Overview
On 16 May 2023, the Council of the European Union (the Council) held an Economic and Financial Affairs Council (ECOFIN) meeting where the EU finance ministers reached a political agreement (general approach) on the compromise text for the Directive on Administrative Cooperation (DAC) implementing the Organisation for Economic Co-operation and Development's (OECD) rules on reporting for crypto-assets and amendments to the Common Reporting Standard (CRS) (the Directive or DAC8).
DAC8 introduces reporting requirements for crypto-assets related to transactions carried out by European Union (EU) resident clients of reporting crypto-asset service providers. DAC8 also extends the scope for exchanging advance cross-border rulings to those concerning natural persons in certain situations and introduces the possibility of exchanging information received under the DAC framework for non-tax-related purposes.
The compromise text, published by the Swedish Council presidency in advance of the ECOFIN meeting, is the result of negotiations among the Member States that amended the European Commission's (the Commission) initial proposal published on 8 December 2022.
Following the Council's formal adoption of DAC8 (which was expected to take place in early June 2023), Member States will have until 31 December 2025 to transpose the new rules into national law and such rules will apply as of 1 January 2026 (with some exceptions).
Background
The DAC originally facilitated administrative cooperation between tax authorities and the exchange of information on employment income, pension income and certain other payments. The DAC has since been amended multiple times to improve the existing exchange of tax-related information.
On 8 December 2022, the Commission released a legislative proposal aimed at improving existing provisions of the DAC and extending the scope of automatic exchange to specific information reported by reporting crypto-asset service providers, known as DAC8. On the same date, the Commission launched a public consultation for feedback on the proposal, which was concluded on 30 March 2023.
Two months before the release of the Commission's proposal, the OECD published the final rules and commentary of the Crypto-Asset Reporting Framework (CARF) and enhancements to the CRS. The OECD publications cover (a) the adoption of the CARF, which introduces a new Automatic Exchange of Information package, and (b) amendments to the existing CRS rules to cover digital financial products and allow a broader scope of reporting.
During the ECOFIN meeting of 16 May 2023, EU finance ministers adopted the Regulation on Markets in Crypto-Assets (MiCA), introducing rules on the supervision, consumer protection and environmental safeguards of crypto-assets, including cryptocurrencies, and the Transfer of Funds Regulation (TFR), ensuring that crypto transfers can always be traced with the ultimate goal of preventing money laundering and terrorist financing. Adoption of these texts is a crucial step for DAC8, as DAC8 builds on the provisions of MiCA and TFR, in particular regarding definitions and authorisation requirements.
The revised DAC (DAC8)
On 16 May 2023, EU finance ministers reached a political agreement (general approach) on a compromise text for DAC8.
DAC8 extends the scope of the automatic exchange of information under DAC to information that reporting crypto-asset service providers will be required to report on reportable transactions and transfers involving crypto-assets and e-money. The proposed legislation aligns closely with MiCA, using the same definitions for crypto-asset service providers, crypto-asset services and crypto-assets. In practical terms, this means that reporting crypto-asset service providers will either be entities that are registered under MiCA (crypto-assets service providers) or entities that provide crypto-asset services under MiCA but are not required to register for MiCA (crypto-asset operators).
More specifically, the new rules impose an obligation on:
the reporting crypto-asset service provider to collect and verify the information on crypto-asset users in line with due diligence procedures and to report to the relevant competent authority information on the crypto-asset users resident in the EU (certain exceptions apply); and
the competent authority of the Member State that has received information from the reporting crypto-asset service provider to convey the reported information to the competent authority of the relevant Member State where the reportable crypto-asset user is resident.
In addition to addressing the automatic exchange of information on crypto-assets and e-money, DAC8 extends the scope of the DAC by also including provisions on the automatic exchange of advance cross-border rulings concerning high-net-worth individuals and on the automatic exchange of information on non-custodial dividends and similar revenue. Furthermore, DAC8 amends several other DAC provisions, including reporting and communication of the Tax Identification Numbers (TINs) to help tax authorities identify relevant taxpayers and correctly assess the related taxes.
