Luxembourg implements the Mandatory Disclosure Regime (DAC 6)

What will be the Impact on Private Equity Investments in Luxembourg?

In this article, Oliver R. Hoor provides an overview of the key features of the new mandatory disclosure regime (“MDR”), analyses the mechanism for determining reportable cross-border arrangements and considers the impact of the MDR on private equity investments made from Luxembourg.

1. Introduction

On 8 August 2019, a draft law (the “Draft Law”) implementing the Council Directive (EU) 2018/822 of 25 May 2018 as regards mandatory exchange of information in the field of taxation in relation to reportable cross-border arrangements (“DAC 6”) was submitted by the government to the Luxembourg parliament. As expected, the wording of the Draft Law largely resembles the wording of DAC 6 and the commentaries to the draft law provide only few explanations.

Luxembourg is a prominent financial centre and a major hub for the structuring of Private Equity Investments which are often made via a Luxembourg or foreign fund vehicle and Luxembourg companies that directly or indirectly invest into businesses. It is common knowledge that the investments and business activities of Luxembourg companies often have a cross-border dimension. In all these cases, the question needs to be answered as to whether a particular piece of advice, or involvement in implementation, is reportable under the MDR.

DAC6 has been inspired by the Final Report on Action 12 of the OECD Base Erosion and Profit Shifting (“BEPS”) Project that provides recommendations regarding the design of mandatory disclosure rules for aggressive and abusive transactions, arrangements or structures. However, mandatory disclosure rules are not a new phenomenon. A number of countries including the UK, Ireland, Portugal, the US, Canada, South Korea, Israel and South Africa implemented disclosure regimes with different scopes in the past.

2. Design principles and main objectives of mandatory disclosure rules

According to the Final Report on BEPS Action 12, mandatory disclosure rules should satisfy the following design principles:

  • -such regimes should be clear and easy to understand (a lack of clarity may result in a tax administration receiving poor quality or irrelevant information);
  • they should balance additional compliance costs to taxpayers with the benefits obtained by the tax administration (unnecessary or additional requirements will increase taxpayer costs and may undermine a tax administration’s ability to effectively use the data provided);
  • they should be effective in achieving their objectives and accurately identify the
    schemes to be disclosed (it would be impractical for a mandatory reporting regime to target all transactions that raise tax avoidance concerns and the identification of “hallmarks” is a key factor to setting the scope of the rules);
  • they should be flexible and dynamic enough to allow the tax administration to adjust the system to respond to new risks or carve-out obsolete risks; and
  • they should ensure that information collected is used effectively (requiring the implementation of effective procedures at the level of the tax administration).

It is further stated that mandatory disclosure rules both complement and differ from other types of reporting and disclosure obligations in that they are specifically designed to detect tax planning schemes that exploit vulnerabilities in the tax system, while also providing tax authorities with the flexibility to select thresholds, hallmarks and filters to target transactions of particular interest or perceived areas of risk.

The main purpose of mandatory disclosure rules is to increase transparency by providing tax authorities with early information regarding potentially aggressive or abusive tax planning schemes and to identify the promoters and users of those schemes.

Another objective of mandatory disclosure rules is deterrence as taxpayers may be inclined to keep distance from arrangements that trigger reporting obligations. Likewise, there is pressure on tax intermediaries that in each and every case have to consider whether their advice has to be disclosed or not. Given that mandatory disclosure rules target new and innovative schemes, it is also believed that with timely reported information there will only be limited opportunity to implement schemes before they are closed down.

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