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According to the European Commission, the rise of alternative ways of payment and investment, such as crypto-assets and electronic money, poses significant risks of tax evasion. The European Commission argues that regulation and reporting obligations regarding crypto-assets can help prevent tax evasion, money laundering and other illegal activities.
Also, tax authorities often do not have the required information to monitor income earned from the use of crypto-assets. This is because crypto-assets can easily be traded cross-border.
The proposal of the European Commission takes the form of an amendment to the EU Directive for Administrative Cooperation (DAC). The proposed rules follows the OECD’s Crypto-Asset Reporting Framework (CARF) closely.
The seventh amendment of the Directive on Administrative Cooperation (DAC8) will primarily cover the exchange of information relating to crypto-assets. As with traditional financial instruments, income from crypto-assets may be subject to taxation. However, proper enforcement of this tax liability depends on proper information being provided to local tax authorities.
While the existing provisions of the DAC already provide for a reporting requirement for financial intermediaries (through DAC2), no such reporting requirement yet exists for Crypto-asset Service Providers. The reason is that crypto-assets and the relevant intermediaries for this type of assets are currently not fully covered by the DAC directive. The proposed amendment of the DAC directive should change this.
Under DAC8, 'Crypto-asset Service Providers', such as exchanges where crypto-assets can be traded, will be required to carry out know-your-client procedures on EU customers that hold crypto-assets, regardless of whether the providers themselves are based in the EU. The proposal defines EU customers as individuals or entities using platforms that offer crypto-asset services.
The definition of Crypto-asset Service Provider follows the definition as defined in the Markets in Crypto-Assets regulation (MiCA).
MiCA aims to provide legal certainty by protecting consumers from the risks of investing in cryptocurrencies. The providers and issuers of cryptocurrencies, for example crypto exchanges, must meet certain requirements to be able to offer crypto-asset services. The DAC8 rules are intended to complement MiCA.
A Crypto-asset Service Provider is any legal person that provides one or more covered crypto-asset services (for example exchanging fiat currency into crypto-assets and vice versa) to third parties and is authorized in a EU Member State to provide these crypto-asset services under MiCA.
DAC8 provides for an obligation for the Crypto-asset Service Provider to collect and verify information relating to crypto-assets in accordance with the due diligence rules proposed in DAC8. Individuals and legal entities holding crypto-assets with Crypto-asset Service Providers are identified as "Reportable Users".
Crypto-assets that have to be reported to the tax authorities are called Reportable Crypto-Assets.
The Crypto-assets Service Providers must provide the required information on Reportable Users to the tax authorities. The Crypto-Asset Service Provider must notify each user who holds crypto-assets on its platform. Besides, users have to be notified that certain information about them will be collected and reported to the tax authorities.
The following information of Reportable Users will be exchanged with the tax authorities:
For each Reportable Crypto-Asset, the following information has to be reported by the Crypto-Asset Service Provider to the tax authorities:
Overall, the Dutch government strongly supports tax transparency with regard to crypto-assets. The Dutch government therefore considers it important that as much countries as possible adopt CARF of the OECD. This should lead to a level playing field globally.
When DAC8 is introduced within the EU, it will have far-reaching implications for businesses and individuals in scope of DAC8. But other parties involved with cryptocurrencies will also be affected.
It is important to carefully assess how internal processes should be set up to meet the many reporting requirements under DAC8.
We also recommend that Crypto-assets Service Providers covered by DAC8 inform their users as soon as DAC8 comes into force.
We are happy to assist with the compliance of DAC8.