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Overview
On 25th May 2018, the Economic and Financial Affairs Council (ECOFIN) formally adopted the DAC6 Directive.
The amending law on Administrative Cooperation in the field of taxation in Cyprus (‘’Cyprus law’’) was enacted on 18th March 2021. On 29th October 2021 the regulation Κ.Δ.Π 438/2021 has been issued in the Official Gazette of the Republic of Cyprus, as guidance of the DAC6 Directive.
DAC6 is an EU Directive requiring disclosure to tax authorities of cross-border arrangements entered by taxpayers which fall within certain criteria. The main purpose of DAC6 is to strengthen tax transparency and deter aggressive tax planning.
The term aggressive tax planning is not defined. Instead, reference is made to several predetermined criteria, called ‘’hallmarks’’, which are features that could render a cross-border arrangement to reportable.
DAC6 provides mandatory disclosure of cross-border arrangements by intermediaries or the relevant taxpayers (individuals or companies).
In most cases, cross-border arrangement means an arrangement concerning either more than one Member State or a Member State and a third country, where not all the participants in the arrangement are tax residents in the same jurisdiction.
A cross border arrangement must be reported to the relevant tax authorities if at least one of the hallmarks is met. These hallmarks may be generic or specific. Hallmarks are broadly defined and split into five categories, setting out particular characteristics identified as potentially indicative of aggressive tax planning.
Main Benefit Test (‘’MBT’’)
Hallmarks under Category A, B and b(i), (c) and (d) of Category C may only be taken into account where they fulfill the MBT. The MBT will be satisfied if it can be established that the main benefit or one of the main benefits of the arrangement is the obtaining of a tax advantage.
The MBT is assessed to determine whether the specific hallmarks should be reportable or not.
In assessing the applicability of the MBT, based on the regulation Κ.Δ.Π 438/2021 acting as Cyprus Guidance, the Cyprus Tax Authorities (‘’CTA’’) will consider only EU tax benefits, i.e. when the tax advantage is obtained in a country outside EU, the MBT will not be satisfied.
Implementation timeline
The DAC6 Directive has retrospective effect and covers transactions from 25 June 2018.
Although the first deadline was 31 January 2021, the CTA issued a series of announcements, stating that overdue submissions that will be submitted by 31 January 2022 will not be subject to administrative fines.
Therefore, the deadline for reportable transactions occurred from 25 June 2018 until 31 December 2021 is 31 January 2022.
Reportable transactions occurred thereafter should be reported within 30 days. The 30-day deadline for reporting commences on 1st January 2022.
The relevant taxpayer with whom the reporting obligation lies, shall file the information within 30 days, beginning on the day after the reportable cross-border arrangement is made available for implementation to that relevant taxpayer, or is ready for implementation by the relevant taxpayer, or when the first step in its implementation has been made in relation to the relevant taxpayer, whichever occurs first.
Hallmarks
Annex IV of the Directive and Cyprus law provide the categories and list of the hallmarks which are set out in abstract terms as follows:
A.1 Requirement for confidentiality on how the tax advantage is secured.
A.2 Payment of a premium fee by reference to the tax advantage.
A.3 Substantially standardized documentation and/or structure.
B.1 Acquisition of loss-making company, discontinuation of its main activity and using its losses.
B.2 Converting income into capital/gifts/categories of revenue taxed at lower level or exempted from tax.
B.3 Circular transactions resulting in round tripping of funds with no other primary commercial function.
C.1 Deductible cross-border payments made between two or more associated enterprises, where
(b)(i) The recipient is tax resident in a jurisdiction with no or 0% or <1% corporate tax.
(c) The recipient is tax resident in a jurisdiction where full tax exemption for the payment applies.
(d) The recipient is tax resident in a jurisdiction where preferential tax regime for the payment applies.
Specific hallmarks related to cross border transactions – not linked to the MBT
C.1 Deductible cross-border payments made between two or more associated enterprises, where
(a) The recipient is not tax resident for tax purposes in any tax jurisdiction.
(b)(ii) The recipient is tax resident in a black-listed jurisdiction.
C.2 Deduction of the same depreciation on asset in more than one jurisdiction.
C.3 Double tax relief for the same income/capital is claimed in more than one jurisdiction.
C.4 Transfer of asset where there is a material difference in the amount being treated as payable in consideration for the assets in the jurisdictions involved.
D.1 Undermining the reporting obligation on automatic exchange of financial information
D.2. Arrangements involving non-transparent legal or beneficial ownership chain which
• Do not carry on substantive economic activity,
• Are not in the jurisdiction of the beneficial owner,
• Render the beneficial owner unidentifiable.
E.1 Use of unilateral safe harbour rules.
E.2 Transfer of hard to value intangibles between associated enterprises.
E.3 Intra Group transfer of functions/risks/assets resulting in more than 50% decrease in EBIT of the transferor during the three-year period post the transfer.
How can Taxcom help you
Taxcom comprises the appropriate expertise and resources to assist you to fully comply with DAC6 legislation by helping you to understand DAC6, review arrangements and demonstrate the appropriate steps that should be undertaken to ensure that all reportable cross-border arrangements are identified and managed properly.
Contact us at info@taxcom.cy
