DAC6 compliance – Category B: Specific hallmarks – which transactions should you be aware of?

On 25 May 2018, the Economic and Financial Affairs Council of the European Union (ECOFIN) adopted the 6th Directive on Administrative Cooperation (the “DAC6”), requiring so-called tax intermediaries to report certain cross-border arrangements that contain at least one of the hallmarks as defined in DAC6.

Within DAC6, there are five different hallmark categories that represent an indication that a transaction may have a potential risk of tax avoidance.

This blog will focus on the category B hallmarks which are classified as specific hallmarks, and may include one of the following:

  1. Acquiring loss-making companies: Trading in loss-making companies to reduce tax liability.
  2. Income conversion: Conversion of income into lower-taxed revenue streams.
  3. Circular transactions: An artificial transaction between companies in a group, or under single control, the purpose of which is to inflate the turnover of one or more of the companies.

It is important to note that each category B hallmark also requires that the main benefit test is met – this is a condition where the main benefit of a transaction is a tax advantage.

An example of a category B hallmark would be if an external advisor of a Cypriot company is given company shares as remuneration. In Cyprus, dividends are not subject to withholding tax and the external advisor is a tax resident of Spain which provides a full exemption from tax from foreign dividends paid to individuals.

DAC6 training and reporting

Failure to report a cross-border transaction under DAC6 will result in effective, proportionate and dissuasive penalties. DAC6 should therefore not be taken lightly. VinciWorks has a DAC6 reporting and training solution to help organisations understand the Directive and efficiently report on their transactions. This includes both an advanced and fundamentals course, as well as a customisable reporting tool to effectively log and track transactions.