On December 8, 2022, the European Commission (EC) proposed new rules regarding tax transparency for all service providers facilitating transactions in crypto assets for customers located in the European Union1. These rules are in addition to the regulation concerning markets in crypto assets and anti-money laundering rules. What do these new rules mean for you?
What does the EU amendment directive DAC82 entail?
The directive (DAC) has undergone six expansions since its introduction in 2011, including:
- Automatic exchange of banking information;
- Potentially aggressive cross-border tax planning arrangements; and
- Exchange of data and information on sales via digital platforms.
In the proposed EU amendment directive DAC8, the EC obliges providers of crypto asset services to report transactions from EU-resident customers. This directive amends the Administrative Cooperation Directive 2011/16/EU. Additionally, the directive establishes a common minimum level of sanctions for serious cases of non-compliance, such as the complete absence of reporting, despite administrative reminders to do so. DAC8 is essentially the "crypto-equivalent" of the automatic exchange of bank account information.
Furthermore, the EC proposes to expand the reporting obligations of financial institutions to cover e-money and digital currencies. The EC also wants to expand the scope of the automatic exchange of information to include advance cross-border rulings for wealthy individuals. The new rules are intended to apply in the EU Member States from January 1, 2026.
Background of directive DAC8
In order to generate income for government investments and services while creating a business environment where innovation can thrive, fair and effective taxation is essential. However, tax authorities currently do not have the necessary information to monitor the revenue generated from the use of crypto assets. Owners easily trade crypto assets across borders with little supervision, leading to significant tax revenue losses as tax authorities do not have sufficient resources to verify whether owners of crypto assets are actually paying taxes. The proposal will enable member states to better detect and combat tax fraud, evasion, and avoidance by obliging all providers of crypto asset services, regardless of their size or location, to report transactions from EU-based customers.
Content of DAC8 proposal
The proposal for the DAC8 directive obliges providers of crypto services (brokers, crypto exchanges, and providers of digital wallets) to collect information about the identity of their customers, both natural persons and legal entities. In the case of the latter category, crypto service providers must also identify the controlling persons in accordance with the rules applicable to passive non-financial entities under the Common Reporting Standards (DAC2). In addition, crypto service providers must collect information about their customers' transactions, including transactions where crypto assets are bought or sold against fiat currency and exchanges of different types of crypto assets. The crypto service providers must share this information annually with the relevant authority of a Member State by category of crypto asset, and then exchange the information automatically via existing systems.
The proposed directive is related to the EU Markets in Crypto-assets (MiCA) directive, which regulates the issuance and trading of crypto assets within the EU. Unlike MiCA, however, DAC8 also applies to crypto service providers located outside the EU, even if they do not offer their services within the EU.
Apart from minimum penalty amounts, the proposal does not provide tools for Member States to enforce compliance with DAC8 obligations for such entities located outside the EU. This will obviously pose problems for national legislators. In addition, crypto transactions often take place in a "decentralized" manner, meaning that there is no intervention from physically located parties. Technically, such parties (such as decentralized exchanges) fall under the proposed directive, but compliance with it will be a challenge.
Compliance and sanctions for DAC8
The current DAC directive only gives Member States a general instruction to impose effective, proportionate, and dissuasive fines for non-compliance. The proposed directive adds minimum fine amounts in case a person fails to report after two reminders or if more than 25 percent of the reported information is incorrect or incomplete. The minimum fines vary by section of the DAC.
In most cases, the proposed minimum is 50,000 euro if the person's annual turnover is less than 6,000,000 euro and 150,000 euro for higher turnovers. For natural persons, the minimum is set at 20,000 euro. These minima apply to DAC2 (Common Reporting Standards (CRS)), DAC6 (aggressive tax arrangements), DAC7 (platform operators), and DAC8 (crypto assets). For Country-by-Country Reporting (CbCR, DAC4), the minimum is 500,000 euro. Providing an incorrect self-certification form is also punishable.
