Luxembourg publishes draft tax transparency rules for digital platforms

• DAC7 is the latest update of the EU’s Directive on administrative cooperation in the field of taxation (DAC) and some of the other EU Member States have already passed their respective implementation laws or have published draft implementation laws.
• Member States must transpose the Directive into national law by 31 December 2022.
• The Luxembourg DAC7 draft law sets forth due diligence procedures and reporting requirements for platform operators.
• Reporting Platform Operators will have to register with the Luxembourg Tax Authority by 31 December 2023 at the latest. A Reporting Platform Operator starting its activity after 31 December 2023 must register at the latest at the date it starts its activity.

Executive summary

Luxembourg’s Minister of Finance recently submitted a draft law (the Draft Law) to Parliament aimed at transposing Council Directive (EU) 2021/514 of 22 March 2021 (DAC7) amending Directive 2011/16/EU on administrative cooperation in the field of taxation (DAC).

DAC7 introduces a reporting obligation for digital platforms whether located inside or outside the European Union (EU) and an automatic exchange of information between EU Member States’ tax administrations on revenues generated by sellers on these platforms as of 1 January 2023.

In addition to this new reporting obligation for digital platforms, DAC7 introduced a number of generic changes to the DAC not limited to digital platforms, including a delineation of the internationally agreed standard of foreseeable relevance and a legal framework for the conduct of joint audits between two or more Member States as of 1 January 2024.

This Alert summarizes the main features of the Draft Law.

Detailed discussion

Background

On 7 February 2020, the European Commission (the Commission) opened a public consultation to strengthen the exchange of information framework in the field of taxation focusing on the collection and exchange of data from digital platform providers.

As part of a tax package for fair and simple taxation supporting the recovery of the EU released on 15 July 2020, the Commission published DAC7, a legislative proposal for revision of the DAC, to address the challenges posed by the digital platform economy. On 22 March 2021, the Council unanimously adopted DAC7 to strengthen administrative cooperation and include the reporting of sales through digital platforms.

The EU rules for information from digital platforms are inspired by the work done at the Organisation for Economic Co-operation and Development (OECD) but are much wider in terms of the scope and businesses affected. The revised DAC states that, although not identical, the OECD Model Rules are expected to provide for the reporting of equivalent information in relation to relevant activities that are in scope of both DAC7 and the Model Rules, which may be expanded further to cover additional relevant activities.

Reporting obligations for digital platform operators

In order to transpose DAC7, the Draft Law defines the due diligence procedures, the registration and reporting obligations of Platform Operators in Luxembourg and also determines the modalities of the automatic exchange of reported information relating to nonresident sellers with the tax authorities of other EU Member States.

In order to clearly delineate to whom the registration and reporting requirements apply, the Draft Law defines certain key concepts.

Definitions

Platforms

The provisions of the Draft Law apply to the operators of both EU and non-EU based digital platforms. ”Platform,” under the Draft Law and in line with DAC7, refers to any software, such as for example a website, an application or a mobile application, that allows a Seller to connect with a potential purchaser, the user, for purposes of carrying out a “Relevant Activity,” directly or indirectly, to such user. It also includes any arrangement for the collection and payment of consideration in respect of a Relevant Activity.

The definition specifically excludes software that exclusively allows any of the following activities:

• Processing of payments in relation to the Relevant Activity
• Users to list or advertise a Relevant Activity
• Redirecting or transferring of users to a Platform

Operators

The Draft Law defines Operators as an Entity (i.e., a legal person or a legal arrangement, such as a corporation, partnership, trust or foundation) that makes contractually all or part of a Platform available to Sellers. The Draft Law distinguishes between three types of Platform Operators:

• “Reporting Platform Operator,” is defined as any Platform Operator who:
  o   Is resident for tax purposes in Luxembourg.
  o   If it is not resident for tax purposes in Luxembourg or in any other EU Member State, it meets one of the following conditions: (i) is incorporated under the laws of Luxembourg; (ii) has its place of management (including effective management) in Luxembourg; or (iii) has a permanent establishment in Luxembourg without being a Qualified Non-Union Platform Operator.
  o   Is neither resident for tax purposes, nor incorporated or managed in a Member State, nor has a permanent establishment in a Member State, but facilitates the carrying out of a Relevant Activity involving the rental of immovable property located in a Member State and is not a Qualified Non-Union Platform Operator (see below definition).
• “Excluded Platform Operator,” meaning a Platform Operator that has demonstrated upfront and on an annual basis to the satisfaction of the Luxembourg Tax Authority that the Platform’s entire business model is such that it does not have any Reportable Seller.
  
