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DAC 6: What is it and what are the implications for failing to report?

DAC6 is an EU directive which can require ‘intermediaries’ or taxpayers to disclose cross-border arrangements which exhibit certain ‘hallmarks’, and concern either more than one EU member state or an EU member state and a non-EU country.

The directive requires almost real-time reporting to EU member states for all disclosable transactions going forward, as well as looking back and reporting on transactions since June 2018.

Why are the rules being brought in?

DAC 6 is the latest tool the EU are using to clamp down on perceived tax avoidance and evasion. The aim of the rules is to provide the EU tax authorities, including HM Revenue & Customs (HMRC), with information on tax planning at an earlier stage to improve transparency and fairness in taxation.

What is a cross-border arrangement?

An arrangement is a cross-border one if it contains either:

  • more than one EU member state, or
  • an EU member state and a third country.

And any one of the following conditions is met:

  • not all the participants in the arrangement are resident for tax purposes in the same jurisdiction
  • one or more of the participants in the arrangement is simultaneously resident for tax purposes in more than one jurisdiction
  • one or more of the participants in the arrangement carries on a business in another jurisdiction through a permanent establishment situated in that jurisdiction and the arrangement forms part or the whole of the business of that permanent establishment
  • one or more of the participants in the arrangement carries on an activity in another jurisdiction without being resident for tax purposes or creating a permanent establishment situated in that jurisdiction
  • such an arrangement has a possible impact on the automatic exchange of information or the identification of beneficial ownership.

A cross-border arrangement is reportable if it contains at least one ‘hallmark’.

Hallmarks

There are five categories of hallmark. A number of the hallmarks require the arrangement to meet the ‘main benefit test’ which will broadly apply where the main benefit of the arrangement is to obtain a tax advantage and that advantage is not consistent with the policy objectives of the applicable law. Further detail on the five hallmarks can be found below.

Implications for failing to report

Failing to comply with DAC6 could result in significant penalties under local law in EU countries for businesses, individuals, and intermediaries.

UK changes

Effective from 31 December 2020 (on entering of the Free Trade Agreement with the EU), the Government has completely overhauled the UK regulations implementing DAC 6. As a result, reports will be required less frequently from intermediaries or taxpayers in the UK since only one of the previous five ‘hallmarks’ remains in the regulations, Hallmark D.

Do the UK changes impact the application of DAC6 in the EU?

No, this change does not alter the application of DAC6 in the EU. Reports are still required to be filed.

Would you like to know more?

If you would like to learn more about how Brexit may impact you, please visit our Practical Guidance: Brexit hub here.

And if you have any questions or would like to discuss your specific circumstances, please get in touch with your usual Blick Rothenberg contact or one of the contacts whose details are on this page.