In a significant move on December 8, 2022, the European Commission unveiled DAC8, a set of fresh regulations geared towards fostering tax transparency. The primary objectives are to eradicate potential tax loopholes, fortify measures against tax avoidance, and elevate the European market's standing as a pivotal investment hub. Once DAC8 becomes operational, the onus of gathering, validating, and furnishing information regarding crypto assets and their users will fall squarely on the shoulders of crypto service providers. This marks a pivotal shift in responsibility within the realm of tax transparency in the EU, emphasizing the pivotal role that providers of crypto services will play in upholding the integrity of the financial landscape.

In delineating a decisive stance on the regulation of tokenized assets in Europe, DAC8 brings forth pivotal elements:

  • Substantial revisions to the established DAC framework.
  • Providing directions for worldwide solutions shaped for wealthy individuals and creating a system to report these virtual assets under the oversight of relevant European Union authorities.

The central emphasis lies on the introduction of the Crypto Asset Reporting Framework (CARF), scheduled to become operational on January 1, 2026. Within the existing DAC framework, virtual assets are presently not subject to information exchange. This implies that, at present, individuals who own or engage in transactions with crypto assets are not required to disclose pertinent information about these digital holdings to the tax authorities of the European Union.

Once the fresh EU tax transparency system is enacted, member states must collect and share information about users of crypto assets. This involves putting in place thorough checks and reporting guidelines for entities involved in crypto transactions. These guidelines take cues from the OECD's Crypto Asset Reporting Framework (CARF).

New EU tax transparency rules: Who is obligated to report?

Let's explore crypto reporting through the lens of the Markets in Crypto-Assets Regulation, acting as a guide to identify reporting providers. It covers not only explicitly mentioned entities but also those operating within its boundaries. This regulation serves as the playbook for overseeing digital currency markets in Europe, setting standardized conditions. Despite being adopted on September 24, 2020, the legislative journey continues to unfold, shaping crypto regulations.

According to DAC8, any authorized legal entity in a member state offering professional services related to crypto assets, such as exchanging regular currency for crypto, is required to provide reports.

A significant distinction from the EU proposal and OECD's CARF is that businesses within the European Union must adhere to MiCA regulations to fall under DAC8. These forthcoming DAC8 transparency rules will also impact service providers from outside the EU. They have the option to report transactions if their home country aligns with CARF or equivalent laws, as outlined by a special mechanism.

DAC8 mandates virtual asset service providers to report on clients subject to reporting requirements. However, the following entities are exempted from this reporting:

  1. Corporate enterprises and affiliated enterprises within the group.
  2. Government institutions.
  3. International organizations.
  4. Central banks.
  5. Financial institutions, excluding investment organizations. This category broadly includes organizations engaged in activities like trading in money market instruments, participating in portfolio management, or managing financial assets for clients.

Digital and tokenized world, issuing various forms of decentralized assets, when engaged in any payment or investment activities, requires reporting to DAC8, except for CBDCs and electronic money.

Operational Procedures for Reporting Entities:

Phase 1: Diligent Examination Protocols. DAC8 tax transparency regulations introduce a mandate for reporting service providers to amass and authenticate information adhering to diligent examination protocols. Thorough verification processes necessitate the identification of individuals and legal entities utilizing crypto assets as eligible registrable users.

Distinct sets of diligent examination processes must be executed for both individuals and legal entities. For instance, certain situations may necessitate the identification of controlling individuals for legal entities. Regardless, explicit details such as the taxpayer's resident country, legal address, and name must be precisely specified.

Phase 2: Disclosing to Regulators: Evolving EU cryptocurrency market regulations require blockchain service entities to furnish essential data on reporting account holders to the applicable regulatory agency. Reporting providers must inform each concerned party that their information will be collected and reported to authorities in compliance with the proposed DAC8 directive and GDPR.

Phase 3: Seamless Data Flow Between Regulatory Bodies. The conclusive stage encompasses the smooth interchange of data between the regulatory authority of the specific member state, receiving insights from the reporting service provider, and the regulatory body of another European member state, where the reporting entity maintains its tax residency. The proposal extends its coverage to both local and international transactions. It's noteworthy that the EU aligns closely with the OECD's Common Reporting Standard (CARF) without divergence in this context.

The exchange of information regarding registrable users encompasses:

  1. Full name.
  2. Legal residence.
  3. Member state of registration.
  4. Tax identification number (if applicable).
  5. Global Legal Entity Identifier (LEI).

The application of the information gathered and shared under DAC8 by EU authorities remains uncertain. This introduces valid concerns about the security and confidentiality of the reported and transmitted data in adherence to DAC8's new tax transparency regulations. To ensure data protection, competent authorities across all EU member states must implement a robust cybersecurity framework for the collection, exchange, and storage of information.

Tax Accountability Measures: What to do next and what to expect

The EU Regulatory Body is firm on enforcing measures for regulatory violations linked to DAC8. Providing vital directives for member states to craft their frameworks, DAC8-aligned provisions' violation results in a minimum financial penalty of €50,000, escalating to €150,000 for entities with income exceeding €6 million.

Concurrently, the OECD actively crafts an exhaustive integration set to synchronize CARF's application with DAC8. This encompasses:

  • Establishing bilateral/multilateral competent authorities for seamless information exchange among participating nations.
  • Implementing cutting-edge IT solutions dedicated to facilitating smooth data interchange.
  • Offering comprehensive guidance tailored for the efficient execution of CARF, providing insights into the reporting practices of both crypto asset service providers and participating nations.

Summing up, the EU Commission extends a request for stakeholders to contribute their insights on the suggested adjustments to EU crypto market regulations until February 7, 2023. Member states are obligated to formally adopt and disclose their legislations, norms, and administrative guidelines essential for DAC8 compliance by December 31, 2025. This timeline signifies the enforcement commencement of DAC8 on January 1, 2026.

For a more in-depth discussion on the topics covered in the publication, interested parties are encouraged to engage with our company's experts. Within our suite of services, we provide consultations on the regulatory landscape of EU crypto asset markets and offer support for the initiation of crypto startups.