• “Qualified Non-Union Platform Operator,” is defined as one of the following:
  o   A Platform Operator facilitating Relevant Activities that are covered by the automatic exchange of information equivalent to the information to be reported under the Draft Law pursuant to an agreement between an EU Member State and a Non-EU Jurisdiction and that is resident for tax purposes in a Non-EU Jurisdiction that has in effect such agreement with all Member States which are identified as reportable jurisdictions in a list published by the Non-EU Jurisdiction (Qualified Non-Union Jurisdiction).
  o   Where such Platform Operator does not have a residence for tax purposes in a Qualified Non-Union Jurisdiction, it is either incorporated under the laws of a Qualified Non-Union Jurisdiction or it has its place of management (including effective management) in a Qualified Non-Union Jurisdiction.

Relevant Activities

The scope of activities considered is very broad, as it covers the rental of any immovable property, a personal service (i.e., a service performed at the request of a user), the sale of goods (which can be any tangible property) and the rental of any mode of transport. To be a Relevant Activity, any of the aforementioned must in addition have been carried out for consideration, meaning that compensation in any form must have been paid to the Seller in connection with such activity.

Sellers

A Seller is defined as a Platform user (an individual or an Entity) that is registered at any moment during the Reportable Period (i.e., the calendar year in respect of which reporting is being completed) on the Platform and carries out a Relevant Activity.

The Draft Law distinguishes between:

• “Active Seller,” is defined as Sellers that either provide or are paid or credited consideration in connection with a Relevant Activity during the Reportable Period.
• “Reportable Seller”, is defined as any Active Seller, other than an Excluded Seller (see below definition) that is either resident in Luxembourg or in another EU Member State, or that rented out immovable property located in Luxembourg or in another Member State.
• “Excluded Seller,” is defined as any Seller:
  o   That is a Governmental Entity (e.g., the government or a political subdivision of a Member State or other jurisdiction)
  o   That is an Entity the stock of which is regularly traded on an established securities market or a Related Entity of such Entity. An Entity is a Related Entity of another Entity if either Entity controls (direct or indirect ownership of more than 50% of the vote and value in the Entity, a person holding more than 50% of the voting rights being deemed to hold 100%) the other Entity or the two Entities are under common control;
  o   That is an Entity for which the Platform Operator facilitated more than 2,000 Relevant Activities by means of the rental of immovable property units located at the same street address, owned by the same owner and offered for rent by the same Seller (Property Listing) during the Reportable Period; or
  o   For which the Platform Operator facilitated less than 30 Relevant Activities by means of the sale of goods and for which the total amount of consideration paid or credited did not exceed €2,000 during the Reportable Period.

Registration and notification requirements of Platform Operators

The Draft Law requires in principle that each Reporting Platform Operator and Excluded Platform Operator register with the Luxembourg Tax Authority if it fulfills any of the below conditions:

• It is resident for tax purposes in Luxembourg.
• It is incorporated under the laws of Luxembourg.
• It has its place of management in Luxembourg.
• It has a permanent establishment in Luxembourg without being a Qualified Non-Union Platform Operator. 

If a Reporting Platform Operator fulfills any of the above conditions in Luxembourg and in one or more other EU Member States, it shall elect either Luxembourg or one of these Member States to fulfill its reporting requirements. If the Reporting Platform Operator does not elect Luxembourg, it must notify the Member State of its choice to the Luxembourg Tax Authority.

A Reporting Platform Operator that is neither resident for tax purposes, nor incorporated or managed in an EU Member State, nor has a permanent establishment in a Member State, but facilitates the carrying out of a Relevant Activity involving the rental of immovable property located in a Member State and is not a Qualified Non-Union Platform Operator, is exempt from the obligation to register in Luxembourg if it has registered with the competent authority of another Member State (Single Registration). No notification to the Luxembourg Tax Authority is required since this information will be made available to Luxembourg through the Central Register of the Commission.

Upon registration, certain information such as e.g., the name and the tax identification number (TIN) will have to be provided. The registration and, where applicable, the notification must be made at the latest by 31 December 2023. Any change in the information provided upon registration must be notified to the Luxembourg Tax Authority within one month after the change has occurred.

The Luxembourg Tax Authority will allocate an individual identification number to each Reporting Platform Operator upon registration, which is also communicated to all other EU Member States either electronically or through the Central Register.

A Platform Operator may incur a fixed fine of €5,000 if it fails to register or to notify the Member State of its choice within the required period, or where the reported information is incomplete or erroneous, or has not been updated or has been updated late. 

Due diligence procedures and reporting obligations of Platform Operators

Due diligence procedures

Reporting Platform Operators are required to carry out specific due diligence procedures for the purpose of identifying Reportable Sellers and verifying if the information collected is reliable.

