DAC 6 implementation in Luxembourg: What's important?

What penalties are foreseen?

Any intermediary may be subject to a maximum penalty of EUR 250,000 in case of no, late, incomplete or inaccurate reporting to the Luxembourg tax authorities. Professionals benefitting from a professional secrecy privilege may in addition be subject to the same penalties in case of no or late notification to any other relevant intermediary (itself subject to reporting), and if there is none, the taxpayer itself. As explained by the DAC 6 Bill commentaries, the intentional character of the infringement will be taken into account when determining the amount of penalty to be inflicted. 

Certain considerations need to be made as regards those penalties.

First, the application of the penalty regarding incomplete reporting may leave room for interpretation. Please refer in this respect to our comments under "What information needs to be communicated?".

Second, the maximum amount of the penalty seems very high. Such penalties are considered, according to the DAC 6 Bill commentaries, to be effective, proportionate and dissuasive as requested by DAC 6 and are in line with the penalties foreseen in the Luxembourg laws dealing with FATCA and CRS. However, this approach may be questionable. Indeed, the purpose of the DAC 6 Law seems different to those other laws previously mentioned as it merely aims at getting relevant information of certain tax schemes that may be considered as potentially harmful. Further, those sanctions may be inflicted for persons who may have acted as mere passive Service Providers. Moreover, Luxembourg cross-border arrangements generally involve a certain number of intermediaries; as such, the penalties for each reportable arrangement can get extremely high. Finally, the reporting/notification obligation is applicable per transaction and considering the number of cross-border transactions performed in Luxembourg, the Luxembourg intermediaries may be confronted with a significant exposure to such penalties in case of non-compliance.

Thus, it seems unfortunate that Luxembourg has not taken the same approach of some EU Member States to apply (much) lower penalties in view of the purpose of the DAC 6 Law and to not apply the penalties for the reporting period from 25 June 2018 until 31 December 2019. The latter is even more relevant considering the number of uncertainties included within the DAC 6 Law.

Finally, the consequence of such high penalties will most probably be a systematic reporting by (almost) all intermediaries involved and as such not only create an undesirable administrative burden for the Luxembourg tax authorities but also go against the aim of the DAC 6 Law as such over-reporting will most likely impede the identification of indisputable harmful tax arrangements.

Concluding remarks

Considering certain broad definitions within the DAC 6 Law and the relatively high sanctions included therein, there is currently a high risk of over-declaration, which will not only be burdensome, time-consuming and potentially harmful for the Luxembourg image, but also go against the aim of DAC 6 and thus the DAC 6 Law generally. Indeed, it would have seemed to be more useful for the Luxembourg tax authorities to get information on some limited cases of really aggressive and/or innovative cross-border operations that may go against the purpose of certain tax provisions or flag loopholes in the current legislation. Instead, the Luxembourg tax authorities will have to deal with most probably a very high number of reports and cope with the administrative burden related thereto, resulting in the risk that some of the targeted arrangements may not be discovered, or discovered only after quite some time.

Further, as highlighted throughout our different blog contributions regarding the DAC 6 Law, many grey areas need written clarifications or guidelines to offer the required legal certainty, key concept in all democracy and generally one of the strengths of the Luxembourg legal tax environment.

A detailed summary of the main topics regarding the DAC 6 Law may be found on our Hogan Lovells blog:

  1. What are the origins of DAC 6?
  2. Who needs to report?
  3. To whom needs to be reported?
  4. What kind of arrangements need to be reported?
  5. What information needs to be communicated?
  6. When has the reporting to be made?
  7. What penalties are foreseen?
  8. Concluding remarks

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