On 26 July 2019, the Luxembourg government finally approved the long-awaited bill (the Bill) that transposes the MDR Directive (the Directive) — also known as DAC 6. The Bill is available to the public at the Chamber of Deputies’ website.
It’s the result of the latest EU initiative regarding the automatic exchange of information on tax matters, enforcing mandatory reporting of certain cross-border arrangements. These reporting obligations affect intermediaries (potentially including insurers) — or in some circumstances even taxpayers (potentially including policyholders).
While the Bill’s wording is very similar to the Directive, it requires further review as some vital clarifications are still missing. The Luxembourg insurance sector is especially in need of further guidance, as these new reporting requirements could significantly impact them.
Here are some of the Bill’s key points that are especially relevant to insurers.
Concepts and scope
The Directive’s main concepts — including defining reportable cross-border arrangements, intermediaries, associated enterprises and information to report — were directly transposed into the Bill without any major changes.
Also, the Bill does not exceed the Directive’s minimum requirements.
However, as the Bill’s concepts and terms have a very general and broad definition, insurers are in danger of over-disclosing if they apply the Bill’s wording at face value.
Considering the specifics of the insurance business, practitioners have raised the following concerns:
- It is not clear how the reportable information should be collected, considering that the scope of information collected during sale depends on the distribution channel, e.g. when selling via intermediaries.
- Luxembourg’s insurance business is highly cross-border oriented because of its geographical location and small local market. This may lead to unnecessary over-disclosure considering that the Directive’s main objective is to avoid harmful tax practices.
- The hallmark related to the “standardized documentation” and “conversion of income” requires further guidance, as otherwise it may lead to over-disclosure and create an extensive burden for insurers.
Hallmarks and the main benefit test
Cross-border arrangements are only reportable if they satisfy at least one of the Bill’s definition of a potentially harmful feature — referred to as “hallmarks”.
Similar to the Directive, certain hallmarks are only met if they fulfill the so-called main benefit test (MBT) — more precisely, if the arrangement’s main benefit or one of its main benefits is gaining a tax advantage. The Bill’s MBT definition follows the Directive’s but further clarifies that the MBT takes both EU and non-EU tax advantages into consideration. However, it does not provide any further clarifications regarding hallmarks.
Based on the Bill’s current wording, the insurance sector is likely to be caught out, for example, by the hallmark regarding arrangements that have “substantially standardized documentation and/or structure” or that “have the effect of converting income into capital or income taxed at lower level or exempt from tax”.
Applying the Bill’s hallmarks in an overly strict way and a broad interpretation of the MBT could lead to all life insurance contracts being included. In fact, life insurance contracts could potentially benefit from a favorable tax treatment and the contracts may be viewed as standardized.
Corporate tax returns
Taxpayers will have to reference reportable arrangements in their corporate tax returns.
Ticking a checkbox on corporate tax returns will indicate that reportable arrangements apply to the company filing the return.
An absence of, late or incomplete reporting may mean a fine of up to EUR 250,000.
No grace period or limits on fines are expected for the retroactive reporting period from 25 June 2018 to 30 June 2020.
However, the Bill’s comments state the amount fined will depend on the specific facts and circumstances of the case — i.e. the gravity of the infraction.
The way forward
The Bill must now follow the legislative process. It may be subject to change following the Chamber of Deputies’ discussions or the State Council’s comments.
It is also foreseen that the legislative process will provide further clarifications or if not, the tax authorities will provide them in a circular. However, it is not expected that the circular will be published before the second quarter of 2020.
The Directive must be transposed into Luxembourg law by 31 December 2019 and be generally applied as from 1 July 2020. However, the first reporting period retrospectively covers almost two years as of 25 June 2018. The deadline to file the retrospective report is 31 August 2020.
All new arrangements falling within the scope of MDR and concluded after 1 July 2020 will need to be reported within 30 days.
So, the clock is ticking and insurers need to ready themselves for these new reporting requirements. Don’t get left behind — the time to act is now!