Collection of information

The Reporting Platform Operator must in a first step collect the following information in respect of each Reportable Seller on their platform that is not an Excluded Seller:

• Name
• Address
• Any TIN attributed to the Seller
• Value-Added Tax (VAT) number
• Date of birth/business registration number
• Existence of any permanent establishment through which the Relevant Activity is carried out in the EU

Where a Seller is engaged in a Relevant Activity involving the rental of immovable property, the Reporting Platform Operator must in addition collect the address of each Property Listing and, where issued, respective land registration number or its equivalent under the national law of the Member State where it is located.

Where a Seller does not provide the requested information after two reminders following the initial request by the Operator and after the expiration of a period of 60 days, the Reporting Platform Operator must close the Seller’s account and prevent the Seller from re-registering on the Platform or withhold the payment of the consideration to the Seller as long as the Seller does not provide the information requested.

Verification of the information

The Reporting Platform Operator must verify if the information is reliable, using all information and documents available in its records, as well as any electronic interface made available by a Member State or the EU free of charge to ascertain the validity of the TIN and/or VAT identification number.

Determination of the EU Member State(s) of residence

The Reporting Platform Operator also must determine, on the basis of this information, the Seller’s Member State(s) of residence within the meaning of DAC (which is different from the residence for tax purposes) following the rules set forth in the Draft Law.

A Reporting Platform Operator may rely on a third-party service provider to fulfil the due diligence obligations, but such obligations remain the responsibility of the Reporting Platform Operator.

Records

Reporting Platform Operators are required to keep records of the steps undertaken and any information relied upon for the performance of the due diligence procedures and reporting requirements (see below). Such records shall remain available for a period of 10 years following the end of the Reportable Period to which they relate.

Reporting Platform Operators must implement policies, controls, procedures and IT systems to ensure that their reporting and due diligence obligations are met. These policies, controls, procedures and systems shall be proportionate to the nature, characteristics and size of the Reporting Platform Operators.

Reporting requirements

The Reporting Platform Operator must report annually and no later than 31 January of the year following the calendar year in which the Seller is identified as a Reportable Seller, the information collected in respect of each Reportable Seller on their platform to the Luxembourg Tax Authority. Failure to report within the aforementioned period may trigger a fixed fine of €5,000.

In addition, the Reporting Platform Operator must report:

• The consideration paid to the Seller
• The identifying number or reference available to the Platform Operator of the bank account or other similar payment services account to which the consideration is paid or credited and, where different from the name of the Reportable Seller, the name of the holder of the financial account
• Each EU Member State in which the Reportable Seller is resident
• The total consideration paid or credited
• Any fees, commissions or taxes withheld or charged by the Reporting Platform Operator

The Reporting Platform Operator is exempt from reporting the information to the Luxembourg Tax Authority where it has proof that the same information has been reported by another Reporting Platform Operator in Luxembourg or in another Member State.

Administrative procedure to verify compliance of Reporting Platform Operators with the due diligence procedures and reporting requirements

The Luxembourg Tax Authority has the obligation to monitor and ensure that Platform Operators comply with their obligations under the Draft Law. In this context, the Luxembourg Tax Authority retains its own powers of investigation, which it implements within the existing framework and limits of the procedure for the investigation and determination of domestic taxes and duties.

Penalties

A Reporting Platform Operator may be fined up to €250,000 where it is found, following an audit, not to have complied with its obligations under the Draft Law.

The Luxembourg Tax Authority may revoke the registration of a Reporting Platform Operator that is neither resident for tax purposes, nor incorporated or managed in an EU Member State, nor has a permanent establishment in a Member State, but facilitates the carrying out of a Relevant Activity involving the rental of immovable property located in a Member State and is not a Qualified Non-Union Platform Operator, if it does not comply with the obligation to report after two reminders by the Luxembourg Tax Authority. The Luxembourg Tax Authority will in such case also request the Commission to delete the Reporting Platform Operator from the Central Register.

In addition, where such Reporting Platform Operator does not comply with the obligation to register in the EU or where its registration has been revoked in an EU Member State other than Luxembourg, the Luxembourg Tax Authority may, as a last resort, request that such Reporting Platform Operator be prevented from operating its activities in Luxembourg.

Confidentiality and data protection

Each Reporting Platform Operator must inform each individual concerned that information relating to that individual will be collected and transferred in accordance with the Draft Law and provide to each individual concerned all information that the individual is entitled to from the data controller in sufficient time for that individual to exercise his/her data protection rights and, in any case, before the information is reported.

In line with DAC7, the Draft Law extends the aforementioned requirements in relation to data protection to existing similar legal provisions on the exchange of information by amending the relevant laws accordingly (law of 18 December 2015 on Common Reporting Standard, law of 23 December 2016 on Country-by-Country Reporting and the amended law of 25 March 2020 on Reportable Cross-Border Arrangements).

Other amendments

The Draft Law also provides for the adaptation and supplement of certain provisions of the Luxembourg law of 29 March 2013 on administrative cooperation in tax matters to ensure the strengthening of the existing administrative cooperation as provided for by DAC7.

