date | theme

01. July 2019 | International Tax Design: Patent & Licensing Company Abroad

22. July 2020 | Functional relocation and functional doubling in International Tax Law

25. January 2021 | International triple holding: no exit tax & gift tax/inheritance tax

23. September 2021 | EU Directive DAC 6: Exchange for international tax arrangements (this contribution)

The EU directive DAC 6 serves to determine various international tax design models and an EU-wide registration. As a result, these models are to be recognized more easily, prevented or even such designs are to be controlled by new regulations. It is important to focus on particularly aggressive models. Nevertheless, there are proven tax design models, which are also recognized by other states.

At the beginning of a new EU directive, the question is first of all about the goal and the starting points of this. This is the case on 25. In May 2018, DAC 6 (Directive on Administrative Cooperation) introduced the goal of improving the cross-border exchange of authorities on aggressive tax models and obliging companies to report certain design models. This directive initially obliges the Member States to implement legislation which ensures the automatic exchange of information in the area of taxation on reportable cross-border arrangements. Consequently, the objective for all EU countries is for certain cross-border tax arrangements to be communicated to the financial authorities of the Member States. Subsequently, they are encouraged to exchange and develop indifferent regulations.

In the following, the DAC 6 guideline is specifically examined, with explanations regarding the personal reporting obligation, the reportable information and the beginning and duration of the reporting period. In addition, there is only a cross-border arrangement and thus a reporting obligation, provided that certain characteristics or criteria in connection with the so-called “main benefit” test are fulfilled. Finally, this test will also be examined.

Now the EU directive DAC 6 has been introduced in the EU since 2018. Nevertheless, the resulting reporting obligation only applies since 01. July 2020. In principle, a maximum reporting period of 30 days applies to all tax design models with cross-border arrangements. These design models must meet one of the criteria defined later, which are mentioned in Annex IV to the Directive. In addition, cross-border regulations refer to a design that includes more than one Member State or a combination of Member States and third countries. The directive also aims exclusively at arrangements to avoid direct taxes.

Since the Directive was introduced in 2018, the question applies, which means that the rules will not come into force until mid-2020. A transitional period is envisaged for the Member States in the implementation, because they had to convert the requirements into national law by the end of 2019. Nevertheless, for this transitional period, a mandatory retroactive reporting of arrangements already started in the transitional period, which took place within two months from 01. July 2020 should take place.

Now, about one year after the start of the reporting obligation, DAC 6 is being further developed. Nothing changes in the basic reporting procedure, only an adaptation of the DAC6 XML transmission scheme and the data set description should take place due to the new EU requirements. Furthermore, a transmission of cross-border tax arrangements in accordance with § 138f para. 1 sentence 1 AO according to officially prescribed data set to the Federal Central Office for Taxation (BZSt).

2.2.1. Intermediaries of international tax arrangements

Mainly the intermediary, i.e. the tax designer, is responsible for the reporting obligation according to DAC 6 of his clients. Accordingly, an intermediary represents someone who develops this design and initiates all measures for it, sells this design to clients as well as provides their use or controls the implementation. Thus, based on this definition, it is also clear that intermediaries are mostly lawyers, tax consultants or asset advisors.

2.2.2. Users of international tax arrangements

Logically, users of international tax arrangements are often corporations and large corporations rather than small medium-sized companies that have a certain home affinity. Nevertheless, international tax law is equally relevant for rapidly expanding and growing companies. However, it is important to know that only the intermediary has to comply with the DAC 6 reporting obligation.

In the future, the EU Amendment Directive 2018/822/EU, which was introduced in 2018 and is also referred to as the DAC 6 Directive, will impose a stricter reporting obligation on the intermediaries already mentioned regarding international tax arrangements. The system is based on international EU-wide exchange to avoid illegal arrangements.

Now the intermediary has to report the information to the BZSt for the user of the international tax structure via a prefabricated official data sheet. The task of the BZSt is then to enter this information into a central EU directory and keep it up to date. Because this directory is the main source of information for the EU Commission, which has access to it. In addition, tax authorities of other EU countries access this EU directory and access information about taxpayers resident in their country. Finally, it is important for the countries, as already happens via DTA, to reach agreements on the extent to which these arrangements are addressed.

Now intermediaries only fall under the reporting obligation if the “main benefit” test is met. This is assumed as long as, as in the case of misuse of design according to § 42 AO, the main goal of the design is to obtain tax advantages. The international design must meet certain criteria explained below.

On the one hand, the “main-benefit” test is fulfilled if affiliated companies agree on payments among themselves, whereby the paying company reduces its profit by the resulting operating expenses. In addition, these payments must be exempt, favoured or excluded from taxation at the receiving company. This can occur through various regulations, such as the absence of certain types of tax in other countries or a percentage close to zero, and through priority rules in certain countries.

Furthermore, the fulfilment of other specific characteristics is to be classified as reporting. This includes taking over a loss carry-forward from another acquired company for the exclusive purpose of profit compensation. In addition, a change in the classification of income as non-taxable or lower taxable income. Finally, the reporting obligation also applies if there are circular capital shifts, since only companies are interposed who do not contribute to the transactions made.

If for any reason a reporting obligation is not observed, this can lead to very severe penalties. In Luxembourg, for example, it was stated that it was essential for the Member State to impose deterrent sanctions. It therefore provides for penalties of up to EUR 250,000 if the reporting obligation is not complied with and for late, incomplete and incorrect reports.