DAC6, what is it? What Recruitment Businesses and Clients need to watch out for.
Labour supply chains are firmly on the radar of tax authorities across Europe. For recruitment businesses and their clients, this creates an increasing compliance challenge, particularly where pay structures operate across multiple jurisdictions and utilise “split payment schemes”.
At the centre of this is DAC6 (Council Directive (EU) 2018/822), a regime designed to shine a light on arrangements that may deliver a tax advantage. It is intended to identify circumstances in which recruitment activities may constitute facilitation of a reportable cross-border arrangement and to establish controls to prevent involvement in arrangements whose main benefit, or one of the main benefits, is a tax advantage.
The key point many businesses miss is this: you don’t need to design a tax structure to be exposed. Simply facilitating or enabling one can be enough.
Where the risk starts
DAC6 risk typically arises where workers perform services in one country, but their pay is structured across borders in a way that changes how it is taxed.
In practice, this often manifests in familiar ways, such as workers receiving a minimum salary in the country where they work, with additional payments being routed elsewhere, or umbrella or payroll models that split or reclassify income. Another example is standardised structures that are marketed on the basis of improved take-home pay. These features are not just commercial choices; they are red flags. If there is no clear non-tax reason for the structure, tax authorities are likely to question whether achieving a tax advantage is one of its main purposes.
Why recruitment businesses are in scope
A common misconception is that DAC6 only applies to those designing tax arrangements. In reality, the scope is much wider.
For example, if a recruitment business directs workers into a particular payroll model, explains how it improves net pay, coordinates contracts, or continues to place workers after concerns arise, it may be seen as facilitating a reportable arrangement.
Importantly, this is about conduct, not intent. Even passive involvement in the supply chain can create exposure.
The Main Benefit Test (MBT): A Practical Lens
A useful way to assess risk is to ask yourself three simple questions:
- Are services physically performed in one country?
- Is any part of remuneration paid or routed to a different country?
- Does the structure alter how income is taxed compared to a normal employment model?
If Yes to all three, Cross-border DAC6 risk exists!
Other warning signs include Marketing or communications focused on take-home pay, income splitting or a mismatch between where the work is performed and where income is taxed.
These are associated with Annex IV hallmarks as follows;
- Hallmark A.3 (standardised or mass-marketed arrangements)
- Hallmark B.2 (conversion of income into lower-taxed categories)
- Hallmark C.1(d) (cross-border payments benefiting from preferential taxation)
DAC6 – Is only part of the story
While DAC6 introduces reporting obligations, the bigger risk often lies elsewhere.
Where cross-border pay models artificially reduce taxable income or social security contributions in the country where work is performed, authorities may step in to recharacterise the entire arrangement. This can trigger retrospective tax and social security liabilities, often spanning multiple years, along with interest and penalties.
Crucially, these liabilities do not always stop with the payroll provider. If an umbrella company fails or disappears, tax authorities may look further up the chain towards recruitment businesses or even end clients under joint liability or deemed employer rules. DAC6 disclosures can also increase visibility, making it more likely that these structures are challenged.
What good practice looks like
In this environment, a defensive approach is essential.
Recruitment businesses and clients should avoid recommending or mandating specific tax-driven models and should instead remain structurally neutral. Due diligence on payroll and umbrella providers is critical, particularly with regard to understanding how any ‘net pay benefits’ are achieved.
Equally importantly, businesses should avoid explaining or promoting tax outcomes. The moment tax advantages become part of the conversation, the risk profile changes. If a structure appears to be designed to reduce tax in the country where the work is performed, this should be escalated internally and challenged. While contractual protections can help, they are not a substitute for proper scrutiny. And in some cases, the right decision is the simplest one: walk away.
Final thoughts
Cross-border workforce models are not inherently problematic. However, when they are used to split or reclassify income without a clear commercial rationale, they create significant exposure, not only under DAC6, but also in terms of tax, social security and reputational risk.
The safest course for recruitment businesses and clients alike is a cautious one: if a structure appears to be driven by tax considerations, treat it as high risk and act early.
