1. Purpose of this position paper
The Mandatory Disclosure Regime (“MDR”) has been implemented by the Luxembourg legislator by means of the Law of 25 March 2020 (the “MDR Law”) in accordance with the Council Directive (EU) 2018/822 of 25 May 2018 as regards mandatory exchange of information in the field of taxation in relation to reportable cross-border arrangements (1) (“DAC 6”). The wording of the MDR Law largely resembles the wording of DAC 6. The Luxembourg Tax Authorities also issued guidance in the form of Frequently Asked Questions (“FAQ”) which was first issued in May 2022 and is regularly updated.
The main purpose of the MDR is to increase transparency by providing tax authorities with early information regarding potentially aggressive or abusive tax planning schemes and to identify the promoters and users of those schemes.
The reporting responsibilities under the MDR generally rest with the so-called intermediaries based on the MDR Law definition (that can be, among others, tax advisers, lawyers and other service providers involved in the design or implementation of cross-border arrangements).
Luxembourg Alternative Administrators (2) frequently assist investors and fund managers with respect to the implementation and management of international investments. Here, it is imperative to consider potential reporting obligations and to help clients complying with their obligations under the MDR in Luxembourg and other EU Member States.
The purpose of this position paper is:
(i) Providing an overview of the MDR system;
(ii) Defining the concept of intermediaries and considering the role of Alternative Administrators; and
(iii) Providing guidance on best practices as to how Alternative Administrators may ensure compliance with the MDR.
This paper is the abridged version of the L3A position paper entitled “The role of Alternative Administrators in the System of the Mandatory Disclosure Regime (DAC 6)”. For more information on sections 2, 3 and 4, please refer to the unabridged version that can be found on the website of L3A.
2. The Mandatory Disclosure Regime (DAC 6)
Cross-border arrangements that come within the scope of at least one of the hallmarks defined in the Appendix to the MDR Law may need to be reported under the MDR.
The reporting regime further limits the number of reportable cross-border arrangements through the adoption of a threshold condition (that is the main benefit test, “MBT”). This means that many of the hallmarks only trigger a reporting obligation to the extent an arrangement meets the MBT (i.e. the main benefit or one of the main benefits of the arrangement is a tax advantage), reducing the risk of excessive or defensive filings.
In terms of relevant taxes, the MDR applies to all taxes of any kind levied by, or on behalf of, an EU Member State or the Member State’s territorial or administrative subdivisions, including the local authorities. The MDR does not, however, apply to value added tax and customs duties, compulsory social security contributions or to excise duties covered by other Union legislation on administrative cooperation between Member States.
For more information on the MDR, please refer to the unabridged version of this L3A position paper.
3. Intermediaries
An intermediary is defined as any person that designs, markets, organises or makes available for implementation or manages the implementation of a reportable cross-border arrangement. The MDR Law further extends the circle of intermediaries to “any persons that know, or could be reasonably expected to know that they have undertaken to provide, directly or by means of other persons’, aid, assistance or advice with respect to designing, marketing, organising, making available for implementation or managing the implementation of a reportable cross border arrangement”. (3)
The definition of intermediaries thus envisages two distinct types of intermediaries: (i) those who design, market, organise, make available for implementation or manage the implementation of a reportable cross-border arrangements (that are “primary intermediaries”), and (ii) those who undertake to provide aid, assistance or advice in relation to the designing, marketing, organising or implementing of a reportable cross-border arrangement (that are “secondary intermediaries”).
Alternative Administrators regulated by the CSSF should generally not be primary intermediaries as the range of services cannot comprise tax advisory services. However, when Alternative Administrators are involved in the implementation of investments, they may be a secondary intermediary.
According to the MDR Law, any person shall have the right to provide evidence that such person did not know and could not reasonably be expected to know that that person was involved in a reportable cross-border arrangement (that is the knowledge test). (4)
For more information on the MDR, please refer to the unabridged version of this L3A position paper.
4. Overlapping reporting obligations
When a cross-border arrangement is reportable under the MDR, the broad definition of the term intermediary will likely result in overlapping reporting obligations.
In addition, there might be overlapping reporting obligations of Luxembourg intermediaries and intermediaries that are resident in other EU Member States (given that there must be a cross-border dimension for an arrangement to fall within the scope of the MDR). Here, it is important for taxpayers to coordinate the different intermediaries with a view to avoid multiple reports regarding the same arrangement.5
When no intermediary is involved or the intermediaries that are involved may not report in accordance with professional secrecy rules, the reporting obligations are shifted to the relevant taxpayer. Here, the MDR also provides for rules that are meant to avoid multiple reports.
