DAC 6: New reporting obligation on cross-border arrangements

Feb. 1, 2021 Czech Republic

In the autumn of last year, the Czech Republic belatedly implemented the European Union directive called DAC 6.

DAC 6 introduced the automatic exchange of information in the field of taxation between individual EU Member States regarding cross-border arrangements. The aim of this directive is to provide Member States' tax administrations with timely and relevant information on schemes that potentially constitute aggressive tax planning.

DAC 6, which was transposed into Czech legislation by Act No. 164/2013 Coll., on International Cooperation in Tax Administration, not only imposes obligations on EU Member States themselves, but also introduces a reporting obligation on individuals and legal persons who are intermediaries or users of reportable cross-border arrangements.

The DAC 6 reporting and information exchange mechanism was originally scheduled to be launched on 1st July 2020; however, due to restrictions related to the spread of coronavirus, the possibility for individual Member States to postpone the start of the reporting obligation by several months was approved at the EU level. Most Member States, including the Czech Republic, have made use of this possibility.

Subject of the reporting obligation

The reporting obligation according to DAC 6 applies to so-called reportable cross-border arrangements. The term "arrangement" is not defined by DAC 6 or by law; from the context it can be concluded that it is a very general term including the instructions or plan of one or more steps, a transaction or a structure (contained, for example, in an internal presentation, memorandum or recommendation of an adviser/consultant). The law distinguishes between two types of arrangements, namely standardised arrangements (those that are designed and offered on the market so that they can be implemented without substantial modifications for a particular user) and customised arrangements (those that are not standardised, i.e. are prepared specifically for a particular user).

The term 'cross-border' means an arrangement which concerns either (i) more than one Member State of the European Union or (ii) one Member State of the European Union and another third state or jurisdiction, and a cross-border element is given for at least one participant (for example, the latter is a tax resident in a state different to the other participants, is a tax resident of more than one state or carries on business in a state other than that of which s/he is a tax resident). According to the explanatory memorandum to the law, a cross-border arrangement is one that is based on (and relies on) the nature of the participants being from or operating in different countries.

Hallmarks (characteristic features)

In order for a cross-border arrangement to be reportable, it must meet at least one hallmarks (characteristic feature) from the list stated in the directive/appendix to the act. In some cases, the so-called main benefit test must also be met, i.e. obtaining a tax advantage is the main benefit or one of the main benefits that can be assumed given all the relevant facts and circumstances that the arrangement will result in. The hallmarks, one of which the arrangement must at least meet in order to be subject to the reporting obligation, are divided into five groups and outlined in detail below:

Generic hallmarks (linked to the main benefit test)

  • Confidentiality feature: the intermediary's remuneration is conditional on the user or participant committing to not providing other intermediaries or tax authorities with information on how the arrangement could provide a tax advantage;
  • Remuneration feature: the intermediary's remuneration is derived from the amount of the tax advantage obtained, or the right to it emerges depending on the actual obtainment of the tax advantage by the user;
  • Standardisation feature: an arrangement with standardised documentation or structure that is available to more than one user without the need for substantial modifications.

Specific hallmarks (linked to the main benefit test)

  • Loss usage feature: the participant takes the steps of intentionally acquiring a loss-making company, terminating the company's core business and using its tax losses in order to reduce his/her own tax liability;
  • Change in the nature of income feature: an arrangement that results in the conversion of income to capital, gifts or other categories of income taxed at a lower rate or benefiting from a tax exemption;
  • Circular transaction feature: an arrangement involving transactions that lead to the movement of assets in a circle (e.g. through the involvement of entities without another major economic function or transactions that are mutually offsetting or cancelled).

Specific hallmarks cross-border transactions

  • An arrangement involving a deductible cross-border payment where
    • The recipient is not a tax resident in any state or jurisdiction;
    • The recipient is a tax resident in a country which does not impose any corporate tax or imposes corporate tax at a zero or almost zero tax rate (and is subject to the main benefit test) ;
    • The beneficiary is a tax resident in a country assessed by EU/OECD as non-cooperating jurisdictions;
    • The beneficiary enjoys the benefits of full tax exemption in the country of his/her tax residence (and is subject to the main benefit test);
    • When paying tax in the state of the recipient's tax residence, the benefits of the preferential tax regime are used (and is subject to the main benefit test);
  • Multiple depreciation feature: the same asset is depreciated in several states or jurisdictions at the same time;
  • Multiple exemption from double taxation feature: arrangement according to which the exemption from double taxation is applied to the same item of income or capital;
  • Different valuation feature: arrangements involving transfers of assets for which the amount of their valuation differs significantly across the participating jurisdictions.

Specific hallmarks concerning automatic exchange of information and beneficial ownership

  • Circumvention of common reporting standard feature: an arrangement that may result in a breach of the reporting obligation of financial institutions in accordance with the DAC II or FATCA/GATCA (e.g. reclassification of income or assets to products or payments that are not subject to information exchange; use of a product that is not a financial account for reporting purposes but has characteristics significantly similar to those of a financial account, etc.)
  • Disguised real ownership feature: an arrangement involving a non-transparent chain using persons or entities (i) that do not carry out significant economic activity demonstrated by adequate personnel, equipment, assets and premises, (ii) that are tax domiciled or domiciled in a country other than the real owner of the assets in possession of these persons or entities, and (iii) for which their real owner cannot be determined under the AML Act.