Member States introduced changes to the Commission's initial proposal of 8 December 2022 including, with respect to the minimum penalties regime, the exchange of advance cross-border rulings, elements of the timeline and an amendment regarding notification requirements for intermediaries under DAC6.
- Minimum penalties regime
- Exchange of advance cross-border rulings
- Changes to the timeline
- Amendment to DAC6
Minimum penalties regime
The compromise text removes the regime on minimum penalties for noncompliance across DAC requirements. The choice to impose penalties is now exclusively at the discretion of the Member States, although penalty imposition should be effective, proportionate and dissuasive.
Exchange of advance cross-border rulings
The initial proposal extended the exchange of advance cross-border rulings to high-net-worth individuals, whereby a "high net worth individual" was defined as an individual who holds in total at least €1m in financial or investable wealth or assets under management, excluding that individual's main private residence. This has been removed under the compromise text. Instead, the updated compromise text extends the scope of the automatic exchange of information regarding advance cross-border rulings to include:
Advance cross-border rulings concerning and involving the tax affairs of one or more natural persons where the amount of the transaction or series of transactions exceeds €1.5m, and such amount is referred to in the ruling;
Advance cross-border rulings determining the tax residence of a natural person in a Member State (exceptions apply considering proportionality and to avoid increasing the administrative burden).
Furthermore, in terms of the compromise text, the competent authorities of the Member States should automatically exchange information only on advance cross-border rulings for natural persons issued, amended or renewed after 1 January 2026. This differs from the Commission's proposal, which included advance cross-border rulings for natural persons issued, amended or renewed between 1 January 2020 and 31 December 2025.
Changes to the timeline
Communication of TIN: The starting date for communication of TINs has been amended depending on the item of information.
- Development of a central directory: The Commission has been given an additional year (i.e. until 31 December 2026) to develop a secure Member State central directory in which information will be recorded to satisfy automatic exchanges.
Amendment to DAC6
DAC8 amends the EU's Mandatory Disclosure Rules (MDR or DAC6) in line with a Court of Justice of the EU (CJEU) decision in Case C-694/20, which ruled that DAC6's obligation for a lawyer who is exempt from the reporting obligation, on account of the legal professional privilege by which he or she is bound to inform any other intermediary who is not his or her client is not required to report because it infringes the right of attorney-client confidential communications.
Next steps
The European Parliament is expected to vote on its opinion regarding DAC8 . Although the European Parliament only has an advisory role in the legislative process for this proposal and its opinion is nonbinding, it is mandatory for the Council to await the outcome of the European Parliament’s vote on its opinion with respect to DAC8.
Once the European Parliament votes, adoption of the proposal will require unanimous agreement among the 27 Member States. The text, as agreed to by all 27 Member States, is expected to be the final text.
Following the Council's formal adoption of DAC8, Member States will have until 31 December 2025 to transpose the new rules into national law.
The new provisions will apply as of 1 January 2026 with two exceptions. Specifically, the provisions related to TIN reporting and the subsequent automatic exchange with respect to (i) advanced cross-border rulings, country-by-country reports and MDR should be transposed into national law by 31 December 2027 and applicable as of 1 January 2028, and; (ii) income from employment, director's fees and pensions should be transposed into national law by 31 December 2029 and applicable as of 1 January 2030.
Conclusion
The compromise text on which ECOFIN reached a political agreement introduces important changes from the Commission’s initial proposal.
All potentially affected organisations should begin to assess the scale of changes that will be required and begin implementation efforts as soon as possible. For financial institutions, substantial CRS data uplift requirements will likely need to be met to comply with reporting changes and new data elements. Crypto-asset service providers should assess the entire package of MiCA, TFR and DAC8 holistically to determine the impact on their business models and governance.
How can we help?
If you have any queries or would like to know more about DAC 8 - Tax transparency rules for crypto-asset transactions or how PwC can support you, please contact our local exchange of information team.
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