For more information on the MDR, please refer to the unabridged version of this L3A position paper.
5. Best practice
5.1. Overview
Potential reporting obligations under the MDR are an integral part of every tax analysis and should be considered at an early stage. This ensures that taxpayers can consider potential reporting obligations in their decisions as to whether or not to implement a certain cross-border arrangement. This on its own achieves the desired deterrence effect as both intermediaries and taxpayers will need to carefully consider potential reporting obligations.
The MDR introduced some vague definitions and concepts that can, at times, make it difficult for practitioners to determine whether a specific cross-border arrangement is reportable, all the more for Alternative Administrators that are not per se international tax specialists.
Given that Alternative Administrators are involved in a large number of cross-border arrangements, it is crucial to allocate appropriate resources to ensure compliance with the MDR. This section includes best practice recommendations for Alternative Administrators.
5.2. The role of Alternative Administrators
The role of Alternative Administrators in the system of the MDR is not always clear. While Alternative Administrators should generally not come within the definition of primary intermediaries, they may be secondary intermediaries depending on their involvement.
In many cases, Alternative Administrators may not pass the knowledge test when operating in their ordinary course of business (for example, when taking care of the accounting only). However, as this might often be a bit of a grey area and may change as the cross-border arrangement is implemented, it would be wise to consider potential reporting obligations systematically.
Considering that Alternative Administrators are not per se tax specialists and may not have all the information necessary to perform the MDR analysis, it might be a reasonable approach for the taxpayer to appoint a primary intermediary to perform the MDR analysis. Given that there will typically be several intermediaries involved in Luxembourg (and other EU Member States), such centralized approach would also be the most cost efficient. Thereafter, the MDR analysis should be shared with all parties that may be intermediaries within the meaning of the MDR.
When employees of Alternative Administrators are appointed to the board of directors of Luxembourg companies and as such involved in the implementation of cross-border arrangements, no reporting obligations should automatically arise for the Alternative Administrator. However, such directors may have reporting obligations in their capacity as a representative of the company when the reporting obligations are shifted to the taxpayer. In these circumstances, it might make sense to raise awareness about the obligations under the MDR and coordinate the MDR analysis between the primary intermediary and the other (potential) intermediaries involved.
5.3. Implementing a MDR policy and training of staff
The significant involvement of Alternative Administrators in the implementation of cross-border arrangements requires the adoption of a robust MDR process that should be documented in a MDR policy and systematically followed in practice.
The MDR policy should define the roles and responsibilities of the employees, the approach towards MDR compliance, the IT infrastructure that should be used to perform/store the MDR analysis and the training of staff.
While Alternative Administrators generally do not render (international) tax advisory services and the staff of Alternative Administrators likely does not have a tax background, it is crucial to raise awareness about the scope and mechanism of the MDR, and the MDR process implemented by the Alternative Administrator.
As a best practice, and considering the importance of the matter, MDR trainings should at least take place on an annual basis and the attendance of the staff to these trainings should be properly documented.
5.4. Assisting clients
The broad definition of the term intermediary will likely result in (potential) overlapping reporting obligations (in Luxembourg and abroad).
When an arrangement is not reportable, it should be ensured that none of the intermediaries files a report. When a cross-border arrangement is not reportable under the MDR, taxpayers should consider, as a best practice, to have this point being analysed and documented by one of the primary intermediaries involved that should have a full understanding of the tax effects of the cross-border arrangement. This would prove that the taxpayer has carefully considered the potential obligations under the MDR. Moreover, other intermediaries may reasonably rely on such analysis without blindly accepting the result of the analysis.
When a cross-border arrangement is reportable, only one report should be filed in order to avoid multiple reporting of the same arrangement. Here, several provisions of the MDR Law should ensure that only one intermediary or, as the case may be, one taxpayer reports the cross-border arrangement.
Importantly, it does not suffice to prove that another intermediary has committed to do the reporting but it is necessary to prove the effective reporting by another intermediary. (6)
This obviously requires a certain extent of coordination between the advisers in order to determine whether or not a cross- border arrangement is reportable and, if so, only one intermediary files a report so as to avoid multiple filings in relation to the same arrangement.
