Updated DAC 6 guidance issued by the Luxembourg Tax Authority

Background and summary

The primary objective of DAC 6 is to strengthen tax transparency through a mechanism of mandatory exchange of information on potentially aggressive tax planning arrangements between the EU Member States. 

In order to further clarify the rules concerning the mandatory exchange, the LTA has been updating the FAQ on its website since May 2020.

1. Hallmark C1

Hallmark C1.a

Hallmark C1.a covers arrangements that involve deductible cross-border payments made between two or more associated enterprises where the recipient is not resident for tax purposes in any tax jurisdiction.

The Guidance confirms that a person is considered to be liable to tax (a tax resident) even if the state does not impose any tax. This explanation stems from the definition of tax residence contained in article 4 of the OECD Model Tax Convention.

Hallmark C1.d

Hallmark C1.d refers to arrangements involving deductible cross-border payments made between two or more associated enterprises where the payment benefits from a preferential tax regime in the jurisdiction where the recipient is resident for tax purposes.

Based on the Guidance, this hallmark covers income/gains that are not taxed on the basis of a double tax treaty or a domestic preferential tax regime.

2. Hallmark E3

Hallmark E3 deals with arrangements involving an intragroup cross-border transfer of functions and/or risks and/or assets, if the projected annual earnings before interest and taxes (“EBIT”), during the three-year period after the transfer, of the transferor or transferors, are less than 50% of the projected annual EBIT of such transferor or transferors if the transfer had not been made.

To begin with, the Guidance confirms that a cross-border transfer should be observed from a legal, rather than tax, point of view. Thus, only a change of ownership from a legal point of view would qualify as a transfer for the purposes of the hallmark E3.

It is further confirmed that there should be no cross-border transfer in case of mergers between EU companies where all assets and liabilities remain linked to a permanent establishment (“PE”) of the absorbing company in the tax jurisdiction of the acquired company.

Furthermore, the Guidance specifies that migrations with continuity of legal personality and transfers of the statutory seat are not in scope of hallmark E3. Namely, in these situations, there is no transfer of legal ownership between the transferor and the transferee needed for the application of the hallmark E3. In this context, the Guidance no longer requires the migrating company to keep a PE with the same functions, assets and risks in its country of origin.

Another important clarification concerns the updated definition of EBIT – the result of the financial year (as defined by the standard chart of accounts), increased by interest and tax expenses and decreased by interest and tax income.

As regards the calculation of the EBIT variation (at least 50% over a three-year period is needed in order to meet the hallmark), two different calculations have to be made. The first one refers to the projection of the three-year period without including the cross-border transfer of functions and/or risk and/or assets, while the second calculation should be made taking into account the transfer.

Finally, the projection period of the EBIT to be reported in the DAC 6 declaration can start either on the closing date of the accounting year during which the transfer took place or on the date of the transfer itself.

3. Legal professional privilege and the notification obligation

The Guidance indicates that the notification obligation for intermediaries protected by the legal professional privilege applies subject to the decision of the Court of Justice of the European Union (C-694/20) dated 8 December 2022. Based on this case law, the obligation of a lawyer acting as an intermediary and invoking professional secrecy to notify the reporting obligations without delay to any other intermediary who is not his client is invalid under the Charter of fundamental rights of the European Union.

4. Our observations

• Jean-Nicolas Bourtembourg - Partner, Head of Tax & Transfer Pricing
• Mélina Rondeux - Partner, Tax Compliance