Specific hallmarks concerning transfer pricing

  • Use of unilateral safe harbour rules feature: an arrangement involving the use of rules simplifying the application of the arm´s length principle unilaterally adopted in a country and derogating from the commonly applied principles applicable to transfer pricing;
  • Use of difficult-to-value intangible assets feature: arrangements involving the transfer of intangible assets between associated enterprises for which there are no comparable assets at the time of their transfer and, at the time of the transaction, the estimates of future income from the asset are highly uncertain;
  • The use of an intra-group cross-border transfer of functions, risks or assets feature: an arrangement involving a cross-border reorganisation (transfer of functions, risks or assets) if the transferor's EBIT is expected to decrease by at least 50% over three years after the transfer; in comparison with the status in which the transfer would not take place.

Obligors

The person who is primarily obliged to report the reportable cross-border arrangement is the intermediary of the given arrangement. This is the person or entity that designs the arrangement, offers it on the market, organises it, makes it available for implementation or manages its implementation (the main intermediary), as well as the person or entity that provided assistance, support or consultancy (secondary intermediary) in connection with the design, offer, market-release or implementation. The intermediary will typically be an external consultant, but may also be, for example, a parent company that has proposed an arrangement through its legal department for a subsidiary as part of an intra-group provision of management services. If there are several intermediaries in relation to a particular reportable arrangement, they may agree who of them would submit the information with the tax authority.

Intermediaries subject to professional secrecy (i.e. tax advisers, lawyers, notaries and auditors) do not have a reporting obligation to this extent. In such a case, the reporting obligation passes to other intermediaries, and unless there are any other intermediaries not bound by professional secrecy in relation to the given arrangement, the obligation to report this arrangement arises directly to the user (client). Likewise, the obligor is the user if the arrangement has no intermediary. (It is an arrangement that is designed and implemented purely in-house.)

If a reporting obligation arises in relation to a certain arrangement in several EU Member States and the information is filed by one of the obligors in another Member State, the domestic obligor (intermediary or user) in the Czech Republic no longer report if the information submitted in another Member State by the same or another obligor contained the same data as those required by Czech law.

Manner and deadlines for fulfilling the reporting obligation

If the information is submitted by a Czech obligor (typically an intermediary or a user who is a tax resident in the Czech Republic) with respect to a certain reportable cross-border arrangement, it shall be submitted electronically on a form issued by the Ministry of Finance. The report has a number of elements, including details of the characteristics of the arrangement, a description of how the arrangement works, identification of the tax laws or international treaties on which the arrangement is based, details of the value of the arrangement and identification of persons associated with any EU Member State that may be affected by this arrangement.

New arrangements must be reported within 30 days of (i) the arrangement being made available for implementation, (ii) the arrangement being ready for implementation, or (iii) the first step in implementing the arrangement has been taken. In the event of a combination of several of these facts, the time limit will be based on the day which occurred earlier. If the arrangement is reported by a secondary, it will be subject to a 30-day deadline from the date on which that intermediary provided advice, assistance or support in relation to that arrangement.

In addition, it is necessary to report the so-called historical arrangements:

  • by 28th February 2021 (or 1st March 2021), arrangements must be reported for which the first step towards their implementation has been taken between 25th June 2018 and 30th June 2020.
  • by 30th January 2021 (or 1st February 2021), it is necessary to report the arrangements for which the first step towards their implementation was taken between 1st July 2020 and 31st December 2020 and the arrangements made available for implementation or ready for implementation between 28th August 2020 and 31st December 2020, regardless of when they are implemented.

ASB comments

Despite the fact that the first deadlines for fulfilling the reporting obligation are approaching, there are still a large number of unclear areas in the Czech Republic in relation to the legal regulation of the reporting obligation. At present, expert discussions are still taking place at the level of representatives of the Chamber of Tax Advisers and the Czech Financial Administration regarding the interpretation of a number of terms (especially in regards to the hallmarks) and the application of new rules to specific situations. Unfortunately, the opinions cannot be expected to be unified in the short term.

The definitions of the hallmarks are so general that, if interpreted broadly, completely ordinary transactions such as the payment of dividends covered by the exemption under the Parent-Subsidiary Directive, the capitalisation of a claim or a domestic merger of companies owned by foreign shareholders could also be subject to the reporting obligation. Given that the tax authorities may impose relatively high sanctions (up to CZK 500,000) for non-compliance with the reporting obligation, we recommend paying appropriate attention to this issue. At the same time, coordination at the group level is more than appropriate in relation to setting up intra-group transactions and payments, as it is likely that these transactions may be subject to reporting obligation in more than one Member State. If the arrangement is reported by another group company or intermediary in another Member State, it must be verified from the point of view of Czech obligors whether this submission contains all data required by Czech law. (Otherwise, this submission abroad would not release the Czech entity from the reporting obligation in the Czech Republic.)

We continuously monitor and analyse the DAC 6implementation process and current developments in the Czech Republic. If you have any questions in this area, do not hesitate to contact us.
Jana Pytelková Svobodová
Senior Tax Manager
ASB Czech Republic
jsvobodova@asbgroup.eu

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