aggressive tax-planning practice
- Circular transactions without primarily commercial function
Category C: Specific Hallmarks Related to Cross-Border Transactions - where some require the fulfilment of the Main Benefit Test
- Tax-deductible payment to an Associated Enterprise with no tax residency
- Deductible cross-border payments to Associated Enterprises subject (when received) to a zero or almost zero tax rate (subject to Main Benefit Test)
- Tax-deductible payment to an Associated Enterprise resident in an EU/OECD-blacklisted jurisdiction
- Deductible cross-border payments to Associated Enterprises subject (when received) to a full tax exemption (subject to Main Benefit Test)
- Deductible cross-border payments to Associated Enterprises subject (when received) to a preferential tax regime (subject to Main Benefit Test)
- Depreciation on same asset in multiple jurisdiction
- Multiple relief from double taxation
- Transfer of assets with a material difference in the price used for tax purposes
Category D: AEOI / CRS and Beneficial Ownership Hallmarks
- Schemes which may undermine the Common Reporting Standard.
- Schemes involving non-transparent legal or beneficial ownership chain.
Category E: Transfer Pricing Hallmarks
- Use of unilateral safe harbour rules
- Transfer of hard-to value intangibles - Rights in intangible assets, such as a licence or a contractual right to use the asset, also count. “Transfers” should be broadly construed to include changes in activities that result in changes in risk-allocations
- Restructuring resulting in significant profit shifts (50%) following the transfer of functions and/or risks and/or assets between Associated Enterprises
DAC6 Cyprus Reporting Requirements
DAC6 in Cyprus seeks to identify Cyprus-based parties, such as tax advisors, lawyers, asset managers, accountants and fiduciaries, with information about Reportable Cross-Border Arrangements by setting forth two types of qualifying Intermediaries:
Promoters: Any Person that “designs, markets, organizes or makes available for implementation or manages the implementation of” a reportable transaction
Service Providers: Any Person “who provides aid, assistance or advice” (referred to as “Relevant Services”) in connection with the design, marketing, implementation or organization of a reportable transaction
For every Reportable Cross-Border Arrangement, Cyprus-connected parties that qualify as “Intermediaries” with respect to the Arrangement, or the taxpayers affected by it (if no EU Intermediary can), must report the specified information about the transaction and the parties involved in it to the Cyprus Tax Authority within 30 days for exchange on an automatic basis with other EU member states.
Special considerations for Cyprus DAC6 implementation
- Arrangement: where an existing Arrangement is renewed, extended or materially modified, it might be treated as a new Arrangement under DAC6
- Person: careful scrutiny as to when someone is acting in his or her individual capacity and when on behalf of a firm and the reporting consequences resulting from this
- Intermediary: scope of Service Provider-type Intermediary definition limited by detailed ignorance defence and exceptions provided for attorney-client communications per the Cyprus Law on Advocates via the DAC6’s legal professional privilege
- Legal professional privilege is adopted fully as a limitation on the disclosure obligation. LPP in Cyprus is broadly determined in line with English common law principles
- Domestic tax planning arrangements are out of scope. For an arrangement to be caught, it will need to have a cross-border element.
- Direct taxation: for example income tax is relevant for the purposes of determining tax planning arrangements within scope.
- Associated enterprise: the last sections of the guidance notes provide detailed analysis and helpful diagrams in order to identify AEs in various situations
Penalties for non-compliance are at the maximum level of around 20,000 euro per transaction/arrangement. In comparison, other member states are up to six or seven figures.
It is worth mentioning that the good faith effort defense for reporting and penalties is invaluable during the implementation phase of DAC6.
Recent Cyprus DAC6 updates
The Cypriot DAC6 department announced on the 27th July that the first DAC6 reporting deadlines would be extended by six months, in line with the provisions of Directive 2020/876 of 24 June 202.
Further information on the implementation of DAC6 and how tos submit will be provided by the tax department.
On 3 February 2021 a further extension of the deadline for submission of information to 31 March 2021 was announced by the Ministry of Finance in Cyprus.