This article was first published in the April edition of the Journal of International Banking and Financial Law.
DAC 6 is a new EU reporting regime targeted at tax-motivated arrangements but framed
much more widely. From July of this year, intermediaries and taxpayers will need to
report cross-border arrangements which bear one or more of a series of prescribed
hallmarks. This includes any transaction entered into since June 25, 2018. Finance parties
may well be within the scope of the regime and thus have an obligation to report. Steps
should be taken to identify historic transactions that need to be reported and to put
processes in place to identify in scope transactions going forward.
What is DAC 6?
Transparency is high on the global
agenda for governments looking
to counter tax avoidance. Attention has
shifted from tax-motivated transactions to
ordinary transactions which may have a tax
effect, even where not driven by tax planning
motives. One result of this in the EU is
Council Directive 2018/822 EU (amending
Directive 2011/16/EU); commonly known
as “DAC 6”.
DAC 6 requires mandatory reporting
of cross-border arrangements when they
involve at least one EU member state
and bear one or more of a number of
“hallmarks”. The UK is to implement the
regime regardless of Brexit.
The potential breadth of the
arrangements picked up by the Directive
and the fact that it is not limited to taxmotivated transactions means that it
presents a considerable compliance challenge
for those within its scope.
Will finance parties have obligations under the regime
The obligation to report under DAC 6
primarily falls on “intermediaries”. An
intermediary is any person who:
- designs, markets, organises, makes
available or implements a reportable
- who assists with reportable activities
and knows or could reasonably have been
expected to know that they are doing so.
In the UK the former are referred to as
“promoters” with the latter referred to as
The broad scope of the definition means
that a large number of those involved are
potentially “intermediaries”. Those caught
include consultants, accountants, financial
advisers, lawyers (including in-house
counsel), banks, trust companies, insurance
intermediaries, holding companies and group
Looking at finance parties, “promoters”
would seem likely to include the corporate
finance advisor on an M&A deal, the sponsor
on a listed transaction or any bank involved
in marketing or arranging any structured
arrangements. “Service providers” is much
wider and could cover a bank whose only
involvement with a transaction is the
provision of third-party financing.
A single transaction may therefore
involve many intermediaries. Take for
example a leveraged M&A transaction
where the intermediaries involved would
include the investment bank co-ordinating
the deal, lawyers, accountants, corporate
services companies, holding and group
treasury companies, as well as the lenders
involved in any acquisition financing as
“service provider” intermediaries.
There is a difference in how “promoters”
and “service providers” are treated under DAC
6 as “service providers” will not be considered
to be intermediaries if they did not know, and
could not reasonably have been expected to
know, that they were involved in a reportable
arrangement. The UK in its guidance to
date states that a lending bank would not
be expected to make a disclosure if it does
not have sufficient knowledge of the wider
arrangements and, crucially, of whether any
hallmark is triggered. However, in practice,
a lending bank may not be able to prove its
lack of knowledge especially if structure
papers or tax reports are part of its credit
In determining whether a service provider
could “reasonably be expected to know” a
hallmark applies, service providers are not
expected to have performed additional due
diligence beyond what is normal, taking into
account the regulatory landscape, for the
client in question. A bank that takes steps
to remain wilfully ignorant by intentionally
avoiding asking questions about the
underlying transaction may well still meet the
knowledge test by virtue of this limb.
A lender may then find out that their
financing into a structure is going to be
used to make a payment to an associated
company, for example, in the Cayman Islands
or Panama. These jurisdictions were added
to the EU blacklist on 18February 2020
and so if the payments are deductible then
the arrangement would be reportable under
hallmark “C” (assuming for these purposes
they remain on the blacklist at the time of
the example arrangement). The lending bank
may have knowledge of this as part of its
due diligence but even if it does not, to argue
that there is no reporting obligation for the
lending bank would require reliance on not
reasonably being expected to know that the
hallmark was met – not necessarily
a comfortable position to be in.
