On 31 March 2021 Cyprus brought into force the Law on Administrative Cooperation in the Field of Taxation 2021 (AC21 Law) consequently transposing the Council Directive EU 2018/822 known as DAC 6. The AC21 Law operates as an amendment to the Law on Administrative Cooperation in the Field of Taxation 2012 and brings Cyprus up to date in the field of mandatory disclosure obligations under EU Law.
It is expected that the Ministry of Finance’s Tax Department will shortly circulate relevant in-depth guidelines, clarifying both the practical application of the AC21 Law as well as the scope of the reporting obligations imposed on the affected parties.
A copy of the AC21 Law is available here.
Recap of DAC 6
DAC 6 requires the mandatory reporting, principally by intermediaries but ultimately by taxpayers, of reportable cross border arrangements (RCBA) and the subsequent automatic exchange of information in relation to those arrangements between EU governments.
A cross border arrangement (CBA) consists of any transaction or structure that has participants either in more than one EU Member State or in an EU Member State and a third country and it is considered as being reportable under DAC 6 if it contains one of the so-called “hallmarks”.
In certain instances, the presence of a “hallmark” alone is not sufficient so as to render a CBA reportable as it also needs to meet the requirements of the “main benefit test” (MBT). This test involves determining whether the main benefit, or one of the main benefits, of the arrangement is a tax advantage.
The hallmarks are divided into 5 categories as follows:
- Category A – these are features of an arrangement that suggest an objective of achieving a tax benefit, namely tax saving confidentiality clauses, fees linked to tax savings, and the use of standardised documentation or structures. Arrangements with these hallmarks will only be reportable if the MBT is satisfied.
- Category B – these are particular types of transactions that are indicative of a tax benefit objective, namely certain acquisitions of loss-making companies, transactions that result in the conversion of income into capital or low or zero taxed income, or circular transactions. Arrangements with these hallmarks will also only be reportable if the MBT is satisfied.
- Category C – these are arrangements that involve a degree of arbitrage in the tax treatment between two jurisdictions and involving associated entities. Some of them will be caught without the need for a main benefit test, for example, where double tax relief or double deductions are available. Others will only be caught if the MBT is also satisfied, for example where a tax deduction is available but the income is not taxed.
- Category D – these are arrangements that have features that indicate an undermining of Common Reporting Standard (CRS) objectives or the disguising of the beneficial owner of a structure. As the category suggests, obtaining a tax benefit is not a required feature for the arrangement to be reportable.
- Category E – these are hallmarks that arise in a transfer pricing context, such as the use of unilateral safe harbour rules or the transfer of hard-to-value intangibles, or intragroup transfers of activities or assets resulting in a 50 per cent reduction in the projected annual earnings of the transferor. These will not involve the application of the MBT.
Finally, it is important to note that all pre-existing RCBAs from the publication of DAC 6 in the official journal of the EU (i.e. from 25 June 2018 until 31 May 2021) have to be reported by 30 June 2021 so as not to incur an administrative fine. For more on the deadlines, please refer to our previous blog post here.
Any RCBA that takes place from 1 June 2021 onwards, has to be reported within 30 days of its first step of implementation in line with the requirements of DAC 6.