Luxembourg Tax Alert 2022-05 - KPMG Luxembourg (2024)

Luxembourg tax authorities issue DAC6 FAQ

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Luxembourg Tax Alert 2022-05

blog postsSébastien Labbé

Partner, Head of Tax

KPMG in Luxembourg

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blog postsJulien Bieber

Partner, Alternative Investments

Concept of intermediary for in-house arrangements

There is in principle no intermediary when a taxpayer implements an arrangement internally.

However, when a tax team employed by an entity of a multinational group designs (without being involved in) a reportable arrangement for another entity of the same group, the entity employing such tax team should be considered as an intermediary.

Proof that an arrangement has been reported elsewhere in the EU and/or by another intermediary or taxpayer

Such proof shall be provided by any means, upon request by the Luxembourg tax authorities.

Providing the arrangement ID (i.e. the initial reporting reference number) shall, in principle, be considered as sufficient evidence.

Declaration in the annual corporate tax return

Referring to a reportable cross-border arrangement only needs to be done by the relevant taxpayer for years during which such arrangement actually creates a tax advantage.

Arrangement made available for implementation

The FAQ reminds that an arrangement made available for implementation needs to be reported, even in cases where the arrangement is not actually implemented.

Main Benefit Test (“MBT”)

A tax advantage is the main benefit of an arrangement if there are no reasons for the implementation of the latter, other than obtaining a tax advantage or avoiding a tax liability.
Where commercial reasons are invoked, the tax advantage is also considered to be the main benefit of an arrangement if these commercial reasons do not present a sufficient economic benefit beyond the mere tax advantage obtained.

The FAQ also refers to the parliamentary comments of the DAC6 law and states that the MBT should not be met when the tax advantage obtained through the arrangement is consistent with the objective or purpose of the applicable legislation, and in line with the intention of the legislator.

To determine whether the MBT is met, the relevant hallmark must also be taken into account . However, the MBT is not met by the sole fact that the conditions of a given hallmark are met.

Hallmark B.2 – conversion of income

A conversion of income may take place in the hands of the payer or the beneficiary, or both.

The tax advantage resulting from the conversion should be assessed in the hands of the beneficiary of the income only. However, such advantage must consider the taxation of a same entity in several countries (i.e., the tax advantage of the conversion may be anywhere).

Hallmark C.1 – cross-border deductible payment between associated enterprises

Hallmark C.1.a) targets cases where the recipient of the payment is not tax resident anywhere, based on the concept of tax residence defined by the relevant double tax treaty or, in the absence of such treaty, the OECD model tax convention.

When a payment is made to a tax transparent entity, the latter should be regarded as look-through, and the payment should be regarded as made directly to the investors of such entity.

The entity will, however, be considered as the beneficiary of the payment if it is not considered as tax transparent in its jurisdiction of establishment due to application of anti-abuse rules.

Hallmark D.1 - arrangements which may have the effect of undermining reporting obligations under laws or agreements on the automatic exchange of financial account information

Hallmark D.1 should not take into account the intention or absence of intention of the relevant taxpayer to infringe rules on the automatic exchange of information.

Hallmark E.3 – intragroup cross-border transfer reducing the EBIT of the transferor

For the purposes of this hallmark, the EBIT (earnings before interest and taxes) of a company should be understood as its profit of the year (as defined by the standard chart of accounts) plus interest and tax expenses. The profit of the year is the difference between income and expenses as shown in the profit and loss account for the year.

Cross-borders mergers and liquidations should be in scope of hallmark E.3 when they meet the EBIT reduction criteria of such hallmark.

The following situations should in principle not be in the scope of hallmark E.3:

the administrative transfer of the registered office of a Luxembourg company to another EU Member State, while it maintains a permanent establishment in Luxembourg with the same functions and/or risks and/or assets;
a tax-free cross-border merger between EU companies where all assets and liabilities remain linked to a permanent establishment of the absorbing company in the tax jurisdiction of the absorbed company.

