Luxembourg Times, May 2019

Tax transparency: additional duties for the Luxembourg financial sector

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A common trend: additional moves towards increased tax transparency

The current tax challenge for financial services operators is certainly additional transparency and reporting duties in the field of taxation. A series of EU Directives on administrative cooperation in tax matters started in 2011 and has generated 6 Directives in a row (also called, in the jargon, “DAC” followed by their number in chronological order of issuance). The latest move has been DAC 6 EU Directive 2018/822 of 25 May 2018 (hereafter the “Directive” or “DAC 6”).

This Directive follows the same path of increased transparency as its EU DAC predecessors, but this time, in the spirit of identifying specific reportable cross-border arrangements (RCBA) from a tax angle, based on categories of generic and specific hallmarks set in the Directive. They will either automatically generate reporting duties or be reportable only if the main purpose of the arrangement is tax driven. As an example, the transfer of Financial Accounts or assets to, or the use of, jurisdictions that are not bound by the automatic exchange of financial account information with the State of residence of the relevant taxpayer will generate automatic reporting duties by operators qualifying as intermediary under DAC 6.  There are however many other applications in various other situations, as the Directive is very wide in its application, which may also create unexpected instances of reporting.

High vigilance is required due to the penalties at stake which are likely to be severe.

What differentiates the new DAC 6 MDR Directive from the previous Luxembourg AML tax evolution?

Regarding AML tax, additional KYC due diligences already resulted from the AML expansion connected to broadening the definition of tax fraud in Luxembourg law from January 2017.

A key differentiator consists in the scope of targeted behaviours.

The AML tax development covers cases falling directly under the definition of criminal offenses while DAC 6 MDR Directive was designed to capture a series of arrangements set in five categories considered as potentially overly aggressive operations from a tax perspective.

Timing of implementation

Luxembourg must implement DAC6 into domestic law before the end of 2019. While the Directive will generate reporting duties as from summer 2020, there is however an identification duty of targeted arrangements already as from 25 June 2018. For financial services operators, this bears two important messages:

  1. Start early enough: Projects of adaptation of their organization and systems (gap impact assessments, testing, procedures, and training) to comply with the Directive should start now in order not to lose track of reportable arrangements whose implementation began on or after 25 June 2018. Starting too late or waiting too long before the Luxembourg law details becomes fully available or the law comes into force could put intermediaries in a very uncomfortable situation;


  1. Be ready to start with limited guidance and adjust along the way: The homework indeed needs to be performed with a currently relatively low level of guidance. This remains a Directive and the definition of intermediaries, characteristics of reportable arrangements (referred to as “Hallmarks”), arbitration procedures between multiple intermediaries and channels of reporting still need to be further developed in legislation. Luxembourg’s and other EU countries’ legislation may take some time to be issued and could come at a time when it is already quite late for those intermediaries that will not have anticipated the process and put them in a difficult compliance situation.

Accelerators to comply with both AML tax and DAC 6 MDR

While workshops can certainly be made available to better understand both above evolutions and translate them in practical case studies for the front desks and matrices for the back-office teams and IT departments, the heart of the matter will lie in tax impact assessment and testing for an appropriate categorization of reportable structures. Along the way, it will be possible to keep or eliminate some items once a) additional guidance will have been provided on some of the hallmarks and b) more detailed guidance will be available on the precise patterns of activities generating a reporting agent role. The current general wording of the Directive remains open to different interpretations.

Although the full adaptation process may take time, there are compliance “quick wins” on each of the main pillars (gap assessment testing, procedures and IT adaptation and training) of these new tax challenges.