The proposed minimum fines in the Netherlands for DAC6 and DAC7 are higher than the proposed minimum amounts. It is logical to align the fines for DAC6 and DAC7 with those for CRS (DAC2) rather than the much higher fine for CbCR (DAC4), as currently included in the law. The proposed directive follows this idea. However, it is unclear whether the Dutch legislature intends to lower the fines and, if not, what arguments they will use.
Proceedings of the Lower House of Parliament
Immediately after its publication by the European Commission on December 8, 2022, the proposal was put up for public consultation. In addition, the Dutch government asked various stakeholders and experts to respond to the proposal3. On February 3, 2023, the Minister of Foreign Affairs informed the House of Representatives in writing about the proposal. Following this letter, questions were asked by various parliamentary factions. The answers to these questions indicate that the Netherlands advocated for an effort obligation for the exchange of TIN4 during the negotiations, while the majority of EU member states are in favor of a results obligation.
The Netherlands will now work towards a later entry into force of the TIN exchange system. At present, it is difficult to assess the impact of DAC8 on the Tax and Customs Administration's ICT systems, but the ICT capacity is expected to be available from 2026. Finally, the Netherlands is in favor of formulating guidelines on the level of fines for non-compliance with DAC8 obligations5.
Tax information under DAC8 cannot be used for pre-filled tax returns (VIA)
The Dutch Tax and Customs Administration receives a portion of the tax information through the DAC8 system. This information is used by the Tax and Customs Administration for risk analysis, but not to fill out tax returns (VIA). This was stated by State Secretary Van Rij of Finance in response to parliamentary questions on the DAC8 directive proposal6.
The mandatory exchange of TIN requires efforts from the Tax and Customs Administration. It involves obtaining, providing, and exchanging TIN in information flows with DAC1 data. These are data on income and wealth categories, such as labor income, pensions, etc., which are included in the original directive (DAC1).
The Tax and Customs Administration shares information on crypto-related transactions with DAC8, but not balance information. The lack of information on held crypto balances means that the received DAC8 information is not suitable to serve as information for tax returns. Therefore, the Tax and Customs Administration uses this information for risk analysis but not to fill out tax returns. This amendment of the DAC also includes a modification of DAC2; information on bank and investment balances, to which crypto-assets must now be added.
Crypto asset service providers that offer custody services are considered financial institutions by the Tax and Customs Administration, which means they must report under both DAC2 and DAC8.
How does this affect you?
As a result of DAC8, providers of crypto asset services, such as exchanges, will be required to perform KYC procedures on EU customers, regardless of whether the providers themselves are located in a European jurisdiction. In addition, according to DAC8, providers of crypto asset services must exchange information on domestic and cross-border transactions of reportable crypto assets with the competent tax authorities.
In response to parliamentary questions regarding the DAC8 proposal, State Secretary Van Rij of Finance indicated that the fiscal information received through DAC8 can be used for risk analyses, but not for (pre-)filling tax returns. DAC8 concerns the mandatory exchange of data on crypto-related transactions, where no balance data is exchanged. However, in addition to DAC8, a modification of DAC2 is also included, requiring the addition of crypto assets to the information on bank and investment accounts that financial institutions must report on.
Crypto asset service providers that offer custody services are considered to be financial institutions, and therefore must report under both DAC2 and DAC8. So, it seems that your crypto data will be shared with the Tax Authorities! If you have not previously declared your crypto assets, we advise you to come forward in a timely manner, to avoid high fines7. We can assist you with this process.
1 European Commission December 8, 2022, IP/22/7513.
2 Directive on Administrative Cooperation in the field of taxation.
3 Parliamentary Papers II 2022/23, 22 112, No. 3600.
4 TIN; Tax Identifcation Number
5 Decision memorandum SO BNC-fiche DAC8, March 27, 2023, note number 2023-0000082341.
6 Letter from the State Secretary "Regarding Written Consultation on the Seventh Amendment to the Administrative Cooperation Directive for Taxes" dated April 17, 2023, reference number 2023-0000075037.
7 A maximum of 300%.