Definition
DAC6 (Directive 2018/822/EU) is a European Union tax transparency regime requiring mandatory disclosure of certain cross-border arrangements that demonstrate hallmarks of aggressive tax planning, tax evasion, or tax avoidance.
Although DAC6 primarily targets tax compliance, it has profound implications for Anti-Money Laundering (AML) because these arrangements can be used to obscure beneficial ownership, disguise illicit proceeds, or facilitate the movement of funds across borders for unlawful purposes. Thus, DAC6 is a critical tool in the AML arsenal for curbing financial crime, tax evasion, and the misuse of the financial system.
Purpose and Regulatory Basis
Purpose in AML
The principal aim of DAC6 is to increase transparency of cross-border arrangements, enabling tax authorities to detect and respond swiftly to potentially illicit schemes that may be used to move criminal proceeds, evade tax, or circumvent AML safeguards. By mandating the reporting of such arrangements, DAC6 aligns with global efforts to dismantle financial crime networks and protect the integrity of the financial system.
Regulatory Foundation
- EU Legal Framework: DAC6 is the sixth amendment to the Directive on Administrative Cooperation (DAC) in taxation. It applies across all EU Member States and covers most types of direct tax, excluding VAT, customs duties, and social contributions.
- Global Relevance: While DAC6 is an EU-specific regulation, it reflects the guidance of the OECD’s BEPS Action 12 (on mandatory disclosure rules), as well as broader AML efforts such as the FATF Recommendations and the goals of the EU AML Directives (notably AMLD4 and AMLD5).
- Other Regulatory Synergies: DAC6 complements other regulatory efforts like the US Foreign Account Tax Compliance Act (FATCA), the USA PATRIOT Act (for AML obligations), and the ongoing EU drive for beneficial ownership transparency.
When and How DAC6 Applies
Triggers and Use Cases
DAC6 applies when:
- There is a cross-border arrangement involving at least one EU Member State.
- The arrangement exhibits at least one of the directive’s “hallmarks”—objective indicators of possible tax avoidance, AML risk, or regulatory evasion.
- Intermediaries (tax advisors, lawyers, accountants, banks) or, in some cases, the taxpayer must report the arrangement to the appropriate tax authorities.
Example: A law firm structures a financing transaction where profits are routed through multiple jurisdictions, minimizing tax liability and obfuscating the ultimate beneficial owner. If this has features flagged by DAC6 hallmarks, it must be reported.
Real-World Use Cases
- Use of shell companies in different jurisdictions to disguise ultimate ownership.
- Complex loan arrangements between affiliated entities for tax deductions and capital movement.
- Transfers of hard-to-value intangibles between group companies in different countries.
- Transactions that could undermine the reporting of financial account information.
Types or Variants (Classifications)
DAC6 arrangements are categorized by five hallmark groups, each with several sub-categories, targeting different forms of aggressive planning or regulatory circumvention:
| Category | Description | Example |
| A | Generic hallmarks linked to tax advantage (e.g., confidentiality, fee arrangements) | Success fee contingent on tax outcome. |
| B | Specific hallmarks (e.g., acquisition of loss-making companies, income conversion) | Conversion of ordinary income into capital gains. |
| C | Cross-border transactions hallmarks | Deductible cross-border payments to non-taxed jurisdictions. |
| D | Hallmarks related to the automatic exchange of information and beneficial ownership | Structures undermining FATCA, CRS, or beneficial ownership reporting. |
| E | Transfer pricing hallmarks | Transfers of hard-to-value intangibles, restructuring affecting profit allocation. |
Some hallmarks are subject to a Main Benefit Test (MBT): the arrangement is only reportable if its main (or one of the main) benefits is a tax advantage. Others must be reported regardless of intent.
Procedures and Implementation
Institutional Steps for Compliance
- Identification of Arrangements
- Screen transactions for DAC6 hallmarks using robust internal controls and automated tools.
- Maintain a database of hallmarks and keep updated on country-specific nuances.
- Assessment and Documentation
- Assess whether arrangements trigger reporting obligations (consider MBT).
- Document every stage of review, reasoning for decisions, and data collected.
- Reporting
- Submit required information to local tax authorities within 30 days of arrangement’s availability, readiness, or implementation.
- Ongoing Monitoring
- Review arrangements regularly.
- Ensure continuous training of relevant staff, especially as rules and interpretations evolve.
- Record-Keeping
- Retain records of all reportable arrangements and reporting compliance, accessible for audits and regulatory checks.
- Internal Communication
- Establish robust communication and collaboration between compliance, tax, and legal departments.
Technology and Controls
Institutions are encouraged to:
- Deploy workflow automation for seamless identification, assessment, and reporting.
