By Costas Savva and Artemis Loucaidou
Mandatory Disclosure of information has been introduced in the European Union through Directive 2018/822 on Administrative Cooperation, also known as DAC6 (‘Directive’ or ‘DAC6’). This Directive provides for disclosure of “reportable cross-border arrangements” which may constitute aggressive tax planning by “intermediaries” or taxpayers in order to facilitate Exchange of Information and enhance Tax Transparency in the European Union.
On March 18, 2021 the Cyprus Parliament transposed into domestic law the Mutual Assistance Directive (2018/822) through the Administrative Cooperation in the Field of Taxation (Amendment) Law N. 41(I)/2021, amending the Administrative Cooperation in the Field of Taxation Law N. 205(I)/2012 (‘the Law’). The Law is closely aligned with the scope and requirements of the Directive. The scope of the Law relates only to cross-border arrangements reportable if certain characteristics (“hallmarks”) included in the DAC6 are triggered.
According to Article 7D(1)(a) of the Law, reporting must take place within 30 days beginning:
For arrangements which are ready for implementation or have been implemented between July 1st, 2020 and December 31st, 2020 the 30 days begins from January 1st 2021. The first periodic report on general-purpose settings is submitted by April 30, 2021. However, according to the Cyprus Tax Authorities (‘CTA’) announcement of February 26, 2021, no administrative fines will be imposed for late submission of DAC6 information, which will be submitted until June 30, 2021 regarding the following circumstances:
Article 2 of the Law defines a “cross-border arrangement” as: an arrangement concerning either more than one Member State or a Member State and a third country where at least one of the following conditions is met:
An arrangement shall also include a series of arrangements and an arrangement may comprise more than one step or part.
This means that a purely domestic arrangement will not fall within the scope of the Directive whereas a domestic arrangement having tax implications in another jurisdiction (both an EU Member State or a third country) will trigger the reporting obligation.
The primary obligation to report rests with the intermediary. Article 2 of the Law defines an intermediary as:
An intermediary must also meet one of the following additional conditions:
The same conditions are applicable for choosing the Member State in which the reporting will take place.
Tax advisors, accountants, auditors, lawyers and consultants are likely to qualify as intermediaries.
There are two cases where the intermediary does not have to report:
Where the intermediary is exempt from reporting, Article 7D(5)(b) of the Law requires the intermediary to notify another intermediary, or if no other intermediary exists the taxpayer to make the disclosure.
The relevant taxpayer is defined by Article 2 of the Law as any person:
The reporting obligation falls on the relevant taxpayer when:
A cross-border arrangement is reportable if it contains at least one of the hallmarks set out in Annex IV of the Law. A hallmark is defined in Article 2 of the Law as “a characteristic or feature of a cross-border arrangement that presents an indication of a potential risk of tax avoidance”. There are five categories of hallmarks. It is important to note that certain hallmarks are only met if they fulfil the Main Benefit Test (“MBT”).
The MBT is met “if it can be established that the main benefit or one of the main benefits which, having regard to all relevant facts and circumstances, a person may be reasonably expect to derive from an arrangement is the obtaining of a tax advantage”. For the hallmarks not subject to the MBT it means that any arrangement which might not even have tax implications must be reported.
The following table presents the hallmarks and indicates those which must fulfil the MBT.
|A. Generic Hallmarks
|1. taxpayer or participant under confidentiality condition as to how the arrangements secure a tax advantage
|2. intermediary receives performance-based remuneration by reference to the amount of the tax advantage derived or the effectiveness of the arrangement
|3. Standardised documentation and/or structure available to more than one taxpayer without need for substantial customisation
|B. Specific Hallmarks linked to MBT
|1. Participant acquiring loss-making company and using its losses to reduce its tax liability
|2. Arrangement which has the effect of converting income into capital, gifts or a category which is subject to low tax or tax exempt.
|3. Arrangements including circular transactions resulting in round-tripping of funds with no other primary commercial function
|C. Specific Hallmarks related to cross-border transactions
|1. Arrangements involving deductible cross-border payments made between two or more associated enterprises where at least one of the following conditions occurs:
|(a) recipient is not resident for tax purposes in any tax jurisdiction
|(b) although the recipient is resident for tax purposes in any tax jurisdiction, the jurisdiction:
|(i) does not impose any corporate tax, or imposes corporate tax at the rate of zero or almost zero
|(ii) is included in a list of non-cooperative tax jurisdictions
|(c) the payment benefits from full exemption from tax in jurisdiction where recipient is resident for tax purposes
|(d) the payment benefits from a preferential regime in jurisdiction where recipient is resident for tax purposes
|2. deductions for the same depreciation on the asset are claimed in more than one jurisdiction
|3. relief from double taxation in respect of the same item of income or capital is claimed in more than one jurisdiction
|4. Asset transfer arrangement where there is material difference on amount treated as payable in consideration between jurisdictions involved.
|D. Specific Hallmarks concerning AEOI and beneficial ownership (BO)
|1. arrangement which undermines reporting obligation for automatic exchange of Financial Account information. Such arrangements include at least the following:
|(a) use of account/product/investment that does not purport to be a Financial Account but has features substantially similar to those of a Financial Account
|(b) transfer of Financial Accounts or assets to jurisdictions that are not bound by AEOI for Financial Accounts with State of resident of the relevant taxpayer
|(c) reclassification of income and capital into products/payments not subject to AEOI for Financial Accounts
|(d) transfer or conversion of Financial Institution or Financial Account or assets therein into one not subject to reporting under AEOI for Financial Accounts
|(e) use of legal entities/arrangements/structures that eliminate reporting of one or more Account Holders or Controlling Persons under AEOI for Financial Accounts
|(f) arrangements that undermine or exploit weaknesses in due diligence procedures used by Financial Institutions to comply with obligations to report Financial Account information, including use of jurisdictions with inadequate or weak regimes of enforcement of anti-money laundering legislation or with weak transparency requirements or legal persons or legal arrangements
|2. Arrangement involving a non-transparent legal or beneficial ownership chain with the use of persons, legal arrangements or structures:
(a) that do not carry a substantive economic activity supported by adequate staff, equipment, assets and premises; and
(b) that are incorporated, managed, resident, controlled o established in any jurisdiction other that the jurisdiction of residence of one or more of the BOs of the assets held by such persons, legal arrangements or structures; and
(c) where the BOs of such persons, legal arrangements or structures as defined in Directive 2015/849, are made unidentifiable.
|E. Specific Hallmarks Concerning Transfer Pricing
|1. arrangement which involves the use of unilateral safe harbour rules
|2. arrangement involving the transfer of hard-to-value intangibles.
|3. arrangement involving an intragroup cross-border transfer of functions and/or risks and/or assets, if the projected actual earning before interest and taxes (EBIT), during the three-year period after the transfer, of the transferor or transferors, are less that 50% of the projected annual EBIT of such transferor or transferors if the transfer had not been made.
The following are examples of common structures that are potentially reportable:
Example 1: Contribution of an interest-bearing receivable
Example 2: Lending of securities
Example 3: Debt/Equity Swap
Example 4: circular transactions with no commercial function
Examples 5-8: deductible cross border payments between associated persons
Example 9: Double Tax Relief claimed in more than one jurisdiction
Example 10: Deductions for depreciation claimed in more than one jurisdiction.
Example 11: Arrangements involving the use of unilateral transfer pricing safe harbour rules
Example 12: Asset transfer where amount treated as payable materially different between jurisdictions
 Directive 2018/822 amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements.