The deadlines for DAC 6 are approaching fast. First reports will be due on 31 January 2021, and retroactive reports stretching back to 25 June 2018 have to be submitted by 28 February 2021.
To avoid common pitfalls, and help you get started, we’ve outlined five key steps to get prepared for reporting.
Step one: Determine your intermediary status
DAC 6 imposes reporting obligations for so-called intermediaries, meaning entities that design, market, organize, make available or manage the implementation of transactions / operations. Intermediaries also refer to entities that advise, assist or provide any kind of aid related to the activities I’ve mentioned.
When it comes to the insurance industry, life-insurers, P&C insurers, reinsurance companies, captives, brokers, as well other professionals need to assess their individual business model and determine their intermediary status (promoter vs service provider).
Reporting requirements aren’t the same for everyone, so it’s important to analyze a number of factors to see what you’re required to do. The key areas to look at when working out the scope of your reporting is your involvement in, knowledge of and active assistance with the design of the life-insurance policy, management and distribution of said policy as well as reinsurance of risk portfolios. Looking at these areas will give you a good idea of the level of reporting required.
Last but not least, multinational financial groups that offer an extensive set of services – like routine banking, life insurance and financial management – need to pay special attention when determining the status and value chain role within their group. The more activities a group performs, the more complex it is to determine the status and related DAC 6 obligations.
Step two: Identify any cross-border arrangements
Once the status is determined (promoter vs. service provider), the next step is to consider cross-border arrangements. DAC 6, as implemented in Luxembourg, focuses solely on arrangements with a cross-border element.
When it comes to life-insurance, considering that, in 2019, roughly 90% of collected premiums in Luxembourg were derived from life insurance contracts with policyholders outside the country, a significant portion of policies might qualify as cross-border arrangements.
Therefore, a detailed analysis of individual arrangements is required in order to limit over-disclosure of non-reportable arrangements.
Step three: Assess the reportable character of your arrangements
Once cross-border arrangements have been identified, you need to assess if these arrangements need to be reported under DAC 6. This will depend on whether they fulfill one of the hallmarks listed in the regulation and, more importantly, if they pass the main benefit test attached to some of these hallmarks.
Let’s look at some examples from the insurance business. A Luxembourg insurance company which enters into a reinsurance treaty with a group reinsurer located in Bermuda might fulfill the “deductible payment without appropriate inclusion” hallmark and the company should therefore check whether the main benefit test attached to said hallmark is met. Also, the “transfer of risk” hallmark might be met, and this hallmark does not require the main benefit test to be fulfilled. Therefore, these arrangements should be analyzed in more details in order to assess whether reporting is required under DAC 6.
Widely used P&C insurance policies for private households, business protection or property insurance should, generally speaking, not fulfill the main benefit test and the probability of reporting under DAC 6 is slim.
Step four: Document your impact assessment
The above steps and actions taken need to be properly documented in relevant impact assessments. These documents will be essential if you’re audited by the tax authorities, and such audits appear to be on the rise. Audits can cover a number of areas, including written due diligence, appropriate procedures and accurate reporting processes.
Under DAC 6, the tax authorities can impose fines of up to €250 000.