With DAC 6, the European Union (EU) aims to prevent potentially aggressive tax planning arrangements. In this context, the reporting obligation applies to all so-called intermediaries' resident in the EU. Nevertheless, Swiss companies may also be affected by the reporting obligation. Therefore, we have summarized the most important critical points of DAC 6.
DAC 6 imposes a reporting obligation on specific "cross-border tax arrangements." A precondition for the reporting obligation is the fulfillment of defined characteristics (so-called hallmarks). In principle, the so-called "Intermediary" is subject to reporting. Intermediaries can be lawyers, tax consultants, trustees, financial service providers, family offices, or other entities alike. In some instances, the reporting obligation is passed on to the companies involved, the so-called "relevant taxpayer." A failure to comply with the reporting obligation can sometimes lead to substantial sanctions. In Poland, for example, penalties of up to EUR 5,500,000 and imprisonment for up to 8 years are possible.
Cross-border tax planning
Cross-border tax planning is covered by DAC 6. Cross-border in this context means the involvement of at least two EU member states, or one EU member state in conjunction with a third country (e.g., Switzerland).
In principle, any tax imposed by an EU member state is affected. However, the directive leaves the EU member states free to include customs duties as well as harmonized valueadded tax and excise duties in their respective national implementation.
The directive bases the definition of tax arrangements on five broad categories of hallmarks. These hallmarks are designated with General (A), Specific (B), Cross-border Payments (C), Tax Transparency (D), and Transfer Pricing (E). Furthermore, the so-called "Main Benefit Test" must be fulfilled for the reporting obligation for hallmark A, B, and partly C. To fulfill the Main Benefit Test means the reasonable expectation of an informed third party that the main benefit, or one of the main benefits of a tax structuring, is attaining a tax advantage, taking into account all essential facts and circumstances.
Hallmarks in detail
The general hallmark (A.1) includes the agreement of a confidentiality clause prohibiting the disclosure of how the tax advantage is obtained due to the design. However, the obligation of professional secrecy does not by itself fulfill this hallmark. Furthermore, the hallmark (A.2) includes an agreement on performance-related remuneration; this means that the intermediary's remuneration is based on the tax advantage obtained. The hallmark (A.3) covers all standardized documentation and structures available to more than one taxpayer without requiring any significant individual adjustments for implementation. This standardization includes, for example, financial products or centralized services provided by a group member. Such tax structures are also called "marketable structures."
A tax arrangement meets the hallmark (B.1) if a loss-making company is acquired. In this case, the acquired company's main activity must be terminated, and obtaining the reduction in the acquirer's tax burden due to loss usage must be received by taking inappropriate steps. The conversion of income into assets, gifts, or other non-taxed or lower-taxed income, or non-taxable income is covered by the hallmark (B.2). The hallmark (B.2) could be fulfilled, for example, by a cash contribution from the parent company to its low-taxed subsidiary, if these funds are subsequently relent to the parent company as a loan by the subsidiary and the interest paid is recognized as an expense by the parent company for tax purposes. The hallmark (B.3) subjects the use of circular transactions by including companies without significant economic activity or by executing transactions that cancel or offset each other ("round-tripping") to the reporting obligation.
The hallmark (C) "cross-border payments" is subdivided into hallmark C.1 to C.4, whereby the Main Benefit Test must be fulfilled for the following criteria of hallmark C.1 regarding deductible cross-border payments between associated enterprises: (i) in the recipient's state of residence, no income tax or profit tax is payable because that state does not levy income tax or profit tax or has an income tax rate of zero or close to zero, (ii) in the recipient's state of residence, the payment is fully tax-exempt, or (iii) the recipient benefits from a preferential tax regime in its state of residency for the payment received. Even without fulfilling the Main Benefit Test, a tax arrangement can fall under hallmark (C.1). The fulfillment is given if (i) the recipient of a deductible cross-border payment between associated companies is not resident in any tax jurisdiction, or (ii) the recipient's state of residence of such a transaction is a non-cooperating state according to the EU or OECD definition. Hallmarks (C.2) to (C.4) also do not require compliance with the Main Benefit Test to constitute a tax arrangement. The hallmark (C.2) is met if the same asset's depreciation is claimed in more than one state. For example, this may be due to qualification conflicts in a leasing agreement. To meet the hallmark (C.3), multiple tax exemptions must be obtained for the same income, which consequently remains untaxed. The multiple tax exemption results, for example, from qualification conflicts or assignment conflicts in a three-state double taxation treaty case, resulting in tax-exempt income between states A and B and an exemption between states A and C. The hallmark (C.4) covers the transfer of assets whose taxable exit values in the country of sale differ materially from the country of purchase's taxable acquisition value.