Foreseeable relevance

Pursuant to Article 5 of DAC, as transposed in Luxembourg law by the law of 29 March 2013, the requested authority is to communicate to the requesting authority any information it has in its possession, or that it obtains as a result of administrative inquiries, which is foreseeably relevant to the administration and enforcement of the domestic laws of the requesting Member State concerning the taxes falling within the scope of that Directive (i.e., all taxes of any kind levied by or on behalf of an EU Member State, excluding VAT, customs duties, excise duties covered by other EU legislation on administrative cooperation between Member States and compulsory social security contributions payable to the State of Luxembourg or to another Member State or a subdivision of the Member State or to social security institutions established under public law).

To ensure the effectiveness of exchange of information and to prevent unjustified refusals of requests, as well as to provide legal certainty for both tax administrations and taxpayers, DAC7 delineates and codifies the internationally agreed standard of foreseeable relevance.

Accordingly, the Draft Law proposes to complete the law of 29 March 2013 by a new article according to which the requested information is foreseeably relevant where, at the time the request is made, the requesting authority considers that, in accordance with its national law, there is a reasonable possibility that the requested information will be relevant to the tax affairs of one or several taxpayers, whether identified by name or otherwise, and be justified for the purposes of the investigation. The new provision also indicates the minimum information that must be provided by the requesting authority, including in presence of requests for exchange of information that relate to a group of taxpayers that cannot be individually identified.

The Draft Law also adapts the deadlines by which the requested Luxembourg authority must respond to a request for exchange of information. The maximum response time remains two months as from the receipt of the request if the requested Luxembourg authority is already in possession of the information, but it is shortened from currently six months to three months in all other cases. The deadline may be extended to six months if the requested Luxembourg authority is unable to respond to the request by the relevant time limit. 

Automatic exchange of information on the ownership of real estate

DAC7 requires EU Member States to automatically exchange information on at least four categories of income and capital for taxable periods beginning on or after 1 January 2025. For the time being, Luxembourg exchanges information on income from employment, directors' fees and pensions. As from taxable periods beginning on 1 January 2025, the Draft Law provides for the extension of the automatic and mandatory exchange of information to the ownership of real estate.

Other forms of administrative cooperation

Among other things, the Draft Law amends the provisions of the law of 29 March 2013 with respect to requests for the presence of officials of another EU Member State in the administrative offices and their participation in administrative enquiries.

Officials authorized by the requesting authority may, upon request, participate in administrative enquiries carried out by the requested Luxembourg authority through the use of electronic means of communication, where appropriate.

The deadline for the requested Luxembourg authority to respond (acceptance or motivated refusal) is set at 60 days as from the receipt of the request.

Where the requested information is contained in documentation to which the officials of the requested Luxembourg authority have access in the framework of the administrative enquiry, the officials of the requesting authority shall be given copies thereof. Under certain conditions, officials of the requesting authority who assist or participate in administrative enquiries, may also interview individuals and examine documents.

The Draft Law also introduces a new form of administrative cooperation, being the joint audit. The joint audit is defined as an administrative inquiry jointly conducted by the competent authorities of Luxembourg and of one or more other EU Member States and linked to one or more persons of common or complementary interest to those competent authorities. It will be conducted in a pre-agreed and coordinated manner, and, if carried out in Luxembourg, according to the procedural modalities as defined by the Luxembourg tax laws. 

Entry into force

The provisions of the Draft Law will enter into force on 1 January 2023, except as regards the provisions on joint audits that will enter into force on 1 January 2024.

Reporting Platform Operators will thus have to register with the Luxembourg Tax Authority by 31 December 2023 at the latest. A Reporting Platform Operator starting its activity after 31 December 2023 must register at the latest at the date it starts its activity.

The first reports will have to be filed with the Luxembourg Tax Authority at the latest on 31 January 2024. Before the reporting, Reporting Platform Operators will have to provide the required information to the Sellers.

A Reporting Platform Operator shall complete the due diligence procedures as foreseen by the Draft Law by 31 December of the Reportable Period, thus for the first time by 31 December 2023. However, with respect to Sellers already registered on the Platform as of 1 January 2023, the deadline is extended to 31 December 2024.

Implications

Digital platforms need to identify the business units that will have reporting obligations under DAC7 and the Draft Law and develop a plan for the overall adoption through to the first reporting in Luxembourg in 2024. The requirements will need to be appropriately delineated and delegated such that actions, owners, responsibilities and timelines within the business align.

It is likely that changes will be needed during seller onboarding and payments processing, monitoring and reporting systems, along with changes to terms and conditions, and data protection standards, which will require co-ordination between the business units, tax departments, legal departments, IT departments and external vendors.

Acting now allows businesses to be ready and compliant when the new rules enter into force.