There is no equivalent knowledge defence
for “promoters” so, for those financial
entities who are actively involved in putting together a transaction, it is assumed that
they will have an understanding of how the
transaction works and what its effect will be.
Taking the example of deductible payments
to blacklisted jurisdictions, an investment
bank organising a deal would be assumed
for the purposes of DAC 6 to know the tax
consequences of the arrangement, ie that the
payments are deductible, even if they did not
have actual knowledge of that fact.
Practically though for both investment
banks co-ordinating a deal and a lender at
the fringes of a transaction the implications
of DAC 6 are similar in that they could both
have reporting obligations. Accordingly,
they will both need to ensure that the
intermediaries involved in a transaction are
clear on who will be reporting and what
they will be reporting as helpfully DAC 6
only requires the relevant information to be
It is also worth flagging that
implementation of the ‘intermediaries’
concept is not aligned in all jurisdictions.
The German implementing law, for
example, does not extend the definition of
“intermediaries” to those who would come
under the UK’s “service providers” definition.
This means that a number of roles carried
out by banks assisting with reportable
transactions may effectively be excluded
from the reporting obligation. Consideration
should be given as to whether and how
this should be reflected in any transaction
What are the hallmarks for arrangements that need to be reported?
Arrangements are only notifiable if they
possess a specified hallmark. Certain of these
hallmarks are subject to a requirement that
the main benefit or one of the main benefits
expected from the arrangement is a tax
advantage (the “main benefit test”). There is
no de minimis value for the arrangements or
level of tax benefit in order for arrangements
to be reportable.
The details of the hallmarks are quite
detailed, but Table 1 overleaf provides a
summary and sets out those which the main
benefit test applies to.
One of the key difficulties facing
intermediaries is in applying these
“hallmarks”. In particular for “promoters”
there is concern around the level of tax
knowledge that is required to determine
whether a hallmark applies. Will an
investment banker, even an extremely
well-informed one, know whether payments
are within a unilateral transfer pricing
safeharbour (hallmark “E”) or involve
deductions in multiple jurisdictions
(hallmark “E”) particularly given that there
is no “main benefit test” qualifier for these.
This, though, is knowledge that will be
assumed for “promoters” in determining
whether they need to report.
A further concern is on the interpretation
of the hallmarks. Hallmark “A”, for example,
refers to standardised documentation or
structures but there is a question over what
constitutes “standardised” – if a particular
structure is commonly used for certain
transactions would this be enough for it to be
considered “standardised”? The UK guidance
suggests that this would not be the case
but other jurisdictions may take a different
approach. Similar concerns arise with respect
to the other hallmarks and while the hope
is that through guidance a sensible and
conformed approach will be taken by EU tax
authorities this cannot be guaranteed.
When are arrangements considered to be cross-border?
An arrangement will be reportable where it
concerns either more than one EU member
state or a member state and a third country
and, in each case, one of a number of other
criteria are met. These criteria include, for
- that not all participants are tax resident
in the same jurisdiction;
- one or more of the participants is
participating in the arrangements
through a permanent establishment; or
- the arrangement has a possible effect on
automatic exchange of information or
identification of beneficial ownership.
The UK has taken the view that for an
arrangement to “concern” a jurisdiction,
it must be of some material relevance to
the jurisdiction: a branch contracting with
entities in the jurisdiction where it is located
will not be entering into a cross-border
arrangement merely by virtue of its head
office jurisdiction. There is no bright line
test: whether an arrangement meets the test
will be a question of fact and degree.
In what jurisdictions do reports need to be made?
