Reporting under DAC 6? A five-step guide for banks

in Regulatory/Compliance, Tax, 23.11.2020

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 / 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 the banking industry, professionals need to assess their individual business model and determine their intermediary status (promoter vs service provider). Here, the scope is broad and ranges from custody and depositary services to investment banking, private banking and succession planning.

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 design of a structured banking product, the management and distribution of said product, as well as routine account opening and custody services. 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 financial 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 banking, given Luxembourg’s largely international exposure and clientele, a large number of transactions might qualify as cross-border arrangements.

Therefore, a detailed analysis of individual arrangements is required in order to limit over-disclosure of routine, non-reportable arrangements.

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 banking industry. A Luxembourg institution opens a bank account for a private equity structure but doesn’t give any further assistance to the account holder with structure or transactions. As part of its regular onboarding due diligence, the bank receives a structure paper detailing the tax treatment for deductible cross-border payments the account holder made to an affiliated company in the Caymans. Here, the bank may have identified an arrangement fulfilling the “deductible payment without appropriate inclusion” hallmark, and it should therefore check if the main benefit test attached to this hallmark is met.

Another example would be a German individual account holder who closes their Luxembourg bank account and requests a transfer of funds to Vietnam. If Vietnam does not exchange financial information with Germany, such a transfer may be reportable, regardless of the main benefit test.

In terms of wealth management, private banking and succession planning, the “conversion of income” hallmark seems to be the most relevant and should therefore be reviewed in more detail.

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 tend to 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:

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

Your first reports are due in less than 3 months, so don’t hesitate to reach out to us to discussion your individual exposure. You can contact me directly on +352 22 51 51 5346 / +352 621 87 5346.