The Mandatory Disclosure Rules (MDR) arose from the ambitious anti-tax avoidance project on Base Erosion and Profit Shifting (BEPS) that the OECD launched in 2015.
The MDR Directive, also known as DAC 6, is the latest EU initiative regarding the automatic exchange of tax information. Aimed at identifying harmful tax practices and further increasing tax transparency, the MDR will affect various intermediaries (including insurers) and their policyholders involved in cross-border arrangements.
Considering that, in 2018, roughly 80% of collected premiums in Luxembourg were derived from life insurance contracts with policyholders outside of the country, the MDR could lead the Luxembourg insurance business to over-disclose.
Below are the five essential questions about the MDR that insurers need an answer to.
1. What are the key dates?
The MDR Directive must be transposed by Luxembourg by 31 December 2019 and will generally be applicable from 1 July 2020 onwards. However, retroactive application is foreseen. This means that intermediaries (or taxpayers) will have to report cross-border arrangements implemented between 25 June 2018 and 1 July 2020. This information must be reported by 31 August 2020.
2. How will it work?
Luxembourg intermediaries (or taxpayers) will have to report predefined cross-border arrangements they assist (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, the Luxembourg Tax Authorities must share this information with all other EU Member States through a centralized database on a quarterly basis. Additionally, some of this information will be disclosed to the EU Commission.
3. Is an insurer an intermediary?
The reporting obligation will apply to all Luxembourg intermediaries unless they are protected by a legal privilege (e.g. attorney–client privilege), assuming this option is in the draft law.
An insurance company can be an intermediary if it is a promoter or service provider of a reportable arrangement.
Regarding the term “promoter,” according to the MDR Directive, 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 a too-broad interpretation of specific hallmarks and the so-called main benefit test might result in over-disclosure. Indeed, any type of life insurance products could be reported, given their favorable tax treatment in most jurisdictions.
At this point, an insurer may face reporting obligations in these situations:
- reinsurance transactions with low tax jurisdictions
- life-insurance customers referred by banks
- cross-border life-insurance schemes with tax deferral in exit taxes
- insurance portfolio transfers with different considerations
- cross-border ALM
However, these reporting obligations will have to be reviewed once the Luxembourg draft law and corresponding guidance is issued.
4. Which transactions will have 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 MDR Directive. The MDR Directive currently defines these hallmarks, although the transposing jurisdiction may expand on their definitions. As Luxembourg has not published a draft law yet, the MDR Directive hallmarks should be considered when assessing potentially reportable tax arrangements.
Certain hallmarks can only be considered if a main benefit test is also satisfied, for example if the main or one of the main benefits of an arrangement is to obtain a tax advantage.
Insurers should review hallmarks referring to substantially standardized documentation and/or structure. They should also examine hallmarks that focus on converting income into capital or other revenue categories benefitting from a more favorable taxation. Also hallmark D, which deals with the automatic exchange of financial account information, applies to insurers who qualified for Reporting Financial Institution status under CRS.
However, other hallmarks may also apply if the insurer has designed, marketed, organized, or facilitated an arrangement.
5. Are you ready to report?
Considering the above, insurers must take necessary actions to:
- analyze their cross-border business such as life-insurance, reinsurance, captive insurance and non-life insurance to assess any potentially reportable arrangements
- identify potential situations where the insurer acts as an intermediary based on its activity/business model
- identify 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, if relevant) procedures in order to identify potential gaps in information collection required for MDR reporting
- start collecting information for identified reportable arrangements that are put into place as from 25 June 2018
- develop controls/checklists to detect hallmarks
Time is running out—you have a little over 12 months to go before the first reporting deadline—so act now!