Communication about DAC6 and MDR

All KH Entities: To individuals and Entity clients

Following recommendations by the Organisation for Economic Co-operation and Development (“OECD”) the European Union (“EU”) has introduced new mandatory disclosure rules by means of a modification to the Directive on Administrative Cooperation in direct taxation in the EU (“DAC”). 

The European Directive 2018/822 of 25 May 2018 (hereinafter "DAC 6"), that came into force on 25 June 2018, aims to enable tax authorities of the EU member states to obtain information on arrangements or operations that provide unfair fiscal advantages and thus assist such authorities to fight against harmful and aggressive tax practices.

To help achieve these goals, DAC 6 imposes a new reporting obligation on providers classed as intermediaries such as banks, lawyers, accountants and tax advisers.  

These providers are considered as intermediaries when they are situated in an EU member state and design, promote, implement or are aware of, cross border operations or arrangements creating a potential tax advantage.

The UK had initially committed to implementing the DAC 6 provisions in full, including after leaving the EU. However, they subsequently decided to repeal DAC 6 with effect from 31 December 2020 and replace it with transitional rules similar to the OECD Mandatory Disclosure Rules (“MDR”). This means that Kleinwort Hambros (“KH”) Entities in the UK are only required to report cross border arrangements if they meet hallmarks under Category D, which is limited to arrangements that seek to either circumvent the OECD's Common Reporting Standard (“CRS”) tax information exchange system or conceal beneficial ownership of entities. The Government will also consult on draft legislation to introduce OECD MDR in due course.

Shortly after the UK Government’s announcement, Gibraltar also decided to align its own reporting requirements with the OECD MDR instead of DAC 6. However, the Gibraltar Competent Authority have qualified that reporting standards in respect of Spain may be realigned with DAC 6 in the future, due to Gibraltar's obligations under the Spanish Tax Treaty.

KH Entities based in the Channel Islands are not subject to DAC 6, since the Channel Islands are not part of the EU. However, both Jersey and Guernsey have enacted legislation to implement OECD MDR in 2020, though they are yet to announce a commencement date.

In certain specific circumstances, individual taxpayers may be liable to report cross border arrangements or operations with a tax advantage that they are involved in, part of, or benefiting from. Information to be provided to the tax authorities of the country of tax residence includes: 

•    the taxpayer’s identity;  
•    their country of tax residence; and
•    a description of the reportable arrangements or operations. 

Reportable arrangements or operations from 1 January 2021 must be reported within 30 days of when the arrangement is first provided. 

If you have questions regarding the application of DAC 6, we recommend you contact your personal tax adviser.