February 26, 2020
Sweden issues final proposal on Mandatory Disclosure Rules to Parliament
The Swedish Government issued, on 4 February 2020, a final bill to Parliament implementing the European Union (EU) Directive on the mandatory disclosure and exchange of cross-border tax arrangements (referred to as DAC6 or the Directive).
An earlier draft of the proposed bill, published on 6 December 2019,1 was subject to scrutiny by The Council on Legislation (Swe: Lagrådet), which made only minor remarks. The updated bill takes into account the view of the Council and the final bill is unlikely to be amended materially before final enactment. It is expected that the Parliament will enact the proposal in early March 2020.
If implemented as currently proposed, the Swedish Mandatory Disclosure Rules (MDR) legislation will be closely aligned with the requirements of the Directive. However, the proposal states that it deals only with the implementation of DAC6 and the Government is still considering whether the regulation should be extended to domestic arrangements.
The Swedish legislation will enter into force on 1 July 2020 and sanctions will be effective from that date.
The Council of the European Union Directive 2018/822 of 25 May 2018 amending Directive 2011/16/EU regarding the mandatory automatic exchange of information in the field of taxation (the Directive or DAC6), entered into force on 25 June 2018.2
The Directive requires intermediaries (including EU-based tax consultants, banks and lawyers) and in some situations, taxpayers, to report certain cross-border arrangements (reportable arrangements) to the relevant EU member state tax authority. This disclosure regime applies to all taxes except value added tax (VAT), customs duties, excise duties and compulsory social security contributions.3 Cross-border arrangements will be reportable if they contain certain features (known as hallmarks). The hallmarks cover a broad range of structures and transactions. For more background, see EY Global Tax Alert, Council of the EU reaches an agreement on new mandatory transparency rules for intermediaries and taxpayers, dated 14 March 2018.
EU Member States were to adopt and publish national laws required to comply with the Directive by 31 December 2019. Sweden did not meet this deadline, but it is expected to adopt the final bill in March 2020 with effect from 1 July 2020. The bill will also retrospectively cover reportable arrangements where the first step is implemented between 25 June 2018 and 1 July 2020.
Scope of taxes covered
The scope of the taxes covered under the Swedish new draft legislation is fully aligned with the Directive and applies to all taxes except VAT, customs duties, excise duties and compulsory social security contributions.
Under the Directive, an arrangement is reportable if:
Under DAC6, cross-border arrangements are defined as arrangements concerning more than one Member State or a Member State and a third country. The hallmarks can be distinguished between those that are subject to the “main benefit test” (MBT), and those which by themselves trigger a reporting obligation without being subject to the MBT. The overall definition of “reportable arrangements” in the Swedish final draft legislation aligns with the DAC6 definition.
Contrary to the initial proposal, the Swedish bill does not cover domestic arrangements, but the Government is still considering an extension at a later stage.
Hallmarks A-E of the Directive
Most elements of the hallmarks included in DAC6 are not expressly defined. The Government’s explanatory notes in the bill provide some clarification on these elements.
Main benefit test
In accordance with DAC6, the MBT will be satisfied if it can be established that the main benefit or one of the main benefits which, having regard to all relevant facts and circumstances, a person may reasonably expect to derive from an arrangement, is the obtaining of a tax advantage.
The Government’s explanatory notes indicate that a “tax advantage” includes a tax advantage outside of Sweden (and there is no suggestion that such tax advantage must arise in respect of EU taxes). The Government further concludes that there is no requirement that the tax advantage occurs during the current fiscal year, it can occur also in the future, for example, in the form of deferred taxation. It states, however, that it must be a tax advantage based on current rules.
Under the Directive, intermediaries with EU nexus have the primary obligation to report arrangements to the tax authority. The Directive gives Member States the option to exempt intermediaries from the obligation to report where the reporting obligation would breach legal professional privilege (LPP). If there are no intermediaries which can report, the obligation will shift to the taxpayers.
The Swedish final draft legislation partly exempts members of the Swedish bar association from the reporting obligation due to LPP. However, Swedish non-bar member lawyers, legal advisers, tax advisors, auditors and accountants are required to report.
Members of the Swedish bar association do not need to report information that would conflict with the Swedish LPP. The new draft proposal does not provide guidance as to exactly what information may not be reported and leaves that to the bar members to decide. However, if the relevant taxpayer agrees to waive the LPP, a bar member may report the reportable arrangement.
An employee of an intermediary entity should not have a personal obligation to report an arrangement provided the employee undertakes the intermediary activities in his/her employment.
The final draft legislation states that an ”in house” tax team could be regarded as an intermediary if it provides advice to another company within the group.
Under DAC6, for intermediaries (and relevant taxpayers), the trigger events for reporting under the Directive (from 1 July 2020) are when the reportable arrangement is “made available for implementation”; or when the reportable arrangement is “ready for implementation”; or when “the first step of implementation has been made.” The same trigger events apply in the Swedish final draft legislation.
Under the Directive, reporting starts from 1 July 2020 and exchanges between jurisdictions from 31 October 2020. However, reports will retroactively cover arrangements where the first step is implemented between 25 June 2018 and 1 July 2020.
The Swedish reporting deadlines are expected to be fully aligned with DAC6.
The final draft legislation contains a provision concerning penalties. Penalties may be imposed if there is a failure to report or if the report is incomplete or incorrect. However, a failure to report will not be regarded as a criminal offense.
The proposed penalty fees for failure to report are the following:
If the violation has occurred within a business with a minimum turnover of SEK15m (approx. €1.4m) for the previous financial year, the secondary and third penalties are instead:
The third penalty can be mitigated if reporting occurs voluntarily before the Tax Agency has started an investigation.
Reporting penalties may be reduced or forgiven under the general rules regarding reduction or forgiveness of tax related penalties.
It is further suggested that penalties do not apply for failure to report an arrangement where the first step is implemented after 24 June 2018 and before 1 July 2020 (the transition period).
The Parliament bill has clarified some questions with respect to the interpretation and implementation of DAC6, but many questions remain unanswered. The Swedish Parliament will likely debate and adopt the final draft legislation in March 2020. The remaining legislative process usually provides limited clarification or amendments. However, it is widely anticipated that the Swedish Tax Agency will issue guidance later this year.
Determining if there is a reportable cross-border arrangement raises complex technical and procedural issues for taxpayers and intermediaries. Due to the scale and significance of the proposed regulations, taxpayers and intermediaries who have operations in Sweden should carefully review their policies and strategies for logging and reporting tax arrangements so that they are fully prepared for meeting their obligations.
For additional information with respect to this Alert, please contact the following:
Ernst & Young AB, Stockholm
Ernst & Young AB, Gothenburg
Ernst & Young LLP (United States), Nordic Tax Desk, New York