What’s next

Subject to further analysis and clarifications, the wide interpretation of some DAC6 concepts and hallmarks by the Luxembourg tax authorities might lead to increased reporting in the coming months and years.

KPMG Luxembourg’s tax professionals are here to assist you regarding any question you may have, as well as help your company to deal with its practical DAC6 obligations (i.e. by providing you with a DAC6 impact assessment, a DAC6 strategy paper or perform your reporting obligations on your behalf).

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Now, let's discuss the concepts mentioned in the article about the Luxembourg tax authorities issuing DAC6 FAQ.

DAC6 Reporting

DAC6 refers to the Directive on Administrative Cooperation in the field of taxation. It aims to enhance tax transparency and combat aggressive tax planning. Under DAC6, intermediaries and taxpayers are required to report certain cross-border arrangements that meet specific hallmarks.

FAQ on DAC6 Reporting

The Luxembourg tax authorities have issued a FAQ document to provide practical guidance and clarifications on the technical aspects of DAC6 reporting. The FAQ covers various topics, including the concept of intermediaries for in-house arrangements, proof of reporting in other EU countries, declaration in the annual corporate tax return, the main benefit test (MBT), and specific hallmarks such as conversion of income, cross-border deductible payments between associated enterprises, arrangements undermining reporting obligations, and intragroup cross-border transfers reducing EBIT.

Intermediaries for In-House Arrangements

According to the FAQ, there is generally no intermediary involved when a taxpayer implements an arrangement internally. However, if a tax team employed by a multinational group designs a reportable arrangement for another entity within the same group, the entity employing the tax team should be considered as an intermediary.

Proof of Reporting in Other EU Countries

The FAQ states that upon request by the Luxembourg tax authorities, taxpayers and intermediaries should provide proof that an arrangement has been reported elsewhere in the EU or by another intermediary or taxpayer. Providing the arrangement ID (initial reporting reference number) is considered sufficient evidence in most cases.

Declaration in the Annual Corporate Tax Return

Referring to a reportable cross-border arrangement in the annual corporate tax return is only required for years in which the arrangement actually creates a tax advantage.

Main Benefit Test (MBT)

The MBT determines whether a tax advantage is the main benefit of an arrangement. The FAQ clarifies that if there are no reasons for implementing an arrangement other than obtaining a tax advantage or avoiding a tax liability, the tax advantage is considered the main benefit. Even if commercial reasons are invoked, the tax advantage is still considered the main benefit if those commercial reasons do not provide sufficient economic benefits beyond the tax advantage. The relevant hallmark must also be taken into account when determining whether the MBT is met.

Specific Hallmarks

The FAQ provides clarifications on several specific hallmarks:

Hallmark B.2: Conversion of Income - The tax advantage resulting from the conversion should be assessed in the hands of the beneficiary of the income.
Hallmark C.1: Cross-border Deductible Payment between Associated Enterprises - Cases where the recipient of the payment is not tax resident anywhere are targeted. When a payment is made to a tax transparent entity, it is regarded as made directly to the investors of that entity, unless anti-abuse rules apply.
Hallmark D.1: Arrangements Undermining Reporting Obligations - The intention or absence of intention of the taxpayer to infringe rules on the automatic exchange of information should not be taken into account.
Hallmark E.3: Intragroup Cross-border Transfer Reducing EBIT - The EBIT of a company is defined as its profit of the year plus interest and tax expenses. Cross-border mergers and liquidations meeting the EBIT reduction criteria are within the scope of this hallmark, while certain administrative transfers and tax-free cross-border mergers may not be.

Future Implications

The wide interpretation of DAC6 concepts and hallmarks by the Luxembourg tax authorities may lead to increased reporting in the coming months and years. Tax professionals, such as those at KPMG Luxembourg, can assist companies in understanding and fulfilling their DAC6 obligations.

Please note that the information provided above is based on the snippets from the search results. If you require more specific details or have further questions, feel free to ask!