13/12/22

GLOBAL REGULATION: EU's DAC8 will extend tax-ruling disclosure to HNWIs.

As published on step.org/industry-news, Monday 12 December, 2022.

The European Commission (EC) has published the legislative text for its proposed eighth version of the Directive for Administrative Cooperation in taxation (Directive 2011/16/EU, DAC8).

The DAC8 transparency rules were announced in 2020, but suspended due to the COVID-19 pandemic. They will extend the EU's existing automatic exchange of information regime to include advance cross-border rulings used by high-net-worth individuals (HNWIs).

HNWIs will be defined as those who hold at least EUR1 million in investable wealth or assets under management, excluding the individual's main residence. If DAC8 is adopted, Member States will exchange information on the advance cross-border rulings issued, amended or renewed between 1 January 2020 and 31 December 2025.

Not all Member States offer tax rulings for HNWIs and the EC expects the numbers to be relatively limited, but significant from a tax perspective. 'The absence of reporting and exchange of this type of information leaves loopholes that can be exploited for tax evasion and avoidance since rulings for high-net-worth individuals are often related to corporate taxation', it says.

The draft DAC8 also requires financial institutions to report e-money and digital currency transactions to the authorities. All virtual asset service providers, irrespective of their size or location, will have to report crypto-asset transactions for customers resident in the EU. This obligation is in addition to those imposed by the Markets in Crypto-assets Regulation (MiCA) and EU anti-money laundering regulations. MiCA provides the conditions for access to the EU market for crypto-assets, but does not provide a basis for tax authorities to collect and exchange the information that they need in order to tax crypto-asset income. However, it does require crypto-asset service providers to be authorised, so that they can be identified for tax reporting purposes. Moreover, DAC8 will apply to crypto-asset service providers whether they are regulated under MiCA or not.

The EC justifies the extra-territorial reach of DAC8 by noting the risk that EU rules on reporting might otherwise lead crypto-assets service providers located in the EU to move elsewhere. 'The proposal covers businesses that provide their services to EU residents, regardless of where such service providers are located', it says. 'This means that the scope is global and that EU service providers will have nothing to gain from leaving the EU.'

The draft text will be submitted to the European Parliament for consultation and to the European Council of Ministers for adoption. The new reporting requirements with regard to crypto-assets, e-money and digital currencies are expected to enter into force on 1 January 2026.