Doing business in Europe means taking into account the many local rules, EU laws and international regulations. It is not unusual to benefit from various tax benefits or to research the best possible tax solutions. However, tax evasion and aggressive tax schemes are highly unwanted and will be fined. Therefore, it is beneficial to look into the DAC6: The EU Mandatory Disclosure Rules for cross-border arrangements. Let’s check if your company is well-prepared for cross-border arrangements.
What is DAC6?
DAC6 is an EU Council Directive that entered into force on 25 June 2018 and is implemented by EU jurisdictions into EU national law. Furthermore, DAC6 amends the cooperation between the EU Member States by focusing on joint actions and audits.
This directive’s primary goal is to harmonize tax rules in Europe by providing tax authorities an early’ warning system’ that notifies potentially aggressive tax planning schemes. Therefore, intermediaries are obligated to disclose potentially aggressive tax planning schemes on cross-border arrangements, otherwise called ‘reportable cross-border arrangements.
Step 1: Check who is required to disclose reportable cross-border arrangements
Intermediaries, and in certain situations, taxpayers, have an obligation to report cross-border arrangements to the authorities. An intermediary may be relieved from its reporting obligation if they can prove that another intermediary has already reported the relevant arrangement. The image below shows an overview of who is required to disclose these arrangements.
Step 2: Check if the arrangement is cross-border and ‘reportable’
For an arrangement to be cross-border, at least one of the participants must be located in more than one EU Member State. There is no reporting obligation if all participants are tax residents in the same jurisdiction or if there is no connection with any EU Member State. However, even an arrangement between two entities from the same EU Member State may be considered cross-border in some cases. A prime example is an EU entity with foreign shareholders. Below is a short overview of examples of non-cross-border and cross-border transactions.
For an arrangement to be reportable, one or more of the DAC6 Hallmarks must be met as set out in Annex IV of the DAC6 Directive. Therefore, a cross-border arrangement will only be reportable if one or more DAC6 Hallmarks are met. These hallmarks are characteristics or features of a cross-border arrangement that may indicate a potentially aggressive tax planning structure. The five categories of the hallmarks set out by the DAC6 directive are:
- Generic hallmarks linked to the main benefit test
- Specific hallmarks linked to the main benefit test
- Specific transactions related to cross-border transactions
- Specific hallmarks concerning automatic exchange of information and beneficial ownership
- Specific hallmarks concerning transfer pricing arrangements
The ‘arrangements’ mentioned in the hallmarks represent undefined terms included in the five hallmark categories.
Step 3: Do the Main Benefit Test
The intermediary or taxpayer may benefit from a tax advantage when they fulfill the ‘main benefit test.’ However, this tax advantage may only be considered under generic hallmarks of categories A, B, and (some parts of) C.
However, it is crucial to keep in mind that due to the broad scope of the hallmarks, DAC6 creates a risk of under-reporting and over-reporting. Furthermore, there is no consistent interpretative guidance agreed between the EU Member States.
Step 4: Act on time and prepare for penalties
You should report reportable cross-border arrangements through a special reporting form. Each Member State has its tax authority, so it is recommended to check out your local tax authority website. Generally, you must report a reportable cross-border arrangement within thirty days of the earliest of:
- the day after the arrangement is made available for implementation;
- the day after the arrangement is ready for implementation; or
- when the first step in the implementation of the arrangement has been made.
In case of non-compliance, such as non-reporting, incomplete or inaccurate information, the relevant intermediary and taxpayer may be subject to penalties. These penalties are up to a maximum of €870,000. In some instances, there will be a criminal prosecution. In other words, it is better to prevent penalties altogether. After all, significant sanctions and reputational risks apply to not only the businesses but also the intermediaries!
As mentioned earlier, there are risks in reporting your cross-border arrangements, such as under- and over-reporting. Meanwhile, many companies either miss out on tax benefits or end up overlooking essential hallmarks. We at Global Connect Admin provide tax advice for many European companies and international companies that have activity in the EU. Do you have any questions regarding the DAC6, (reportable) cross-border arrangements or other vital information to do business successfully? Feel free to send us any questions our way; we would love to assist you.