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 generic hallmarks, and may include one of the following:
- Acquiring loss-making companies: Trading in loss-making companies to reduce tax liability.
- Income conversion: Conversion of income into lower-taxed revenue streams.
- 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.