Asset Managers: Are you on track to meet the DAC 6 deadline?

in Financial Services, Regulatory/Compliance, Tax, 31.10.2019

Mandatory Disclosure Rules (MDR) emerged following the OECD’s ambitious anti-tax avoidance project on Base Erosion and Profit Shifting (BEPS) launched in 2015.

Also known as DAC 6, it is the latest EU initiative regarding the automatic exchange of tax information. Aimed at identifying harmful tax practices and further increasing tax transparency, MDR will impact various intermediaries (including asset managers) involved in cross-border arrangements, and their investors.

In 2018, roughly 97% of net assets under management in Luxembourg were derived from initiators outside of the Grand Duchy, meaning MDR could lead the Luxembourg fund business to over-disclose.


What Asset Managers Need to Know

1. Key dates

  • 8 August 2019 – Luxembourg issues the draft law transposing the MDR Directive into domestic law
  • 31 December 2019 – deadline for local transposition
  • 1 July 2020 – MDR Directive applicable
  • 31 August 2020 – deadline for reporting of information regarding cross-border arrangements implemented between 25 June 2018 & 1 July 2020

2. How will it work?

Luxembourg intermediaries (or taxpayers) will have to report predefined cross-border arrangements they assist with (or benefit from) if these arrangements satisfy at least one of the features (referred to as “hallmarks”) listed in the MDR Directive.

These arrangements must be reported to the Luxembourg Tax Authorities within 30 days, from the day the arrangement is made available or is ready for implementation by the taxpayer. In turn, on a quarterly basis, the Luxembourg Tax Authorities must share this information through a centralized database with all other EU member states. Some of this information will also be disclosed to the EU Commission.

3. Is an asset manager an intermediary?

The reporting obligation applies to all Luxembourg intermediaries unless they are protected by a legal privilege (e.g. attorney-client privilege), an option (partially) taken by the Luxembourg legislator and further detailed in the draft law.

An asset manager can be an intermediary if it is a promoter or service provider of a reportable arrangement.

Regarding the term promoter, according to the draft law, an intermediary is “any person that designs, markets, organizes or makes available for implementation or manages the implementation of a reportable cross-border arrangement.

Regarding the term service provider, an intermediary also includes “any person that knows or could be reasonably expected to know that they have undertaken to provide aid, assistance or advice with respect to a reportable cross-border arrangement.”

Some practitioners think that a person should only be considered an intermediary if they play an active role in facilitating potentially aggressive tax-planning arrangements. The industry is also concerned that too broad an interpretation of specific hallmarks and the so-called ‘main benefit test’ might result in mass-reporting and significant administrative burden for intermediaries. Indeed, numerous investment products could be reported, given their favorable tax features in most jurisdictions.

In what situations could Asset Managers face reporting obligations?

  • Management of foreign investment vehicles/foreign assets
  • Assistance with alternative investment structures with foreign investors
  • Reclaim of withholding taxes
  • Management of AIFs
  • Management of accumulation funds

The current wording of the draft law does not foresee specific exemptions for the fund industry.

4. Transactions to be reported

The reporting obligation applies to predefined cross-border arrangements involving two or more member states, or a member state and a third country.

An arrangement must be reported if it satisfies at least one of the hallmarks in the draft law.

Certain hallmarks can only be considered if a main benefit test is also met. For example, if one of the main benefits of an arrangement is to obtain a tax advantage, then the said arrangement might become reportable.

Asset managers should review hallmarks referring to substantially standardized documentation and/or structure and to no or low tax jurisdictions. They should also examine hallmarks that focus on converting income into capital or other revenue categories benefitting from a more favorable taxation. Moreover, hallmark D, which deals with the automatic exchange of financial account information, applies to asset managers that qualified for Reporting Financial Institution status under CRS.

However, other hallmarks may also apply if the asset manager has designed, marketed, organized, or facilitated an arrangement.

5. Tick tock!

With less than 12 months to go before the first reporting deadline, asset managers must:

  • Analyze their cross-border business to assess any potentially reportable arrangements
  • Identify potential situations where the asset manager acts as an intermediary based on its activity/business model
  • Identify other intermediaries involved in arrangements
  • Pinpoint affected departments/business lines and organize the systematic collection of reportable information
  • Sensitize affected departments/business lines to the new reporting requirements
  • Review and adapt existing due diligence and reporting procedures
  • Collect information for identified reportable arrangements that are put into place as from 25 June 2018
  • Create controls/checklists to detect hallmarks.

Time is running out! Need help? Get in touch with our team of experts


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