EU finance ministers reach political agreement on updated compromise text for Directive introducing tax transparency rules for crypto assets (DAC8)

• EU finance ministers have reached political agreement on updated compromise text for revising the Directive on administrative cooperation to implement the Organisation for Economic Co-operation and Development's rules on the Crypto-Asset Reporting Framework and Amendments to the Common Reporting Standard.
  
  
• The rules require reporting as of 2026 by institutions that offer crypto-asset services or electronic money services to customers in the European Union.
  
  
• The rules also update existing automatic exchange of information rules, including provisions targeting advance cross-border rulings of natural persons.

Executive summary

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 political agreement (general approach) on compromise text (pdf) for the Directive on administrative cooperation 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.

As for next steps, it is expected that the Directive will be formally adopted in early June, after the parliamentary consultation process is completed on 30 May 2023. Following the Council's formal adoption of DAC8, Member States will generally have until 31 December 2025 to transpose the main rules into national law; the provisions will apply as of 1 January 2026 with some exceptions.

Detailed discussion

Background

The Directive on Administration Cooperation (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 allow for the automatic exchange of information across multiple fields of taxation.

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 DAC8.1 On the same date, the Commission launched a public consultation for feedback on the proposal, which was concluded on 30 March 2023 receiving 29 submissions.

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)2 and enhancements to the CRS. The OECD publications cover (i) the adoption of the CARF, which introduces a new Automatic Exchange of Information package, and (ii) amendments to the existing CRS rules to cover digital financial products and allow a broader scope of reporting.

During the ECOFIN of 16 May 2023, EU finance ministers adopted the Regulation on Markets in Crypto-Assets (pdf) (MiCA), introducing rules on the supervision, consumer protection and environmental safeguards of crypto assets, including cryptocurrencies, and the Transfer of Funds Regulation (pdf) (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 authorization requirements.

Revised Directive on administrative cooperation (DAC8)

On 16 May 2023, EU finance ministers reached political agreement (general approach) on a compromise text (pdf) for the DAC8.

The agreement follows a Permanent Representatives Committee II (COREPER II) meeting held on 10 May 2023 where EU Member States' ambassadors discussed DAC8 and modified elements of the proposal that were holding up consensus. DAC8 extends the scope of 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:

• As a first step, the 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.
  
  
• As a second step, the reporting crypto-asset service providers must report to the relevant competent authority information on the crypto-asset users resident in the EU (exceptions apply).
  
  
• The third step requires 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 current rules on the exchange of tax-relevant information. Specifically, DAC8 includes provisions on the exchange of advance cross-border rulings concerning high-net-worth individuals, as well as provisions on the automatic exchange of information on non-custodial dividends and similar revenue. Further, DAC8 amends several other DAC provisions, including on 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 regarding 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

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 €1 million 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 automatic exchange of information regarding advance cross-border rulings to either:

• 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 €1.5 million, 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)

Under the updated 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 in scope 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 shall be recorded to satisfy automatic exchanges.

Interpretation of OECD Commentaries

The Commentaries to the Model Competent Authority Agreement, the CARF and the CRS developed by the OECD are now referenced as sources of illustration and interpretation of DAC8 with the goal of ensuring consistent application of the proposal across the EU.

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 (pdf), which ruled that DAC6's obligation for a lawyer to inform other intermediaries involved is not necessary and infringes the right to attorney-client confidential communications.

Next steps

On 30 May 2023, the European Parliament is expected to vote on its opinion regarding DAC8. Although the Parliament only has an advisory role in the legislative process for this proposal and the opinion is nonbinding, it is mandatory for the Council to await the outcome of the vote on the opinion. Once the European Parliament votes, adoption of the proposal will require unanimous agreement among the 27 Member States.

The text, as informally 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 main 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 regard to (1) 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.

Implications

The compromise text on which the EU finance ministers reached political agreement introduces important changes from the initial proposal (for more on the Commission's proposal, see our EY Global Tax Alert, EU publishes Directive proposal on tax transparency rules for crypto-assets, dated 9 December 2022). All potentially affected organizations 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 in a holistic manner to discern the impact on their business models and governance.

For additional information with respect to this Alert, please contact the following:

Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft, Berlin
 

• Petar Groseta
  
  
• Andreas Bolik
  
  
• Florian Zawodsky
  
  
• Rico Zischka
   

Ernst & Young Belastingadviseurs LLP, Rotterdam
 

• Marlies de Ruiter
  
  
• Maikel Evers
  
  
• Mahi Anastasiou
   

Ernst & Young Belastingadviseurs LLP, Amsterdam
 

• Dennis Post
  
  
• Lu-Shen Qua
  
  
• Toine Gorissen
  
  
• Konstantina Tsilimigka
   

Ernst & Young LLP, Oslo
 

• Magnus Jones
  
  
• Ingebjørg Brekka
   

Ernst & Young LLP (United Kingdom), London
 

• David Wren
  
  
• Abi Jeffreys

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.