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DAC6 in Portugal: Thinking ahead

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These developments in EU and Portuguese legislation followed a general transparency framework

Ricardo Seabra Moura and Miguel Teles of Morais Leitão explain why it is important that parties involved in cross-border arrangements understand the role that economic substance plays as a result of DAC6 reporting.

Council Directive (EU) 2018/822, of May 25 2020, as amended (so called DAC6), establishes a mandatory reporting of cross-border arrangements by the intermediaries who provide them, or by the taxpayers who benefit from them, to all tax authorities across the EU. DAC6 has ultimately changed the way tax planning is being discussed.

In Portugal, DAC6 was transposed into the domestic law, establishing a mandatory reporting to tax authorities of cross-border and internal arrangements:

  • Reports on previous cross-border arrangements (in the period of June 25 2018 to June 30 2020) were due by February 28 2021;

  • Reports on previous cross-border or internal arrangements (in the period of June 30 2020 to December 31 2020) were due 30 days after January 1 2021;

  • Reports on new arrangements, either internal or cross-border (from January 1 2021 onwards), are now due 30 days after the application of the arrangements.

In this sense, Portuguese Tax Authorities (PTA) have been receiving arrangements reports made by the taxpayers and their intermediaries, as well as sharing information with other member states’ tax authorities within the EU framework. The first report sent by the PTA with this information was due on April 30 2021.

Accordingly, tax authorities will now audit new arrangements that have already been ‘hallmarked’ in the DAC6 mandatory reporting as cross-border arrangements that present an indication of a potential risk of tax avoidance.

The expectations are that PTA may try to use anti-abuse rules to tackle potential abusive tax arrangements reported, re-qualifying and applying a new tax framework to it in case the arrangement disclosed do not reflect valid commercial/economic reasons. Having said that, at this stage, is your business activity substantially covered?

These developments in EU and Portuguese legislation followed a general transparency framework that, since the BEPS project, has been focusing on the international cooperation to combat tax avoidance. This gave rise to automatic exchange of information between authorities regarding, inter alia, financial accounts, tax rulings, beneficial ownership, and now, disclosed cross-border arrangements.

DAC6 has, however, been raising doubts all over the EU and, to the best of our knowledge, preliminary rulings before the ECJ have been requested by France and Belgium’s High Courts. In Portugal, a mechanism to review the constitutionality of DAC6 domestic regime before the Constitutional Court has been applied by the Portuguese Ombudsman

In a nutshell, we stand before a situation where a taxpayer can establish an arrangement on legal and economic grounds but it might be subject to rigorous control by tax authorities. Taxpayers and the PTA will have more litigation over these concepts as well as regarding the application of anti-abuse scope. Recently, Portugal has observed a growth in anti-abuse rules litigation, mainly in tax arbitration courts. This gives rise notably to a need to endow corporate structuring and cross border arrangements with economic substance to be on the safe side.

What is economic substance?

Firstly, no legal definition, tiebreak rules or even guidelines regarding economic substance have been provided so far, which presents a great risk of multiple interpretations.

In addition, although such concept is also raised in connection with the beneficial ownership test, it is usually connected with entities that are incorporated to structure a cross-border arrangement. These entities usually serve a purpose in each structure but should also have the role of traditional companies (having premises, clients, workers, etc.). Without economic substance and activity, structures may be challenged.

In this sense, some measures designed to prevent tax evasion mechanisms were introduced due to transposition of anti-avoidance directives (ATAD) 1 and 2. One of these measures, regarding CFC rules, includes a specific reference to companies that carry on a substantive economic activity “supported by staff, equipment, assets and premises” (wording arising from Cadbury Schweppes (C-196/04), as developed by Danish Cases (C-116/16 and others)), which reveals the importance of such dimensions around substance requirements. Sufficient substance abroad is a sign of genuine activity.

Substance is also a reliable objective criteria of real business in the context of tax treaty application since tax treaties (such as Ireland, Malta, Italy, Luxembourg or Netherlands) have been amended under the multilateral convention to implement tax treaty related measures to prevent BEPS, introducing the principal purpose test, which, if not met, no benefits arising from the treaty will be granted.

Economic substance cannot be approached with a ‘one size fits all’ solution for all cross-border arrangements. This type of analysis has many variables that could affect the course of future tax authorities’ enquiries, audits, and tax litigation procedures.

It is therefore of major importance that parties notably involved in cross-border arrangements understand and be prepared to the role that economic substance plays as a result of DAC6 reporting and should revisit their structures.


Click here for more commentary by Morais Leitão on the transposition of DAC6 in Portugal


Ricardo Seabra Moura

Consultant, Morais Leitão



Miguel Teles

Associate, Morais Leitão



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