Mandatory disclosure rules for cross-border tax advice 'DAC6'

19/12/18

On 19 December 2018, a draft bill has been published by means of which the Netherlands will implement a European directive on the mandatory exchange of information about certain cross-border tax advice (DAC6).

In this article you can read about the Dutch proposal. If you would like to know more about the European DAC6 directive, please click here.

This European directive imposes on tax advisers and other intermediaries who advise on tax the obligation to exchange information with the tax authorities about certain advice. The purpose of this European legislation is to prevent tax evasion. The exchange of information should enable EU member states to adapt their tax laws and regulations to counteract these in itself legal, but undesirable, cross-border tax structures. In addition, this legislation may have a behavioural impact, in the sense that taxpayers may refrain from using constructions that fall within the scope of these mandatory disclosure rules.

The draft bill

In short, the legislation covers all taxes except value added tax (VAT) and excise duties.

Hallmarks

The mandatory exchange of information captures cross-border transactions that meet certain characteristics, the so-called 'hallmarks'. These characteristics are closely defined in the EU Directive and the Netherlands has therefore adopted these characteristics in exactly the same terms in the draft bill. The hallmarks consist of generic characteristics, which relate to the relationship between the 'intermediary' and taxpayer (for example, when an intermediary is entitled to a remuneration depending on the amount of the tax benefit from the construction), and specific characteristics, which relate to substantive aspects of the construction (for example, when a cross-border payment is made to a company that is situated in a country that levies (virtually) no tax).

The Netherlands have chosen not to go further than the EU Directive. For example, no additional hallmarks, apart from those of the directive, have been included in the draft bill.

Terminology

The Dutch implementation also follows the terminology used in the EU Directive. As in the directive, certain terms, such as 'arrangement' or 'intermediary', are deliberately not explained in detail. The intermediary is the one who sets up the construction, thinks it out, etc. The directive aims to discourage certain behaviour. It fits within this objective to refrain from issuing precise definitions and have the intermediaries take their responsibility.

Every 'person' can be an intermediary. In general, tax advisors can be regarded as intermediaries. The draft bill also provides for an answer to the question whether an in-house tax consultant can also be regarded as an intermediary. Who in each individual case is considered as intermediary, depends merely on the employment relationship between an 'intermediary' and the person who actually provides the tax advice. If an in-house tax expert is employed by a relevant taxpayer, then that tax expert himself does not qualify as intermediary, instead his employer is usually deemed to be the intermediary.

Penalties

If it is due to the intent or gross negligence on the part of the intermediary or the relevant taxpayer that the reporting obligations are not fulfilled, have been fulfilled late, are incomplete or incorrect, this constitutes an offence for which an administrative penalty may be imposed of up to EUR 830,000 (amount 1 January 2018).

Reporting obligation upon implementation

The Dutch bill provides a welcome clarification about the concept of the first step of implementation. Cross-border constructions must be reported after this first step. The Dutch draft bill clarifies that there is no reporting obligation for cross-border constructions which, although designed for a specific taxpayer, ultimately do not reach the 'finishing line'. Therefore, if a construction is eventually not implemented by that taxpayer, for example because that taxpayer does not want to carry out transactions that are subject to the mandatory disclosure rules, then the 'design' of the construction itself does not become reportable.

Main benefit test

For several hallmarks, the arrangement only becomes reportable if the so-called 'main benefit test' is also met. The Explanatory Memorandum to the draft bill provides with some explanation of this main benefit test.

The main benefit test is satisfied if, taking into account all relevant facts and circumstances, it can be demonstrated that the most important benefit or one of the most important benefits which can reasonably be expected, consists of a tax benefit. This tax benefit can arise both within and outside the EU. Until this stage, the latter was unclear.
If there are valid sound business reasons for the arrangement in question (without, in addition, one of the reasonably expected most important benefits being a tax benefit), the main benefit test shall not be met.
The main benefit test is also not met if the benefit in fact consists of the prevention of a tax disadvantage, as for example in the case of the prevention of double taxation. This could acquit for example asset managers offering investment funds.
One specific case that is addressed in the Explanatory Memorandum, is that mortgages with deductible interest in a cross-border situation, do not meet the main benefit test.

Timing and practical information

Cross-border constructions of which the first step in the implementation has been taken between 25 June 2018 and 1 July 2020 and which meet one or more of the hallmarks and (in some cases) meet the Main benefit test, are already within the scope of the reporting obligation (in 2020).

More information about the EU Directive and what the mandatory disclosure rules mean for you, you can find on this page.

The legislative proposal is still in draft; there is an opportunity give input on the proposed legislation until 1 February 2019. After that, the bill will be published in a final form, which then will be debated by the Dutch Parliament.

What does it mean for you?

If you are advised about cross-border transactions with one of the above-mentioned characteristics (“hallmarks”), your adviser may have to exchange information about this transaction with the local tax authorities. In certain cases you will have to make the report yourself, for example if you do not use a tax consultant but do carry out cross-border transactions that meet one or more of the hallmarks. If, in those cases, you do not comply with reporting obligation, you yourself run the risk of being confronted with an administrative penalty. It is not intended to use the information for further investigation of individual taxpayers’ tax position, but it cannot be ruled out that in some situations the Dutch or foreign tax authorities nevertheless ask questions as a result of the information exchanged. Please find more about what the rules mean for you here.