- Use analytical tools to monitor arrangements globally, flag risks, and manage deadlines.
- Standardize data formats and reporting templates to meet jurisdictional requirements.
Impact on Customers/Clients
Rights and Restrictions
- Transparency: Customers whose arrangements are reported may receive notifications or additional queries from their financial institution or intermediary.
- Data Protection: Reporting parties must ensure customer data is treated per GDPR and relevant privacy laws; only required information is disclosed.
- Repercussions: Certain arrangements may become less attractive or available if flagged or reported, potentially affecting client tax strategies and financial plans.
- Interaction: Clients might be required to provide more documentation or justification for cross-border transactions.
Customer Responsibilities
- Must cooperate with intermediaries to provide necessary information for DAC6 assessment.
- Should be aware that failure to comply, or attempts to circumvent reporting (by withholding information or structuring around DAC6), can result in additional scrutiny, penalties, or engagement termination.
Duration, Review, and Resolution
Timeframes
- Reporting Window: Usually 30 days from when an arrangement is made available, ready for implementation, or after its first implementation step.
- Look-back Period: Arrangements from 25 June 2018 onward may require retrospective reporting, particularly for those implemented before the start of local enforcement in each country.
- Review: Institutions must periodically review processes, update training, and adapt systems as regulation and guidance evolve.
Resolution
- Reportable arrangements must be disclosed to authorities, who may take further investigatory or supervisory action.
- Non-compliance can lead to audits, additional information requests, financial penalties, or reputational damage.
Reporting and Compliance Duties
Institutional Responsibilities
- Assess and Report: Intermediaries and, in certain cases, taxpayers must assess and report obligations.
- Content of Report: Reports generally include arrangement details, parties involved, relevant dates, values, jurisdictions, and applicable hallmarks.
- Retention: Maintain evidence of compliance for inspection.
- Penalties: Significant penalties apply for non-compliance, which vary by EU state but can reach millions of euros and encompass criminal sanctions as well as reputational harm.
Documentation
- Maintain comprehensive, auditable records.
- Ensure processes are updated, reviewed, and aligned across all affected business lines.
Related AML Terms and Connections
- Beneficial Ownership: DAC6 aids AML by increasing transparency over beneficial owners, crucial for fighting money laundering.
- Automatic Exchange of Information (AEOI): Strengthens the global network for tax and financial data sharing, making it harder for criminals to hide assets.
- Main Benefit Test (MBT): Links intent (tax advantage) with legal obligations, aligning with the AML focus on intent and risk.
- Hallmarks: Function as “risk indicators” analogous to AML red flags.
Challenges and Best Practices
Common Challenges
- Complexity of Hallmarks: Understanding and applying detailed hallmark criteria in real transactions.
- Data Collection: Aggregating necessary data from various sources and systems across borders.
- Resource Allocation: Training, staffing, and maintaining up-to-date systems.
- Interpretation Differences: National implementation variations leading to inconsistent requirements and uncertainty.
- Client Engagement: Managing client expectations and privacy during reporting processes.
Best Practices
- Adopt comprehensive policies and cross-departmental workflows.
- Implement automated, end-to-end reporting solutions.
- Train staff regularly on evolving DAC6 rules and local adaptations.
- Maintain a central database and audit trail for all reportable arrangements.
- Monitor regulatory updates frequently and adapt quickly.
- Encourage a culture of compliance and proactive identification of potential risks.
Recent Developments
- Refinement of Hallmark Guidance: National tax authorities continue refining interpretations of hallmarks, mainly through FAQs and regulatory updates.
- Technology Adoption: Increasing reliance on workflow automation, AI-driven analytics, and holistic compliance platforms to streamline DAC6 obligations.
- Interaction with Global AML Trends: DAC6’s focus on information exchange and beneficial ownership overlaps critically with AMLD6, FATF 2023 guidance, and emerging digital asset compliance.
- Regulatory Reviews: EU authorities and stakeholders periodically review DAC6 to determine its effectiveness and potential expansion, responding to feedback and practical challenges.
DAC6 represents a significant stride toward integrating tax transparency and anti-money laundering in the EU regulatory landscape. Its mandatory disclosure system casts a wide net over cross-border arrangements, equipping authorities with vital intelligence to fight financial crime, protect tax revenue, and enhance transparency. For financial institutions and compliance professionals, robust DAC6 compliance is not only a regulatory obligation but also a best practice aligned with global AML standards and the defense against criminal exploitation of the financial system. Institutions are advised to maintain vigilance, invest in capable systems, and nurture a culture of compliance to meet DAC6 and broader AML expectations