LMA update DAC6 riders

Background

The EU Directive on Administrative Cooperation (commonly known as DAC6) requires intermediaries, and in some instances, taxpayers to report to tax authorities certain information about cross border arrangements that exhibit one or more specific “hallmarks”. The hallmarks are intended to be targeted towards tax avoidance structures but they are drafted broadly such that some non-tax motivated transactions may also be caught.

The UK originally intended to implement the DAC6 regulations in the entirety but a change in policy on 31 December 2020 meant that the scope of the regulations implemented by the UK was significantly reduced to cover one hallmark only (Hallmark D). On 28 March 2023 the UK rules implementing DAC6 were repealed and replaced with The International Tax Enforcement (Disclosable Arrangements) 2023 (the “UK Regulations”). The regulations only require intermediaries and reportable taxpayers to report arrangements that involve the use of opaque offshore structures or that circumvent reporting under the Common Reporting Standard (“CRS”), which is similar in scope to DAC6 Hallmark D.

The UK Regulations impose the primary reporting obligations on “intermediaries” that know, or could reasonably be expected to know, that they have provided assistance or advice in connection with the design, marketing, implementation or organisation of a CRS avoidance arrangement or offshore opaque structure. It is unlikely (though not impossible) that a borrower’s facility agreement itself with third party lenders would meet one of the DAC6 hallmarks or be required to be reported under the UK Regulations. However the borrower’s use of the proceeds of the facility could mean that the facility forms part of a wider arrangement that is reportable.

If a loan forms part of a wider reportable cross border arrangement (under DAC6) or a CRS avoidance arrangement or opaque offshore structure (under the UK Regulations) then the finance parties may be intermediaries for the purposes of DAC6 or the UK Regulations and accordingly have reporting obligations and inclusion of the LMA riders should be considered.

LMA Riders

It should be rare that a finance party will be an intermediary with a reporting obligation for a vanilla financing for e.g. working capital purposes. However there are lending transactions, such as real estate finance and leveraged acquisition finance where the finance parties will receive detailed information on the borrower structure and tax position and which could mean that the finance parties are aware (or could reasonably be expected to be aware) that the underlying transactions could be within the scope of DAC6 and/or the UK Regulations and consideration should be given to the inclusion of the use of the riders. Including Rider B1 or B2 in particular could be helpful to demonstrate to the relevant tax authority that the lender has reasonable procedures in place for the purposes of any defence to any failure to report.

As before there are three riders:

• Rider A – This is a narrow additional disclosure permission within the confidentiality provisions that only applies where otherwise restricting disclosure would cause the confidentiality hallmark in DAC6 to be breached (the confidentiality hallmark isn’t present in the UK regulations). This rider should not be controversial and consideration should be given to its inclusion in all lending agreements with a cross border element to avoid any unexpected DAC6 risks. This Rider remains unaltered under the updated memo.
• Rider B1 – An additional representation to be given by Obligors that none of the transactions linked to the financing will meet one of the DAC6 hallmarks or required to be disclosed under the UK Regulations. The representation remains the same as before other than it now specifically refers to the UK Regulations. Borrowers are likely to push back on the inclusion of this rider other than in the most straightforward cases. For uncertain cases, Rider B2 below is likely to be more appropriate.
• Rider B2 – An alternative to rider B1 providing an information undertaking requiring the borrower to provide lenders with copies of any analysis or advice received on whether any of the transactions linked to the lending meets one of the DAC6 hallmarks or require disclosure under the UK Regulations. The form of the undertakings generally remains the same as before other than it now specifically refers to the UK Regulations in addition to DAC6.