While the exact role of Alternative Administrators is not always clear, compliance with the MDR must be ensured and given the involvement and relationship with its clients, Alternative Administrators should play a key role in making clients aware of the requirements under the MDR and assist clients with the management and coordination of potential reporting obligations. For taxpayers, it is important that the reporting in Luxembourg and across EU Member States is as consistent as possible.
Given that only the taxpayer should know all the potential intermediaries involved, it will likely be the taxpayer that takes over this coordination role; in particular, when arrangements concern two or more EU Member States.
A pragmatic approach for Alternative Administrators would be to assist clients with the coordination of the intermediaries involved, encourage that a primary intermediary is chosen to perform the MDR analysis and that subsequently the approach is shared with and agreed upon by all the parties involved.
5.5. Timing aspects
5.5.1. Reporting period
The earliest event that can realistically trigger a disclosure requirement is the point at which an intermediary makes an arrangement available to a taxpayer. With regard to the timing of the reporting, the MDR Law states that an intermediary has to file information that is within its knowledge, possession or control on reportable cross-border arrangements within 30 days beginning:
a) on the day after the reportable cross-border arrangement is made available for implementation; or
b) on the day after the reportable cross-border arrangement is ready for implementation; or
c) when the first step in the implementation of the reportable cross-border arrangement has been made,
whichever occurs first. (7)
This should generally be the reporting period of primary intermediaries that design, market, organize, make available for implementation or manages the implementation of a reportable cross-border arrangement.
Secondary intermediaries should be required to file information within 30 days beginning on the day after they provided, directly or by means of other persons, aid, assistance or advice.8 Consequently, when different intermediaries are involved, the relevant reporting periods may often vary from one intermediary to another.
In addition, there exists a periodic reporting obligation, every three months, for cross-border arrangements that are to be classified as marketable arrangements. These are defined as arrangements that are designed, marketed, ready for implementation or made available for implementation without a need to be substantially customized. (9)
5.5.2. When should potential reporting obligations be considered?
The analysis of potential reporting obligations should ideally be performed as soon as the implementation of a cross-border arrangement is considered. This should enable intermediaries or, where relevant, taxpayers to comply with the short reporting deadline (if reporting is necessary) and allow taxpayers to take into consideration potential reporting obligations under the MDR before deciding on whether or not a specific cross-border arrangement should be implemented.
The early testing of potential reporting obligations under the MDR will further help achieving one of the main purposes of the MDR, deterrence from cross-border arrangements that may be perceived as tax avoidance by tax authorities. Indeed, it can be expected that taxpayers will think carefully before implementing a reportable cross-border arrangement.
In general, the intermediary that is best placed to perform the MDR analysis is the primary intermediary that proposes a cross-border arrangement. This intermediary should have all relevant information and a good understanding of the (tax) effects of the cross-border arrangement.
Thereafter, the other intermediaries that are likely not tax experts and involved to a lesser extent in the transaction may reasonably rely on this MDR analysis. Nevertheless, secondary intermediaries should not blindly rely on the analysis of another intermediary but have to independently assess whether reporting obligations exist under the MDR.
Alternative Administrators should, when possible, advise clients to consider potential reporting obligations at a very early stage (when a cross-border arrangement is proposed). Should the conclusion be that a cross-border arrangement is not reportable under the MDR, the short reporting deadlines should not be relevant, and it merely needs to be ensured that all the intermediaries in Luxembourg and abroad are informed about the result of the analysis. In these circumstances, it must nonetheless be considered whether subsequent changes to the cross-border arrangement may trigger reporting obligations.
(1) Council Directive (EU) 2018/822 of 25 May 2018 amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements.
(2) Alternative Administrators within the meaning of this position paper provide a wide range of services to alternative investment funds and international investors, may have a PFS licence and do not render tax advisory services.
(3) Article 1 No. 4 of the MDR Law.
(4) Article 1 No. 4 of the MDR Law; See Oliver R. Hoor, “The Mandatory Disclosure Regime in Luxembourg: A practical guide”, 2nd edition, Legitech, 2023, p. 31.
(5) See Oliver R. Hoor, “The Mandatory Disclosure Regime in Luxembourg: A practical guide”, 2nd edition, Legitech, 2023, p. 35.
(6) Article 5 of the MDR Law
(7) Article 2 (1) of the MDR Law.
(8) Article 2 (1) of the MDR Law.
(9) Article 2 (2) of the MDR Law.