The hallmark (D) "Tax transparency" is always fulfilled when the reporting obligation of the automatic exchange of information on financial accounts is undermined (D.1). In addition, hallmark (D) is fulfilled if a non-transparent chain of legal or beneficial owners is set up (D.2), for example, to avoid the disclosure of the owner's information via the mutual exchange of information.
The hallmark (E) concerns transfer pricing. A tax arrangement falls under hallmark (E.1) by using unilateral safe harbor rules. The application of a so-called "safe harbor interest rate" of the Swiss Federal Tax Authority for group loans fulfills in many EU member states the hallmark already. Hallmark (E.2) covers transfers of intangible assets that are difficult to measure. This difficult measurement can be either due to (i) insufficient reliable comparative values being available at the time of transfer or due to (ii) the forecasts of expected cash flows or the assumptions underlying the intangible asset's measurement being highly uncertain. Finally, tax arrangements are also given if hallmark (E.3) is met. This hallmark requires a cross-border transfer of functions, risks, assets, and liabilities. The expected annual EBIT of the transferor over three years after the transfer is less than 50% of the transferor's annual EBIT that would have been expected if the transfer had not taken place.
An intermediary is any person who designs, markets, organizes, makes available for implementing, or manages to implement a reportable cross-border tax arrangement. For a person to be able to act as an intermediary within the meaning of DAC 6, he must meet at least one of the following additional conditions: (i) being a tax resident in an EU Member State, (ii) having a permanent establishment in an EU Member State, (iii) being registered or subject to the laws of an EU Member State, or (iv) being a member of a 'professional register' or a 'professional association' for legal, tax or advisory services in an EU Member State. In addition to traditional consulting companies, this includes group companies that provide tax services for the group as well as banks that offer structured products. If more than one intermediary is involved in cross-border tax planning, each intermediary is, in principle, obliged to report individually. Reporting can only be omitted if it can be proven that another intermediary has already reported the cross-border arrangement.
The relevant taxpayer is the person to whom a reportable cross-border arrangement is made available for implementation, or who is prepared to implement a reportable cross-border arrangement, or who has implemented the first step of such an arrangement. The relevant taxpayer is, therefore, in principle, the "user" of the cross-border tax structure.
If no intermediary is involved or the intermediary is not resident in an EU member state, the reporting obligation falls on the relevant taxpayer. If more than one relevant taxpayer is involved in cross-border tax planning, each relevant taxpayer is generally obliged to report. However, multiple reporting can be omitted if it can be proven that other relevant taxpayers have already reported cross-border arrangements.
Example I: A Swiss parent company of a group of companies asks a Swiss law firm to advise it on transferring a patent that is difficult to evaluate to its French-based subsidiary. The patent transfer falls under hallmark E.2, which means that the tax structure is subject to reporting requirements even if the Main Benefit Test is not met. As the Swiss law firm is not an intermediary in the sense of DAC 6, the reporting obligation falls onto the relevant taxpayer. Since the subsidiary is domiciled in the EU, the subsidiary must report the tax arrangement to the French authority.
Example II: A Swiss parent company allows its German subsidiary to use trademark rights for a license fee. The Swiss company benefits from cantonal and federal tax relief (Tax Holiday). If the Main Benefit Text is fulfilled in this respect, there is a reportable tax arrangement (hallmark C.1). Since, in this case, no intermediary is involved, the relevant taxpayer is obliged to report. In principle, both companies are subject to reporting requirements in Germany. The subsidiary in Germany is subject to reporting due to its tax residency in Germany. The parent company generates license income in Germany and therefore has a limited tax liability in Germany. Hence, the parent company generates income that is relevant for German tax under DAC 6. Generating such income is sufficient to justify a reporting obligation under the German provisions. One of the two companies may exempt itself from the reporting obligation by providing proof of the other company's reporting.
Intermediaries or relevant taxpayers must report a reportable cross-border tax arrangement within 30 days. The 30-day period starts from the earliest of the following events: (i) the arrangement is made available for implementation, (ii) the arrangement is ready for implementation, (iii) the first steps for implementation of the arrangement are taken. Furthermore, the notifications of marketable designs must be updated every three months.
The current deadlines and the treatment of reportable cross-border tax structures, which has been in existence since June 25, 2018, can be found in our further magazine article.