Where an intermediary has connections with
more than one EU member state, DAC 6 sets
out a hierarchy to determine where disclosure
should be made. This is determined, in
descending order, by:
- the tax residence of the intermediary;
- the location of the intermediary’s
permanent establishment where this
is connected with the provision of the
- the place of incorporation of the
- the member state of any professional
association with which the intermediary
Applying this hierarchy can give rise
to surprising results. Taking the example
of a UK branch of a French bank – the
UK branch is likely to need to report
transactions arranged in the UK in the
jurisdiction of residence of the bank as a
whole – so France. If, though, the French
implementation of DAC 6 means that the
transaction is not reportable there, the
bank may need to revert to consider the
position in the UK. Even if the arrangement
is reportable in France, the bank may still
need to consider whether the information
requirements of France and the UK are
aligned so that a report made in France
effectively franks the UK obligations.
Who should report?
Where multiple intermediaries are involved
intermediaries will be exempt from the
obligation to file a report if they have evidence
that the information has already been
provided by another party.
Where finance parties are involved in
transactions which may be reportable then
they should ensure that it is clear as to who will report and what they will report and
this should be agreed at an early stage in the
Whilst there is no prescribed hierarchy
as to which intermediary should make
disclosure there is some logic to it being the
intermediary who is most closely involved in
the transaction, thereby effectively franking
the reporting obligation of the other
intermediaries. For finance parties which are
“service providers” it therefore makes sense
to ensure that the “promoter” intermediaries
in the transaction are aware of the need to
analyse whether or not the transaction is
reportable and to file the necessary report.
An important point to note is that if
there are no “intermediaries”, or those
intermediaries are prevented from reporting
(for example, because the information is
covered by legal privilege), the obligation
to report falls on the taxpayer. This could
be relevant where a transaction is being
arranged by a bank as taxpayer without the
involvement of other intermediaries.
Table 1: Summary
||Main benefit test?
seen in marketed tax
|Taxpayer or participant under a confidentiality condition in respect of how the arrangements secure a tax advantage.
|Intermediary paid by reference to the amount of tax saved or whether the scheme is effective.
|Standardised documentation and/or structure.
Tax structured arrangements seen in avoidance planning
|Converting income into capital.
|Circular transactions resulting in the round-tripping of funds with no other primary commercial function.
Cross-border payments, transfers broadly drafted to capture innovative planning but which may pick up many ordinary commercial transactions where there is no main tax benefit.
||Deductible cross-border payment between associated persons …
|to a recipient not resident for tax purposes in any jurisdiction
|to a recipient resident in a 0% or near 0% tax jurisdiction.
|to a recipient resident in a blacklisted country
|the payment is tax exempt in the recipient’s jurisdiction
|the payment benefits from a preferential tax regime in the recipient jurisdiction.
|Double tax relief claimed in more than one jurisdiction in respect of the same income.
|Asset transfer where amount treated as payable materially different between jurisdictions.
Arrangements which undermine tax reporting under the Common Reporting Standard (CRS)/ transparency.
|Arrangements which have the effect of undermining reporting requirements under agreements for the automatic exchange of information.
|Arrangements which obscure beneficial ownership and involve the use of offshore entities and structures with no real substance.
Transfer pricing: non-arm’s length or highly uncertain pricing or base erosive transfers.
|Arrangements involving the use of unilateral transfer pricing safe harbour rules.
|Transfers of hard to value intangibles for which no reliable comparables exist where financial projections or assumptions used in valuation are highly uncertain.
|Cross-border transfer of functions/risks/assets projected to result in a more than 50% decrease in EBIT during the next three-years.
What information must be reported?
The information to be reported is a long
and detailed list including details of all
intermediaries involved and taxpayers
potentially affected; the applicable hallmark(s);
a summary of the arrangement, its value and
details of relevant local laws. The information
reported will then be contributed to a central
directory accessible by member states.
Intermediaries may not be able to disclose
all information that they may have.
DAC 6 is clear that member states can
provide exceptions to the obligation
to report where it would breach legal
professional privilege under domestic
law. Where that is the case, DAC 6
requires intermediaries to notify any other
intermediaries or the relevant taxpayer of
their reporting obligation.
When must the report be made?
