[20/05/2022] The Implementation of Directive 2018/822 (DAC6) in the Republic of Cyprus

The Implementation of Directive 2018/822 (DAC6) in the Republic of Cyprus

Home » Publications » [20/05/2022] The Implementation of Directive 2018/822 (DAC6) in the Republic of Cyprus

Written by Francesca Iosif


Nowadays, tax planning structures have evolved to be exceptionally complex and often take advantage of the increased mobility of both capital and people within the internal market. Due to this, it is crucial that Member States’ tax authorities obtain exhaustive and relevant information about potentially aggressive tax arrangements.

Taking into account that most of the potentially aggressive tax-planning arrangements stretch into more than one jurisdiction, the disclosure of information about those arrangements would bring positive results where that information was also exchanged amongst Member States. In particular, the automatic exchange of information between tax authorities is critical in order to provide those authorities with the necessary information to enable them to take action where aggressive tax practices are observed.

Directive 2018/822, also known as DAC6, is a new mandatory disclosure regime that imposes mandatory reporting of cross-border arrangements. The Directive concerns one or more Member State or a Member State and a third country that falls within one of several categories called “hallmarks”.

Hallmarks and Main Benefit Test

A reportable cross border arrangement must satisfy one or more hallmarks and, sometimes, the main benefit test. A hallmark, as defined within the Directive, is a characteristic or feature of a cross-border arrangement entailing its mandatory reporting if met. There are in total five hallmark categories, divided in generic and specific, closely examined within the Directive.

A main benefit test would apply to generic hallmarks as well as several specific hallmarks. The main benefit test verifies, looking into all relevant facts and circumstances, that a person may reasonably expect to obtain a tax advantage from an arrangement.

The main benefit test compares the value of the expected tax advantage with any other benefits likely to be obtained from the transaction and has the advantage of requiring an objective assessment of the tax benefits. Additionally, the main benefit test may not be met when the main tax advantage obtained through the arrangement is consistent with the object/purpose of the applicable legislation and with the intention of the legislator.

The Directive also clarifies that the main benefit test must be met with respect to direct taxes. It would not apply where the tax advantage would be solely linked to VAT, customs duties, compulsory social security contributions or other taxes, whether the advantage was obtained in a European or a non-European country.

The enforceability of Directives through indirect effect

The character of a Directive is defined in Article 288 of the Treaty on the Functioning of the European Union (TFEU). Under the Article, Directives are said to be “binding as to the result to be achieved” but “leave to the national authorities the choice of form and method”. This means that Directives have distinct objectives but in effect create obligations on Member States to pass national laws within a set time to achieve those objectives. In this way Directives cannot in themselves automatically create substantive rights that citizens are then able to enforce.

Thus, Directives cannot in themselves automatically create substantive rights that citizens will be able to enforce. On the contrary, the Member States are allowed to achieve the objectives contained in the Directives in whatever way they choose, since the Directives are conditional; they are not non-dependent; and they are entirely dependent on implementation by the Member State.

The principle of indirect effect was introduced by the European Court of Justice as a way around the problem of giving full effect to the European Law by the national court, which derived from Article 10 which at the time created an obligation to Member States to “take all appropriate measures to ensure fulfillment of the obligation arising”.

The principle of indirect effect, known also as the Von Colson principle, is therefore considered useful in avoiding the problem of the lack of horizontal effect of Directives.

Implementation within the Republic

With reference to the above, on the 29th October 2021, the Ministry of Finance published in the Official Government Gazette the relevant Decree based on article 22Z on Administrative Cooperation in the Sector of Taxation Amending Law of 2021 (N.41(Ι)/2021) governing the local implementation and regulation of matters pertaining to reportable cross-border arrangements based on the European Union Directive on the mandatory disclosure and exchange of information (“DAC6”) that was transposed into national law in year 2021.


On the 10th of November 2021, the Cyprus Tax Department issued the interpretative Circular 55 providing clarifications in relation to the imposition of DAC6 penalties.

The Circular amongst other information provides for the following:

  • A yearly penalty cap of EUR 120,000 will apply to reportable cross-border arrangements that have a reporting deadline within a calendar year. This yearly cap does not apply if the penalty arose due to a deliberate breach or fraud by the intermediary / relevant taxpayer.
  • A 50% reduction in penalty imposed on a reportable cross-border arrangement will apply in cases where ‘corrective actions’ have been taken by the intermediary / relevant taxpayer before the income tax return deadline of the year in which reporting arose. The 50% reduction does not reduce the yearly penalty cap of EUR 120,000.
  • Every intermediary or relevant taxpayer must keep books and any other records that may relate to a reportable cross-border arrangement for a period of at least six (6) years from the end of the tax year to which the cross-border arrangement refers.


Since the objective of this Directive is to improve the functioning of the internal market by discouraging the use of aggressive cross-border tax-planning arrangements, it cannot sufficiently be achieved by the Member States but can rather, based on the fact that it targets schemes purposely developed to potentially take advantage of market inefficiencies amongst different national tax rules, be achieved at Union level.

It is however important to keep in mind that this Directive does not go beyond what is necessary in order to achieve the above mentioned objective, especially considering that it is limited by its own definition of cross-border arrangements and to which parties applies.

For further information or advice on this matter, please contact Francesca Iosif, Advocate in the Corporate Services Department (email: francesca.i@yiangou.com.cy, telephone number: +357 22 653105)