The provisions of the EU Directive 2011/16 are amended with the introduction of the EU Directive 2018/822 on Administrative Cooperation (DAC), regarding the mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements.
This represents the 6th modification of DAC, and for this purpose it is referred to as the DAC6.
DAC6 reflects new various initiatives in regard to tax transparency, such as the introduction of an early warning mechanism for tax avoidance schemes and it is expected to be enacted in Cyprus within the following months.
B. WHO NEEDS TO REPORT
Intermediaries will be the persons responsible to report to National Tax Authorities, or even the Taxpayers themselves under specific circumstances.
An Intermediary can be either an individual or a company and includes:
- any person that designs, markets, organises or makes available for implementation or manages the implementation of a reportable cross-border arrangement, or
- any person that based on available information and the relevant expertise and understanding required to provide such services, knows or could be reasonable expected to know that such persons have undertaken aid or advice with regards to the above.
In order to be an Intermediary, a person shall satisfy at least one of the following additional conditions:
- be resident for tax purposes in an EU Member State;
- have a permanent establishment in an EU Member State through which the services with respect to the arrangement are provided;
- be incorporated in, or governed by the laws of an EU Member State;
- be registered with a professional association related to legal, taxation or consultancy services in an EU Member State.
The concept of Taxpayer is defined as any person to whom a reportable cross-border arrangement is made available for implementation, or who is ready to implement a reportable cross-border arrangement or has implemented the first step of such an arrangement.
Reporting obligation may shift from the Intermediary to the Taxpayer in the following situations:
- When an intermediary is a non-EU intermediary. An intermediary is considered non-EU when it is neither:
- Resident in a Member State; nor
- Maintains a permanent establishment in a Member State through which the services in respect of the arrangement are provided; nor
- Incorporated/governed by the laws of a Member State; nor
- A member of a professional association in a Member State.
- When there is no intermediary involved, i.e. an in-house arrangement,
- When the taxpayer is notified that an intermediary has the right to a waiver due to legal professional privilege.
It is of essence to clarify further to point 3 above, that DAC6 provides for an exemption on the reporting requirements where the Intermediary is a lawyer who practice the profession as defined in the Lawyers Law and complies to the following requirements:
- Is subject to legal confidentiality (Legal professional Privilege), and
- Has notified the reporting obligations to any other Intermediary or, if no other Intermediary, the taxpayer concerned.
C. WHAT CROSS-BOARDER TAX ARRANGEMENTS ARE REPORTABLE
A scheme or arrangement is reportable if the following apply:
- It is Cross-Border, as defined below; and
- It falls in the Hallmarks, as defined below in Section D.
An arrangement is Cross-Border if it satisfies any of the following criteria:
- Not all participants in the arrangement are tax resident in the same jurisdiction;
- A permanent establishment linked to any of the participants is established in a different jurisdiction and the arrangement forms part of the business of the permanent establishment;
- At least one of the participants in the arrangement carries on activities in another jurisdiction without being resident for tax purposes or creating a permanent establishment situated in that jurisdiction;
- At least one of the participants has dual residency for tax purposes;
- Such an arrangement has a possible impact on the automatic exchange of information or the identification of beneficial ownership.
Cross-border tax planning arrangements may concern all taxpayers, including natural persons, legal persons (i.e. companies), and legal arrangements (i.e. trusts and foundations).
The DAC6 provides for 5 (five) specific Hallmarks in order to determine whether a cross-border arrangement is considered as reportable or not.
Under certain conditions, the hallmarks have to satisfy the ‘Main Benefit Test’ as well, in order to be disclosed to the authorities.
Main Benefit Test is satisfied if 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..
Tax Advantage includes the following:
- Tax Relief or increased tax relief;
- Tax refund or increased tax refund;
- Tax avoidance or reduction of tax liability;
- Postponement of tax or acceleration of tax refund;
CATEGORIES OF HALLMARKS:
- Category A: Generic Hallmarks Linked to Main Benefit Test:
- An arrangement where the taxpayer or a participant, undertakes the obligation to comply with a condition of confidentiality that may require him not to disclose the manner in which the arrangement could secure a tax advantage to other intermediaries or to the Tax Authorities;
- An arrangement where the Intermediary receives a fee for its services proportionate to the amount of the tax advantage received by the Taxpayer or a success fee in case that a tax advantage is obtained;
- An arrangement that has substantially standardised documentation and/or structure and is available to more than one relevant taxpayer without a need to be substantially customised for implementation;
- Category B: Specific Hallmarks Linked to Main Benefit Test:
- An arrangement whereby a participant in the arrangement takes contrived steps which consist in acquiring a loss-making company, discontinuing the main activity of such company and using its losses in order to reduce its tax liability, including through a transfer of those losses to another jurisdiction or by the acceleration of the use of those losses;
- An arrangement that has the effect of converting income into capital, gifts or other categories of revenue which are taxed at a lower level or exempt from tax;
- An arrangement which includes circular transactions resulting in the round-tripping of funds, namely through involving interposed entities without other primary commercial function or transactions that offset or cancel each other or that have other similar features.
