Background and Objectives
On 17 October 2023, the Council of the European Union unanimously adopted the seventh amendment to the Directive on Administrative Cooperation (“DAC”). Referred to as “DAC 8”, this new legislation aims to expand cooperation between EU Member States, assisting them in addressing the complex challenges posed by the digitalised economy. Its primary objective is to extend the scope of automatic exchange of information to include revenues from crypto-assets transactions in order to address the problem of tax authorities not having the necessary information to monitor and verify the income generated by crypto-assets and their potential tax consequences. Additionally, DAC 8 seeks to broaden the current rules on exchange of tax relevant information by including provisions on exchange of advance cross-border rulings concerning high-net-worth individuals.
From a regulatory perspective, DAC 8 will co-exist alongside the OECD’s Crypto Asset Reporting Framework (“CARF”), a global tax transparency framework that provides guidance on cryptocurrency transaction reporting. Notably, the Directive makes specific references to the CARF’s commentaries as sources of illustration and interpretation. Furthermore, DAC 8 aligns closely with the Markets in Crypto-Asset Regulation (“MiCA”), using the same definitions for crypto-asset service providers, crypto-asset services, and crypto-assets.
Three-Step Approach of the Reporting Process
As a first step, the DAC 8 provisions impose due diligence procedures and reporting obligations on Reporting Crypto-Asset Service Providers (“R-CASPs”), such as crypto exchanges, trading platform operators or administrators.
Secondly, it would be bound to report information on the R-CASP itself, the reportable EU resident users, and transactional information on reportable crypto-assets to the competent authority (i.e., the tax authorities of the Member State of residence, authorisation or registration of the R-CASP).
The third step requires the competent authority of the Member State that has received the information from the R-CASP to share the locally reported information with the competent authorities where the users are residents via a mandatory automatic electronic exchange of information. Such exchange of information would be facilitated through the EU Common Communication Network using an Extensible Markup Language (“XML”) schema, which the European Commission has yet to develop.
Penalties for Non-Compliance
Member States were unable to reach a consensus on the proposed framework of minimum penalties put forth by European Commission. Therefore, the related article was removed from the final legislation, meaning that penalties are now left to the discretion of the Member States, provided they are effective, proportionate, and dissuasive.
Exchange of Advance Cross-Border Rulings
The automatic exchange of information is extended to advance cross-border rulings for natural persons issued, amended, or renewed after 1 January 2026 to either:
– Advance cross-border rulings concerning and involving the tax affairs of one or more natural persons where the amount of the transaction or series of transactions exceeds €1,500,000 and such amount is referred to in the ruling.
– Advance cross-border rulings determining the tax residence of a natural person in a Member State.
Timeline and Next Steps
Member States will have until 31 December 2025 to transpose the new rules into national law, with most provisions applying from 1 January 2026 onwards. The information collected by R-CASPs during the 2026 calendar year shall be reported in 2027.
Closing Remarks
Although R-CASPs may view the collection and reporting of data as an onerous obligation and an administrative burden, it holds great potential for positively shaping the cryptocurrency market in the long term. Establishing harmonised regulatory frameworks for cryptocurrencies across the EU is crucial for instilling investor confidence and enhancing the crypto market’s credibility, given that historically, cryptocurrencies have been considered untrustworthy due to their anonymity and lack of regulatory oversight.
Through the several amendments of the DAC framework over the years, there is a huge volume of data that is received by tax authorities. A common criticism is that tax authorities do not possess sufficient resources to filter through the copious amounts of data and assess whether taxpayers are keeping abreast of their tax obligations. The amount of data is vast and needs to be matched by the resources required to analyse such information.
While this Directive intends to harmonise the exchange of information regarding crypto-assets, the absence of a harmonised penalty regime undermines the very purpose of establishing a unified framework. Given that the Directive sets out minimum principles, Member States will hold considerable discretion in determining penalty amounts during the legislative transposition process. Moreover, it is worth noting that DAC 8 solely focuses on facilitating information exchange, without delving into the merit of how capital gains on the disposal or transfer of crypto-assets are to be taxed. Hence, the EU’s efforts of harmonisation through the above-mentioned frameworks could be compromised in this respect.
Overall, DAC 8 seeks to create a level playing field for taxpayers involved in investing and using crypto-assets by enhancing tax administrations’ ability to trace and detect taxable events. Prior to this new Directive, cryptocurrencies operated largely outside the scope of exchange of information legislation, which, coupled with the decentralized nature of the asset class, frequently led taxpayers to overlook the need to declare income or gains from their crypto holdings. With the introduction of these new harmonised regulations by as early as 1 January 2026, the European Commission has estimated that such measures could bring in additional tax revenues of up to €2.4 billion for Member States.
This article was written by Matthew Curmi.
Markita Falzon
Tax Leader
