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EU Directive on Cross-Border Tax-Planning Arrangements Disclosure Published

Council Directive (EU) 2018/822 of 25 May 2018 has been published in the Official Journal of the EU. The Directive provides for the reporting of potentially aggressive cross-border tax-planning arrangements.

The reporting obligation generally applies to intermediaries that design, market, organize, or manage the implementation of a reportable cross-border arrangement, such as accountants, tax advisors, notaries, banks, etc. However, the reporting obligation may be shifted to a taxpayer in cases where an intermediary is prevented by law from reporting the info (legal professional privilege) or where there is no intermediary because, for instance, the taxpayer designs and implements a scheme in-house.

Intermediaries (or taxpayers) are required to report information on reportable cross-border arrangements within 30 days after the reportable cross-border arrangement is made available for implementation, or is ready for implementation, or when the first step in its implementation has been made, whichever occurs first. Reportable information includes the identification of intermediaries and relevant taxpayers, a summary of the reportable arrangement and the date of the first step of implementation, the relevant national law provisions, the value of the reportable arrangement, and the identification of the Member State of the relevant taxpayer and any other Member States or persons that are likely to be concerned by the reportable arrangement. Information reported in a Member State is then automatically exchanged with other Member States within one month following the end of the quarter in which the information was reported.

For the purpose of the Directive, "cross-border arrangement" means an arrangement concerning either more than one Member State or a Member State and a third country where at least one of the following conditions is met:

  • Not all of the participants in the arrangement are resident for tax purposes in the same jurisdiction;
  • One or more of the participants in the arrangement is simultaneously resident for tax purposes in more than one jurisdiction;
  • One or more of the participants in the arrangement carries on a business in another jurisdiction through a permanent establishment situated in that jurisdiction and the arrangement forms part or the whole of the business of that permanent establishment;
  • One or more of the participants in the arrangement carries on an activity in another jurisdiction without being resident for tax purposes or creating a permanent establishment situated in that jurisdiction;
  • Such arrangement has a possible impact on the automatic exchange of information or the identification of beneficial ownership.

A "reportable cross-border arrangement" means any cross-border arrangement that contains at least one of the hallmarks set out in Annex IV of the Directive. Certain hallmarks only apply when a main benefit test is fulfilled, which includes cases where it can be established that the main benefit or one of the main benefits which, having regard to all relevant facts and circumstances, a person may reasonably expect to derive from an arrangement is the obtaining of a tax advantage. Hallmarks subject to meeting the main benefit test include:

  • Generic hallmarks:
    • A confidentiality clause is imposed on the participant;
    • The fee is fixed by reference to the amount of the tax advantage derived or whether a tax advantage is actually derived;
    • Standardized documentation and/or structure is leveraged, which does not need to be substantially tailored for implementation;
  • Specific hallmarks:
    • A loss-making company is acquired in order to reduce tax liability;
    • Income is converted into capital or other categories of revenue which are subsequently taxed at a lower level or are exempt from tax;
    • Circular transactions resulting in the round-tripping of funds occur;
  • Specific cross-border hallmarks involving deductible cross-border payments made between two or more associated enterprises where:
    • The recipient is resident in a jurisdiction that does not impose any corporate tax or imposes corporate tax at the rate of zero or almost zero;
    • The payment benefits from a full exemption in the jurisdiction of the recipient;
    • The payment benefits from a preferential tax regime in the jurisdiction of the recipient.

The above specific cross-border hallmarks cannot be taken as the sole reason for concluding that an arrangement satisfies the main benefit test.

Additional hallmarks where fulfilling the main benefit test is not required include:

  • Specific cross-border hallmarks:
    • Deductible cross-border payments made between two or more associated enterprises where the recipient is not a tax resident in any jurisdiction, or is resident in a jurisdiction assessed by Member States collectively or within the OECD as being non-cooperative;
    • Deductions for the same depreciation on the asset are claimed in more than one jurisdiction;
    • Relief from double taxation in respect of the same item of income or capital is claimed in multiple jurisdictions;
    • There is a transfer of assets with a material difference in the amount treated as payable in consideration for those assets in the jurisdictions involved;
  • Specific hallmarks related to the automatic exchange of information and beneficial ownership:
    • EU legislation or any equivalent agreements on the automatic exchange of financial account information is/are circumvented (e.g., by using jurisdictions outside exchange of information arrangements, or types of accounts, products, investments, income or entities not subject to exchange of information);
    • Non-transparent legal or beneficial ownership chains are used (e.g., not carrying on a substantive economic activity supported by adequate staff, equipment, assets, and premises; or established, managed, or controlled from a different jurisdiction than that of the beneficial owners of the assets held by such structures, or unidentifiable chains);
  • Specific hallmarks related to transfer pricing:
    • Unilateral safe harbor rules are used;
    • Transactions involve intangibles which are hard-to-value due to the lack of comparable intangibles or due to difficulties in predicting the level of ultimate success of the intangible at the time of transfer;
    • Restructuring results in significant profit shifts following the transfer of functions, and/or risks, and/or assets between jurisdictions.

Member States have until 31 December 2019 to transpose the laws, regulations, and administrative provisions necessary to comply with Directive and must apply the provisions from 1 July 2020. The information to be first reported, however, includes information on any reportable transaction where the first step of implementation occurred between the date of entry into force of the Directive (20 days after it was published) and the date of application. This first information should be reported by 31 August 2020.

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