- Category C: Specific Hallmarks Related to Cross-Border Transactions:
- Arrangements that involve deductible cross-border transactions between associated enterprises in at least one of the following situations:
a. the recipient is not resident for tax purposes in any jurisdiction;
b. the recipient is resident for tax purposes in a jurisdiction that:
- does not impose any corporate tax or imposes corporate tax at the rate of zero or almost zero; or
- is included in a list of third-country jurisdictions which have been assessed by Member States collectively or within the framework of the OECD as being non-cooperative.
c. the payment benefits from full exemption from tax in the jurisdiction where the recipient is resident for tax purposes; or
d. the payment benefits from a preferential tax regime in the jurisdiction where the recipient is resident for tax purposes
2. Tax deductions for the same depreciation of assets are claimed in more than one jurisdiction;
3. Double Tax relief is claimed for the same income/capital in more than one jurisdiction;
4. Arrangement that includes transfer of assets where there is a material difference in the amount being treated as payable in consideration for the transferred assets in the jurisdictions involved.
- In the context of hallmark under paragraph 1 of Category C, the presence of conditions set out in points (b)(i), (c) or (d), cannot alone be a reason for concluding that an arrangement satisfies the main benefit test.
For the remaining Hallmarks D and E, the Main Benefit Test does not have to be fulfilled.
- Category D: Specific Hallmarks Concerning the Automatic Exchange of Information and Beneficial Ownership:
- Arrangements that undermine the EU reporting obligations or of equivalent significance reporting obligations in relation to the exchange of Financial Account information, including obligations raised from agreements with third countries, or which takes advantage of the absence of such legislation or agreements;
- Arrangements involving a non-transparent legal or beneficial ownership chain with the use of persons, legal arrangements or specific structures.
- Category E: Specific Hallmarks Concerning Transfer Pricing:
- Arrangements that involve the use of unilateral safe harbour rules;
- Arrangements that involve transfer of hard-to-value intangibles, subject to certain conditions;
- An arrangement involving an intragroup cross-border transfer of functions and/or risks and/or assets, if the projected annual earnings before interest and taxes (EBIT), during the three-year period after the transfer, of the transferor or transferors, are less than 50 % of the projected annual EBIT of such transferor or transferors if the transfer had not been made;
E. WHAT INFORMATION WILL BE DISCLOSED
Reporting is expected to be made through a standard prescribed format, where the following details will be included:
- Identification, including date and place of birth, residence for tax purposes and TIN of taxpayers, associated parties thereof and intermediaries involved.
- Details of the hallmarks that make the cross-border arrangement reportable.
- A summary of the content of the reportable cross-border arrangement.
- The date on which the first step in implementing the reportable cross-border arrangement was made or will be made.
- Details of the national provisions that form the basis of the reportable cross-border arrangement.
- The value of the reportable cross-border arrangement.
- Identification of the Member State of the taxpayer and any other Member State which are likely to be concerned by the reportable cross-border arrangement.
- Identification of any other person in a Member State likely to be affected by the reportable cross-border arrangement and the Member State in which such person is linked.
The fact that a tax administration does not react to a reportable cross-border arrangement shall not imply any acceptance of the validity or tax treatment of that arrangement.
F. CONSEQUENCES OF NON-COMPLIANCE
Failure and/or omission of compliance to the reporting requirements may give rise to penalties, depending on the reasoning for such failure or omission. Penalties may start from as low as €1,000- (One Thousand Euros) and reach up to €20,000- (Twenty Thousand Euros) each.
The relevant Authorities shall notify the responsible person before imposing the penalty, granting the right to such person to report and/or submit information requested within 15 (Fifteen) working days from the day of notification.
The person concerned has the right to appeal within 30 (Thirty) days from the date of notification and the imposition of penalty.
Where the person concerned does not settle the penalty imposed, or continues the infringement, the penalty may be increased with an additional amount up to the maximum of €20,000- (Twenty Thousand Euros).
Our office is in the strong position to discuss the effects of the cross-border arrangements reporting obligations and to provide advice as to which arrangements are considered reportable, the applicable reporting timeframe, the potential imposition of penalty in case of an omission or failure to report, as well as the preparation and filling of the relevant forms.