Reporting under DAC 6? A five-step guide for asset managers

in Regulatory/Compliance, Tax, 29.10.2020

The deadlines for DAC 6 are approaching fast.  First reports will be due on 31 January 2021, and retroactive reports stretching back to 25 June 2018 have to be submitted by 28 February 2021.

To avoid common pitfalls, and help you get started, we’ve outlined five key steps to get prepared for reporting.

Step one: Determine your intermediary status

DAC 6 imposes reporting obligations for so-called intermediaries, meaning entities that design, market, organize, make available or manage the implementation of transactions or operations. Intermediaries also refer to entities that advise, assist or provide any kind of aid related to the activities I’ve mentioned.

When it comes to asset management, management companies, portfolio managers, investment advisers, asset servicers and all other professionals need to assess their individual business model and determine their intermediary status (promoter vs service provider).

Reporting requirements aren’t the same for everyone, so it’s important to analyze a number of factors to see what you’re required to do. The key areas to look at when working out the scope of your reporting is your involvement in, knowledge of and active assistance with the fund setup, investment strategy design, and execution and oversight of such strategy. Looking at these areas will give you a good idea of the level of reporting required.

Last but not least, multinational financial groups that offer an extensive set of services – like routine banking, life insurance and fund management – need to pay special attention when determining the status and value chain role within their group. The more activities a group performs, the more complex it is to determine the status and related DAC 6 obligations

Step two: Identify any cross-border arrangements

Once the status is determined (promoter vs. service provider), the next step is to consider cross-border arrangements. DAC 6, as implemented in Luxembourg, focuses solely on arrangements with a cross-border element.

When it comes to asset management, Luxembourg funds with foreign investors may qualify as cross-border arrangements, as well as Luxembourg funds that invest in foreign targets.

Step three: Assess the reportable character of your arrangements

Once cross-border arrangements have been identified, you need to assess if these arrangements need to be reported under DAC 6. This will depend on whether they fulfill one of the hallmarks listed in the regulation and, more importantly, if they pass the main benefit test attached to some of these hallmarks.

Let’s look at some examples from the fund industry. A Luxembourg fund that issues accumulating fund units to foreign investors might fulfill the “conversion of income” hallmark but, generally speaking, wouldn’t satisfy the main benefit test attached to this hallmark.

For securities lending transactions, several hallmarks may be fulfilled. Each transaction should then be reviewed in detail to find out if the main benefit test is fulfilled, and if they should be reported under DAC 6.

Step four: Document your impact assessment

The above steps and actions taken need to be properly documented in relevant impact assessments. These documents will be essential if you’re audited by the tax authorities, and such audits appear to be on the rise.  Audits can cover a number of areas, including written due diligence, appropriate procedures and accurate reporting processes.

Under DAC 6, the tax authorities can impose fines of up to €250 000.

Step five: Adapt your existing compliance framework

Compliance with DAC 6 goes beyond impact assessments and relevant documentation—existing procedures will also need to be adapted. Procedures to review include:

  • investor acceptance procedures including exchange of information;
  • legal documentation including general terms and conditions;
  • training given to business lines; and
  • your DAC 6 governance policy.

Your first reports are due in 3 months, so don’t hesitate to reach out to us and benefit from our market experience. You can contact me directly on +352 22 51 51 5346 or +352 621 87 5346.