Luxembourg Passes DAC 7 Law for Automatic Exchange of Information by Digital Platform Operators
Luxembourg, renowned for its strong financial sector and commitment to international tax cooperation, has recently enacted the DAC 7 Law. The new legislation establishes the framework for the Automatic Exchange of Information (AEoI) by digital platform operators, ensuring greater transparency and tax compliance in the digital economy. This landmark move reinforces Luxembourg’s position as a leader in embracing digitalization while upholding global tax standards.
Digital platform operators are mainly software or applications that connect Seller and potential Purchaser allowing the development of the “Relevant Activity”. Digital platform operators can fall in different categories (mainly “Reporting platform operators” and “Excluded Operators”) and can be under the scope of DAC 7 Law regardless of their place of origin (EU or non-EU), provided they meet certain criteria.
Entry into force
The DAC 7 Law is largely applicable as from 1 January 2023, save for the provisions on joint audits, which will enter into force on 1 January 2024. The first reports will have to be filed with the Luxembourg Tax Authorities at the latest on 31 January 2024.
Registration and reporting obligations
Digital platform operators must register at the latest with the Luxembourg Tax Authorities on 31 December 2023, or when starting their activity, after that date.
The DAC 7 Law, short for the seventh amendment to the Directive on Administrative Cooperation (DAC), targets digital platform operators and aims to combat tax evasion and aggressive tax planning in the digital sector. Under this legislation, digital platforms will be required to collect and report detailed information about their users’ financial activities to tax authorities, allowing for enhanced tax enforcement and cooperation between jurisdictions.
Luxembourg’s decision to adopt DAC 7 aligns with international efforts to address the challenges arising from the digital economy’s rapid growth. As digital platforms increasingly facilitate economic transactions, tax authorities around the world have sought effective measures to ensure fair taxation and prevent revenue loss. The DAC 7 Law represents a significant step forward in achieving these goals.
The implementation of DAC 7 in Luxembourg brings several notable implications for digital platform operators and tax authorities. Firstly, digital platforms operating in Luxembourg will need to adapt their systems to collect and store specific data related to transactions facilitated through their platforms. They will have to collect the aforementioned data before 31 December of the reporting period. This information includes details about the buyers, sellers, and the nature of the transactions. By mandating this data collection, Luxembourg aims to improve tax compliance and minimize tax evasion risks.
Secondly, digital platform operators will be obligated to automatically exchange the collected information with tax authorities. This exchange will occur on a regular basis, enabling authorities to monitor and analyze the data effectively. Digital platforms operators will have to report to Luxembourg Tax Authorities at the latest on 31 January of the following year in which the seller was determined as reportable. Through this collaboration between platforms and tax authorities, Luxembourg seeks to strengthen tax enforcement and ensure that individuals and businesses are fulfilling their tax obligations in the digital sphere.
The DAC 7 Law not only strengthens the government’s ability to tackle tax evasion but also promotes international cooperation among tax authorities. By facilitating the exchange of information between jurisdictions, Luxembourg contributes to a more level playing field for taxation, reducing the opportunities for tax avoidance by digital platform operators.
Furthermore, the implementation of DAC 7 demonstrates Luxembourg’s commitment to upholding global tax transparency standards, such as the OECD’s Base Erosion and Profit Shifting (BEPS) project. The BEPS project aims to combat multinational tax avoidance by ensuring that profits are taxed where economic activities generating the profits are conducted. By enacting DAC 7, Luxembourg reinforces its adherence to these international standards, fostering a fair and equitable global tax environment.
Luxembourg’s move to enact DAC 7 reflects its forward-thinking approach and adaptability to the evolving digital landscape. The government recognizes the potential of the digital economy to drive economic growth and innovation, but also acknowledges the need for effective regulation to maintain a fair and sustainable tax system. By striking a balance between facilitating digital business activities and preventing tax abuse, Luxembourg demonstrates its commitment to responsible digitalization.
A digital platform operator could potentially face a fixed fine of €5,000 if:
- It fails to register or to notify Luxembourg or the Member State before 31 December 2023, and;
- It fails to report information collected in respect of each Reportable Seller on their platform before 31 January (in an annual basis).
Moreover, a digital platform operator may be fined up to an amount of €250,000 if, after an audit, it is demonstrated that it failed to comply with DAC 7 obligations.
In conclusion, the adoption of DAC 7 in Luxembourg represents a significant and further step in combating tax evasion and ensuring tax compliance in the digital economy. The new law compels digital platform operators to collect and exchange detailed financial information with tax authorities, enhancing transparency and cooperation between jurisdictions. By embracing DAC 7, Luxembourg reaffirms its dedication to international tax standards and positions itself as a frontrunner in fostering a fair and transparent global tax environment in the digital age.