The EU introduced a Directive on mandatory disclosure rules aimed at increasing transparency to detect potentially aggressive cross-border tax planning.
Following the adoption of Council Directive (EU) 2018/822 (amending Directive 2011/16/) on the mandatory automatic exchange of Information in the field of taxation in relation to reportable cross-border arrangements (referred to as DAC6 or the Directive), the Republic of Cyprus transposed the EU Directive into domestic law, on 31 March 2021.
Law (L. 41(Ι)/2021, the Law) amending the Law on Administrative Cooperation in the field of Taxation (Law N. 205(I)/2012) was published in the Official Gazette of the Cyprus Republic and entered into force. It is important to note that even though the Law entered into effect as of 1 January 2021, it has retroactive application, being in force as of 25 June 2018.
The aim of the Directive is enabling the EU to prevent harmful tax practises and to close loopholes by enacting legislation or by undertaking adequate risk assessments and carrying out tax audits collectively within its Member-States.
Disclosure of Cross-Border Tax Arrangements
The disclosure applies to any individual, partnership, company or legal entity, operating in the EU or with interest in the EU.
The disclosure is also extended to multinational companies, intermediaries such as law firms, accountants, banks and financial advisors.
DAC6 requires EU intermediaries and taxpayers to submit all relevant information to the Tax Authorities, in relation to cross-border arrangements that meet at least one of the ‘’hallmarks’’ as defined within the Directive.
The retroactive application of the Law, implies that intermediaries and taxpayers must review the necessary information in relation to reportable cross-border arrangements concluded on or after 25 June 2018 provided that one of the prerequisite triggering events is met, to ensure fulfilment with their reporting obligations.
Requirements for Reportable Arrangements
· Cross Border
· One or more of the Hallmarks A-E as listed in Annex IV of the Directive and the Main Benefit Test («MBT»), where applicable
What is a 'Reportable Cross-Border Arrangement' («RCBA») ?
Under Directive (EU) 2018/822, a reportable cross-border arrangement (RCBA) refers to any cross-border tax planning arrangement (concerning two or more EU member states or one EU member state and a third country), which bears one or more of the hallmarks listed in the Directive and concerns at least one EU Member State. The definition of RCBA, included in Article 2 of the Law is aligned with the DAC6 definition.
"Marketable arrangements," are defined in both DAC6 and the Law as "cross-border arrangements that are designed, marketed, ready for implementation or made available for implementation without a need to be substantially customised."
The hallmarks – are features of the arrangement indicating potential tax avoidance. Hallmarks can be divided into those which are subject to the MBT, and those which by themselves trigger a reporting obligation without being subject to the MBT.
Features regarding the automatic exchange of information and beneficial ownership are not subject to the MBT, i.e. in cases where it can be established what the main benefit or one of the main benefits which a person can reasonably expect to derive from the arrangement is.
(One of) the following conditions must be met:
Not all of the participants are tax residents in the same jurisdiction.
Any of the participants holds a dual tax residency.
Any of the participants carries on business in another jurisdiction via a permanent establishment (domestic arrangements are not expressly included).
Any of the participants carries on business in another jurisdiction without a permanent establishment
The transaction could potentially impact the automatic exchange of information or the identification of beneficial ownership.
‘’EU Nexus’’ Main Benefit Test (MBT)
Under DAC 6, this is 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.
The reporting obligations primarily lies with intermediaries. The DAC 6 Law envisages two distinct types of intermediaries. Primary Intermediaries and Secondary Intermediaries.
The concept of intermediary in not limited to tax experts but may include inter alia lawyers, domiciliation companies, consultants, accountants, banks, insurance companies, management companies or investment managers if they qualify as intermediaries within the meaning of the DAC 6 Law.
Intermediaries should only be exempt from their reporting obligations to the extent they can evidence that the same arrangement has already been reported by another intermediary.
Who is an intermediary / secondary intermediary ?
