Notification requirements for cross-border tax structuring (alias DAC6)
Bureaucratic chaos for entrepreneurs: From July 1, 2020, new compliance obligations apply to entrepreneurs with activities abroad. The basis for the new regulation is an EU directive, which has obliged all member states to implement it. Thus, companies with business relations in the EU might have an interest to know the new rule.
The new obligations intend to help reduce profit shifting and tax avoidance practices in a cross-border context. By reporting cross-border tax arrangements, the government has the opportunity to adapt legal loopholes or undesired arrangements through changes in the law.
The new task for entrepreneurs with foreign activities is now: For all arrangements with cross-border reference, it is necessary to check whether a reporting obligation is required.
The regulation in Germany includes income taxes (corporation tax, trade tax and income tax) as well as inheritance and gift tax and real estate transfer tax.
When does a cross-border reference exist?
The DAC6 reporting obligation only covers cases in which at least two EU countries or one EU country and a third country are affected.
The tax residency of the parties involved also plays a role here.
Every person involved in the tax structuring of a cross-border tax structuring falls under this rule.
When does a reporting obligation apply for a tax restructuring?
In addition to the border crossing, a tax restructuring has to be reported if it fulfills one of the legally regulated characteristics. The legislator differentiates between hallmarks that immediately trigger a reporting obligation and hallmarks for which a so-called main benefit test must also be fulfilled.
A. DAC6 - Immediate reporting requirement
The following arrangements immediately trigger a reporting obligation:
- Transfer pricing with intangible assets that are difficult to evaluate or use of a one-sided regulation
- Relocation of functions with a significant impact on the profit of the transferring company
- Payments to affiliated “stateless” companies
- Payments to affiliated companies domiciled in non-cooperating countries
- Payments in the case of multiple tax breaks (e.g. double deductibility of business expenses, multiple depreciation, white income, etc.)
- Asset transfers with different valuation approaches in the countries
- Arrangements that bypass the exchange of information between states
- Tax structuring in a non-transparent chain of participants
B. DAC6 - Obligation to report if the main benefit test is fulfilled
First of all: For a DAC6 reporting obligation, it depends largely on the reasons for which the tax restructuring was carried out. If one of the reasons is to obtain a tax advantage, the test is generally to be regarded as fulfilled and the tax structuring must be reported. A tax advantage (main advantage) exists if a knowledgeable third party, after knowing all the circumstances, must come to the conclusion that the tax advantage is the cause of the tax structuring.
The German tax authorities have stipulated that there is no tax advantage for certain situations (e.g. use of exemption limits and allowances, exercise of tax options, etc.). This so-called ” whitelist ” finally contains the case groups that are exempt from the notification obligation.
The collaboration with your tax advisor is also essential for the question of whether there is a notification obligation for tax structuring. This could be the case in the following constellations:
- Confidentiality clauses regarding disclosure to third party agreed
- A success fee has been agreed with your tax advisor. This remuneration depends on the occurrence and the amount of the actual tax advantage
- There is a standardized documentation / approach of the tax structuring that is available for more than one user. This does not include individual advice.
- Tax structuring’s are proposed for the optimized use of losses when acquiring a company
- Income is converted into gifts or non-taxed or low-taxed income
- There are circular transactions involving companies with no economic activity
Naturally, the law is very abstractly. Below are a few examples that fall under the above-mentioned constellations: Debt push-down arrangements, the contribution in subsidiaries and repayment as an interest-bearing loan, the granting of a license to a subsidiary for the production of goods, which are then bought back at high prices.
Certain payments to affiliated companies also trigger a notification obligation in conjunction with the existence of a tax advantage:
- The recipient's state has a corporate tax rate of 0 or near 0 percent
- The payment is completely tax-free for the recipient
- The recipient's payment is subject to a preferential tax arrangement (e.g. license box)
How is the DAC6 reporting obligation carried out?
Deadline
The report is made electronically via a portal at the Federal Central Tax Office. The data set is standardized across the EU.
The report must generally be submitted within 30 days of the end of the event. An event is the provision of the tax structure for implementation, the willingness of the user to implement it and the first steps towards implementation by the user.
Information to report
In addition to the abstract information such as the legal provisions and a summary of the cross-border structure, etc., individual information about the user, the affiliated company, etc. must also be provided.
In principle, the intermediary (usually the tax advisor) has to submit the report. However, since a German tax consultant is subject to a statutory duty of confidentiality, the user of the tax structuring must release him from this obligation so that the report can be submitted. Without being released from the duty of confidentiality, the tax advisor still has to report the abstract information, whereas the user of the tax structuring must then report the individual information himself. Tax advisors and companies should work hand in hand here to complete these formalities together.
Reporting in more than one EU country?
If the report is made by an intermediary in one country, the other intermediaries in the other country generally no longer have to submit a report. However, caution is advised here, as there may well be situations where the report is not made abroad.
What happens if you don't follow the DAC6 rules?
If you fail to report it, it is an administrative offense. This can be punished with a fine of up to 25,000 EUR.
Attention: other EU countries have significantly higher fines if the notification requirements are not met. In Poland, a violation of the reporting obligation can be sanctioned with up to EUR 5 million.
Since these are cross-border reporting obligations, the sanctions of other EU countries must always be taken into account.
Information in the tax return
In addition to the actual notification requirement, a cross-border tax structure must also be stated in the tax return in the year in which the benefit is to take effect for the first time.
Practical Tip
At first glance, the new regulation regarding DAC6 reads abstract. Many companies assume that only larger corporations are affected by the obligation. But this is a mistake. Medium-sized companies can also be affected. A reporting obligation should be checked for every tax structuring with a cross-border reference. In case of doubt, a report should be made.
It is important that DAC6 is only a matter of reporting requirements. These should not be a knockout criterion for your cross-border tax structuring.
For a better understanding, this article refrains from using complicated technical terms and is presented in shortened form with regard to the individual preconditions required by law. An individual examination in your case is recommended.
Disclaimer: This article does not constitute legal or tax advice but is for general information only. Every personal/company situation is unique, so that your tax situation might be different as described in this article. Therefore, I always recommend professional advice to avoid any tax disadvantages.
Last updated on October 12, 2021
