New mandatory disclosure rules – Directive 2018/822/EU

Tax transparency has been a hot topic on the agenda of governments worldwide following the introduction of anti-avoidance and transparency measures within the European Union.

The EU Economic and Financial Affairs Council reached an agreement, in March 2018, on the final draft of the Council Directive (EU 2018/822) which amends Directive 2011/16/EU on mandatory automatic exchange of information regarding reportable cross border arrangements.

Directive 2018/822/EU (DAC6) introduces a mandatory automatic exchange of information in the field of taxation in relation to reportable cross border arrangements and pursuant to DAC6, on 19 March 2019, the Cypriot Ministry of Finance circulated a draft bill (the Bill) which will be enacted into Cypriot national legislation by 31 December 2019. The Bill adopts the DAC6 and amends the existing Cypriot law on Administrative Cooperation in the field of taxation. Upon enactment of the legislation in Cyprus, guidance notes will be issued by the Cypriot tax authorities.

Pursuant to DAC6, cross border arrangements must be reported, as of July 2020, if they fall within one of a number of categories. These categories are:

  1. commercial characteristics seen in marketed tax avoidance schemes;
  2. structured arrangements seen in avoidance planning;
  3. cross border transactions;
  4. arrangements which challenge tax reporting and transparency; and/or
  5. transfer pricing arrangements which are not at arm’s length.

Categories 1-3 above will apply only in cases where the “main benefit” test threshold is met. The threshold will be met where the tax advantage obtained constitutes the main benefit or one of the main benefits derived from the arrangement.

A number of challenges may arise under the new reporting obligations and determining whether there is a reportable cross border arrangement raises complex technical and procedural issues for taxpayers and intermediaries.

It is expected that the Cypriot Mandatory Disclosure Rules will be fully aligned to the text and the minimum requirements of DAC6. Official guidance will be issued by the Cypriot tax authorities to provide clarification on the interpretation of specific terms and provisions.

If you have questions, please contact Emily Yiolitis, Marisa Efstathiou Petevi or your usual Harneys contact.