The EU Directive 2018/822 on the mandatory automatic exchange of information in relation to reportable cross-border arrangements was transposed into Luxembourg domestic law by the law of 25 March 2020 (the "DAC 6 Law").
As a reminder, the DAC 6 Law applies to cross-border tax arrangements which (i) concern either more than one EU Member State or an EU Member State and a non-EU country and (ii) fall within the scope of one or more of the defined hallmarks. The DAC 6 Law requires certain intermediaries and taxpayers (in certain circumstances) to report to the Luxembourg Direct Tax Administration (Administration des contributions directes) (“DTA”) any cross-border arrangements which, falling within the scope of the hallmarks and – if applicable – meeting the main benefit test, are considered to be potentially fiscally aggressive.
The DTA has provided guidance regarding the interpretation of certain provisions of the DAC 6 Law, certain terms and definitions used therein, as well as the transmission of information to the DTA. This guidance was updated on 4 May 2022 in the form of “frequently asked questions” (“FAQs”) available on the DTA's website. In this article, we focus on just a few of the key clarifications provided by the FAQs, regarding intermediaries and the DTA’s position on the application of hallmark E3.
Clarifications regarding intermediaries
The FAQs provide useful clarifications regarding intermediaries, (a) on their obligations in case of application of professional secrecy as well as (b) on the distinction between intermediaries qualifying as promoters and those qualifying as simple service providers and on the respective obligations to be fulfilled in both cases (please refer to questions 4.1 and 4.2 of the FAQ).
The DTA’s position on the application of hallmark E3
According to the FAQs cross-border liquidations and mergers should fall under hallmark E3, where these transactions involve a cross-border transfer of functions, risks or assets within the same group and result in a reduction of at least 50% of the annual profit before interests and taxes by the transferor compared to the situation that would have existed if the transaction had not taken place.
The only transactions that would not be relevant for the purpose of hallmark E3 would be transfers of a company’s registered office out of Luxembourg or tax neutral mergers, where a Luxembourg permanent establishment with the same functions, risks and assets would continue to be maintained after the transfer of the registered office or the merger (please refer to question 11.5.2 of the FAQs).
These FAQs provide a welcomed clarification of the DTA’s views, especially as the positions taken were not unanimously shared by legal scholars and/or practitioners.