What is DAC6?
The 6th Directive on Administrative Cooperation (DAC6), or Directive 2018/822/, obliges intermediaries—including lawyers, accountants, consultants, financial institutions, and service providers—to report advice or implementations of cross-border arrangements that could be considered aggressive tax planning to local tax authorities.
In some cases, this responsibility may fall on the taxpayers themselves.
The directive aims to promote transparency in cross-border transactions and curb tax avoidance within the EU by assessing certain objective indicators, or “hallmarks,” that could signify tax planning schemes.
What Triggers a Reporting Obligation?
Hallmarks are the core indicators used to evaluate whether a cross-border arrangement must be reported.
Some hallmarks require the arrangement to meet the “main benefit test,” which evaluates whether the primary purpose of the arrangement is to gain a tax advantage.
Other hallmarks, which do not rely on the main benefit test, are triggered by specific circumstances that intermediaries are expected to recognise.
ECJ Rulings Impacting DAC6
Several Belgian Bar Associations and the Institute for Accountants and Tax Advisors challenged the implementation of DAC6 in Belgium, leading the Belgian Constitutional Court to seek guidance from the European Court of Justice (ECJ).
The ECJ ruled on these challenges in two landmark cases: on December 8, 2022 (Case C-694/20), and on July 29, 2024 (Case C-623/22).
These rulings addressed issues of non-discrimination, equal treatment, legal certainty, and legal professional privilege. Below are the key takeaways from these decisions:
Lawyers Must Not Report to Other Intermediaries
The ECJ determined that the DAC6 Directive violates the principle of legal professional privilege by requiring lawyers to notify other intermediaries of reportable arrangements.
Under the DAC6 Directive, if a lawyer is exempt from reporting to the tax authorities due to legal professional privilege, they were still expected to notify other intermediaries involved in the arrangement.
However, the ECJ ruled that this undermines the confidentiality of client-lawyer relationships, so lawyers are no longer required to notify other intermediaries.
Legal Professional Privilege Applies Only to Lawyers
While tax consultants, accountants, notaries, and auditors often operate under professional secrecy obligations, the ECJ clarified that the legal professional privilege exemption applies only to lawyers.
This is due to the specific role lawyers play in the judicial systems of Member States. The ruling limits this exemption to legal professionals with specific titles (such as advocaat, solicitor, avocat, barrister, etc.) under Directive 98/5.
Other professionals are still required to inform other intermediaries, though they are exempt from reporting directly to the tax authorities.
Disclosure Extends Beyond Corporate Income Tax
Although DAC6 was initially focused on direct taxes, it is designed to capture a broader scope of aggressive tax planning strategies.
The reporting obligations extend beyond corporate income tax to include other direct and indirect taxes, excluding VAT, customs duties, and excise duties (which are covered under separate EU cooperation laws).
Clear and Precise Definitions
The ECJ confirmed that despite the potential severity of sanctions for non-compliance, the definitions within DAC6 are sufficiently clear and precise.
These definitions were found to be abstract but well-defined for the intended purpose. For instance:
- An “arrangement” is any mechanism or structure designed for tax planning, and it may consist of multiple, coordinated steps implemented across different Member States.
- A “participant in the arrangement” is only the “relevant taxpayer” unless an intermediary is directly involved in the arrangement as a relevant taxpayer.
- A “marketable arrangement” is a standardized, off-the-shelf cross-border arrangement made available to multiple taxpayers, while a “bespoke arrangement” is one that requires customization for individual taxpayers.
- The “main benefit test” compares the value of the expected tax advantage to other benefits of the transaction, using an objective assessment to determine whether tax is the primary motivation for the arrangement.
Day Reporting Period
DAC6 imposes a 30-day reporting obligation on intermediaries.
This period starts from the earliest of three possible events:
- The day after the arrangement is made available for implementation.
- The day after the arrangement is ready for implementation.
- The day after the first step of the arrangement’s implementation.
However, the ECJ clarified that intermediaries who are simply advising on the arrangement—such as lawyers or tax consultants—should report from the time the arrangement moves from the conceptual stage to the operational stage.
For “promotor” intermediaries, this period begins once the arrangement is ready for execution, but for “service provider” intermediaries, their reporting period begins after they complete their advisory role.
Conclusion
DAC6 is a key piece of legislation designed to enhance transparency around cross-border tax planning arrangements.
The rulings by the ECJ reinforce the principle of legal professional privilege for lawyers but limit this exemption to them alone, leaving other professionals subject to reporting obligations.
These decisions have clarified several aspects of DAC6, ensuring that intermediaries are fully aware of their responsibilities and that aggressive tax planning arrangements are reported promptly to the relevant tax authorities.
Final thoughts
If you have any queries about DAC6, or international tax matters in general, then please get in touch.