EU member states were required to
implement DAC 6 into national legislation
by 31 December 2019 with effect from
1 July 2020. That this was a challenging
timeframe was borne out by the fact that
infringement action is now being taken
against 15 jurisdictions (including the UK,
France and Spain) for failure to implement
the regime in time.
From 1 July 2020, reports will need to
be filed within 30 days of the earlier of the
day on which the arrangement is made
available or ready for implementation and the
day on which the first step in implementation
The Directive also requires reporting of
arrangements dating back to 25 June 2018
(being the date DAC 6 was adopted by the
European Council). Reports for arrangements
entered into between 25 June 2018 and 1 July
2020 must be made by 31 August 2020.
This timetable is set out in Diagram 1 above.
Where the reportable arrangement is
a “marketed arrangement” (marketed tax
schemes which can be implemented with
minimal customisation), there are ongoing
quarterly reporting obligations. In other
cases, there may also be ongoing annual
reporting obligations: the UK regulations
require annual reporting by taxpayers as
long as the identified tax advantage of the
arrangement is continuing.
What are the consequences for failing to comply?
Member states are obliged to impose
“effective, proportionate and dissuasive”
penalties as part of their implementation
of DAC 6. The UK position is that there
will be a £5,000 penalty per breach with
daily penalties of up to £600 per day
charged where reporting failures are
serious: for example, where there is a
repeated or intentional failure to report.
France has proposed penalties of up to
€10,000 per reporting failure, while
Germany has penalties of up to €25,000 and
Luxembourg’s draft legislation provides for
penalties of up to €250,000.
What steps should a finance party be taking?
Finance parties should look back to
arrangements undertaken as principal
or in which they have been involved from
25 June 2018 to see whether any reporting
obligations arise and, if so, how these
obligations will be met.
Going forward, it will be necessary
to ensure that procedures are in place to
identify reportable arrangements and
collect the necessary information to enable
reporting. It would seem sensible for banks
to ensure that there is agreement at the
outset of any transaction with multiple
intermediaries as to which intermediary
will make any necessary report. This is
likely to be the intermediary most closely
involved with facilitating the arrangement
and so in some instances (for example, on
listed transactions, M&A or structured
arrangements) could well be the
Given that there may be different
reporting obligations across jurisdictions
it would also be prudent for finance parties
who are reliant on others reporting to
input into the scope and content of any
report to ensure that it franks their DAC 6
Where it is the bank that is required
to make the report, it will be necessary
to ensure that they have the necessary
permissions from taxpayers to disclose
reportable arrangements and that they are
not reporting privileged information.
The UK has indicated that penalties
will not be imposed where the entity
has “reasonable procedures” in place to
ensure compliance (Germany has also
indicated that robust internal procedures
will be an important factor and other
jurisdictions are expected to adopt a
similar approach). Reasonable procedures
are likely to require training of in-house
teams, ongoing communication with those
teams as guidance becomes available,
implementation of a suitable system to
monitor arrangements and collect relevant
data and consideration of standard and
bespoke terms and conditions with clients
Compliance with DAC 6 is a large
task, both in terms of identifying historic
reportable transactions (to the extent
that this has not already been done) and
ensuring that processes are in place for
compliance going forward. Banks should
not be assuming that they will be compliant
just by virtue of the involvement in their
transactions of other intermediaries such
as lawyers and accountants. Rather they
should be actively monitoring arrangements
to ensure that the necessary reports are
made with respect to any transactions they
are involved with.
- DAC 6 is coming into force in July 2020 but with the reporting obligation applicable to
arrangements entered into from 25 June 2018.
- The regime requires “intermediaries” to report cross-border arrangements which have one
or more prescribed hallmarks.
- What constitutes an intermediary is very widely framed and will likely cover finance
parties even where they are not actively co-ordinating or arranging a transaction.
- Finance parties should consider historic transactions to determine whether these are
reportable and going forward they will need to agree how any reporting obligations will be
met with respect to transactions they are involved in.