The proposal is actually the eighth amendment of the direct administrative cooperation, which established a system for secure cooperation between the tax authorities of EU countries and laid down rules for exchanging information on tax purposes, explained Jean Kizito, partner in the financial services tax department of KPMG.
Since the directive entered into effect in 2013, there have been seven amendments, which range from the automatic exchange of information on financial accounts and related income (Dac2, commonly known as CRS, or Common Reporting Standards) to giving access to information regarding the beneficial owners of companies (Dac5). These are meant to improve the exchange of tax-related information and increase transparency.
“Fair and effective taxation is key to securing revenue for public investment,” said Kizito, but “tax authorities sometimes lack the necessary information to monitor proceeds obtained by the use of cryptoassets, which is easily traded across borders.”
“The purpose of Dac8 is indeed to broaden the scope of this directive to include cryptoassets,” said Kizito. It’s consistent with the Markets in Crypto-Assets (Mica) regulation, which is meant to replace national legislation on cryptoassets with a harmonised EU legal framework, according to the European Parliament, and is expected to be enforced in the second half of 2024. However, “Mica does not provide a basis for tax authorities to collect information on an automatic basis,” said Kizito.
Keeping in mind that Dac8 is “just” a proposal for the moment, “A cryptoasset is defined as any digital representation of a value or of a right, which is able to be transferred and stored electronically, using distributed ledger technology or similar technology,” explained Kizito. It’s quite a broad definition, he noted. “Cryptoassets are typically used either for payment or for investment purposes,” said Kizito, and, in both cases, will be reportable.
Who will be affected?
Under the proposal, two types of entities will be responsible for reporting information: cryptoasset service providers and cryptoasset operators. Providers are “any legal person or undertaking who provides cryptoasset services and who is authorised in a member state to provide cryptosset services in accordance with the Mica regulation,” said Kizito. These entities are part of a European Securities and Markets Authority registry.
The second category--cryptoasset operators--includes “natural persons,” or human persons, and legal persons or undertakings who provide cryptoasset services but are not covered by the Mica regulation. They need to register with a member state, and will then report information in that country.
This is essential to ensure a level playing field of all reporting cryptoasset providers and prevent unfair competition.
Reporting on domestic and cross-border exchanges and transfers is required by both EU resident and non-EU resident cryptoasset operators, said Kizito. “This is essential to ensure a level playing field of all reporting cryptoasset providers and prevent unfair competition,” he added. This way, EU resident providers don’t have “additional burden.”
The European Commission, however, argues that “pseudo-anonymity” is a feature of the cryptomarket. How will it be possible to enforce the rules and ensure transparency?
“The problem is even intensified, in particular when a trade is carried out using cryptoasset providers or cryptoasset operators located in another country, or when it is done directly between individuals or entities established in another jurisdiction,” said Kizito. “Under the Dac8 proposal, the reporting cryptoasset provider would need to report to their local tax authorities.”
Kizito gave an example: “If I am a Belgian resident exchanging cryptoassets via a Luxembourg service provider, ultimately, the Belgian tax authority will know my identity and the type and amount of transactions that I conducted in Luxembourg.” As a reminder, both exchange and transfer transactions will be reported.
It will enhance the general trust in cryptoassets and bring forward many opportunities across the whole financial services industry in Luxembourg.
“Cryptoasset users will need to be documented by the crypto service provider, and they will also need to be reported,” added Kizito. But to comply with current GDPR data protection rules, before service providers report this information--including the name, address and tax identification number--to the authorities, they need to notify the user first, which could take some additional time.
But what happens if the user doesn’t provide their information to the service provider? “If a cryptoasset user does not provide the required information in a timely manner, the reporting cryptoasset providers are to prevent the cryptoasset user from performing exchange transactions,” Kizito replied.
Dac8 “is purely seeking to increase tax transparency and mitigate the risk of tax fraud or evasion,” he said. “It will enhance the general trust in cryptoassets and bring forward many opportunities across the whole financial services industry in Luxembourg, while decreasing the legal uncertainty to protect investors and customers.”
Impact in Luxembourg
When asked about the potential impact on Luxembourg, Kizito noted that the sector is fast-evolving. “Luxembourg currently has nine virtual asset service providers. The term is a little bit more different than in the directive,” he said. “These are providers subject to CSSF [Luxembourg’s financial regulator] supervision,” and provide services like exchange transactions and transfers or safekeeping and/or administration.
“We’re expecting to see more and more entities apply for the licence as regulations get more clear and also as the customer’s appetite for cryptoassets increases,” he added.
From a revenue point of view, the European Commission expects additional tax revenue of €2.4bn, with a one-off cost of implementation of €300m and a recurring cost of approximately €25m per year.
Points to review: definitions, reporting thresholds, deadlines and penalties
This is still a proposal, which means the final text has not yet been agreed upon. Are there any points that might be important to add?
The definition of cryptoassets in the directive is quite broad, noted Kizito. He would recommend narrowing this definition, considering different types of cryptoassets and providing more clarity around similar technology.
A second point concerns the type of reportable transactions. “The directive should consider introducing de minimis rules,” Kizito suggested. “So, for instance, say that a transaction that does not exceed a certain amount should not be reported.”
“Another point that we noticed in the directive is the deadline, which is quite ambitious,” he said. “To give an example, under the Fatca and CRS--so this is Dac2--the reporting deadline in various member states is around May or June. However, under Dac8, they have a reporting deadline of 31st of January, which seems to be very ambitious.” Considering the increased number of regulations, resource availability and the need to notify users under GDPR, aligning the Dac8 deadline with the current Fatca [Foreign Account Tax Compliance Act]/CRS deadlines would be “more appropriate.”
Kizito also had a suggestion regarding the proposed penalties, which he called “disproportionate.” The Dac8 proposal includes minimum penalties--€50,000 for entities and €20,000 for individuals--for failure to report after two administrative reminders or if more than 25% of the reported data is incomplete.
“For startup fintech companies--because those are the kinds of companies that operate in the crypto market--such a magnitude of minimum penalties is disproportionate. And this might discourage the development of the blockchain technology in Luxembourg.” The current penalties applied under Fatca/CRS--around €10,000--are sufficient, he added.
The Luxembourg Banker’s Association, ABBL, also noted that the proposal “extends the scope of (1) the automated exchange of information on tax rulings to high-net-worth individuals and of (2) the CRS to notably cover e-money and central bank digital currencies.”
Dac8 will come into effect on 1 January 2026, but a few other steps have to come first: a consensus on the EU level must be reached and the text needs to be finalised, IT specifications need to be defined and the directive has to be transposed into Luxembourg law. Kizito said: “Hopefully the Luxembourg tax authorities will also issue some guidelines on how to apply both the directive and the domestic law.”
This article was published for the Paperjam+Delano Finance newsletter, the weekly source for financial news in Luxembourg. Subscribe using this link.