Intermediaries are broadly defined in Article 3(21) DAC 6 as follows: ‘any person that designs, markets, organises or makes available for implementation or manages the implementation of a reportable cross-border arrangement’. The same definition is adopted within the Law and subsequent Regulations (Κ.Δ.Π. 438/2020) as well.
Under the Directive, intermediaries with EU nexus have the primary obligation to file information with the tax authorities. DAC6 provides for an exemption from reporting for intermediaries and relevant taxpayers, if sufficient proof of reporting of the same information is provided by the other intermediary/relevant taxpayer, as well as an exemption from reporting for intermediaries covered under legal professional privilege (LPP). If there are no other qualifying intermediaries (i.e., EU-nexus intermediaries or intermediaries not covered under LPP), the obligation will be shifted to the relevant taxpayer(s).
Secondary intermediaries are persons (individuals or companies) who provide aid, assistance or advice in relation to the designing, marketing, organizing or implementation of reportable cross-border arrangements, or know, or could reasonably be expected to know, that they have undertaken to provide such aid, assistance or advice. The same definition is adopted within the Law and subsequent Regulations (Κ.Δ.Π. 438/2020) as well.
Note: Opinions regarding whether an arrangement and/or transaction is reportable, does not on its own, create the responsibility to disclose any information. The requirements of an intermediary as defined above, are not met. For such opinion to create disclosure responsibility, it is presumed that the person know or could reasonably be expected to know that he or she have undertaken to provide aid, advice or assistance.
If however, consulting services are provided, including ways to better structure the transaction, this could make the said person to be regarded an intermediary.
Information on RCBA is filled with the CTA through the Government getaway Portal «Ariadni».
Intermediaries and taxpayers are able to register in Ariadni and upon validation, information can be submitted by uploading an XML file. Detailed help and support on how to register and/or upload the relevant information, is found on the CTA website.
Legal Professional Privilege (LPP)
Practicing lawyers are excluded from the obligation to file information to the CTA, where such information fall within the scope of ‘legal professional privilege’.
They must, however, provide within 10 days, any other intermediary involves in the RCBA, or where there is no other intermediary involved, the relevant taxpayer of their reporting obligation. The reporting obligation is shifted to the taxpayer except where the taxpayer explicitly waives its right of confidentiality.
Right to ask for information
The competent authority may require with written notice to receive within 14 days information from the intermediary or the tax payer, so as to ensure compliance with the provisions of the legislation.
Non-compliance with the above disclosure requirements, could result in penalties as high as €20.000 per arrangement, depending on the infringement.
Intermediaries as well as taxpayers engaging in cross-border arrangements should take action and review their procedures and practises to ensure compliance with the new obligations under DAC6 legislation. Following the new disclosure regime applicable, intermediaries and taxpayers must engage in continuously monitoring their disclosure obligations so as to avoid any infringement and penalties, as well as reputational damage.
Extension for Submission of Information
Considering the complexity and uncertainty that remains in the area, as well as delays caused due to the COVID-19 pandemic, the CTA has issued further guidance and clarifications, as well as extending the deadline for compliance – before any administrative fines are issued to those who do not meet the disclosure criteria. The latest extension for overdue submission as published by the Tax Department is until the 30th January 2022, and applies in the following cases:
Reportable cross-border arrangements that have been made between 25 June 2018 and 30 June 2020 and had to be submitted by 28 February 2021.
Reportable cross-border arrangements that had been made between 1 July 2020 and 31 December 2020 and hat to be submitted by 31 January 2021.
Reportable cross-border arrangements made between 1 January 2021 and 31 August 2021, that had to be submitted within 30 days from the date they were made available for implementation or were ready for implementation or the first step in the implementation has been made, whichever occurred first.
Reportable cross-border arrangements for which secondary intermediaries provided aid, assistance or advise, between 1 January 2021 and 31 August 2021 and had to submit information within 30 days beginning on the day after they provided aid, assistance or advise.
Periodic reports for marketable arrangements.