DAC6 Tax structuring - MKY GROUP

The agenda for tax transparency

Directive 2018/822/EU, known as DAC6, is an EU directive that introduces new reporting requirements for cross-border agreements.

In recent years, a number of tax transparency and anti-tax avoidance measures have been introduced across the EU, several of them in direct response to the OECD's final Base Erosion and Profit Shifting (BEPS) reports and the revelations of the Panama Papers. DAC6 has the task of imposing disclosure requirements for certain agreements with a cross-border element of the European Union when the agreements fall under certain characteristics (so-called “hallmarks”) and in certain cases where the main or expected benefit of the agreement is a tax advantage. The Directive came into force on July 1, 2020, but taxpayers and intermediaries must report their cross-border tax planning models as early as June 25, 2018, i.e. retroactively.

Which transactions are affected by the DAC6 Directive?

For a transaction to be reportable under DAC6, it is necessary that

- the agreement has a cross-border dimension, i.e. it concerns participants who are either based in more than one EU member state or in a member state and a third country; the agreement falls under one of the five “hallmarks” referred to in the Directive; and
- in the case of certain Hallmarks, that the “Main Benefit Test” has been met.

Main Benefit Test
The test is considered to have been met if it can be determined that the main advantage or one of the main advantages of an arrangement is the obtaining of a tax advantage.

The five regulated “Hallmarks” are as follows:

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A: General characteristics associated with the “main benefit” test
Confidentiality conditions — Agreements where the participant or taxpayer enters into a confidentiality agreement not to disclose how the agreement could disclose a tax advantage to other intermediaries or tax authorities.

Fee scheme — The agency fee is based on the tax saved as a result of the agreement.

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A design whose documentation and/or structure is essentially standardized and is available to more than one relevant taxpayer without the need to significantly adapt it individually for implementation.

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B:Specific characteristics in connection with the “main benefit” test

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Loss buying — When the agreement involves buying a loss-making company to reduce tax liability.
Conversion of income types — When the agreement has the effect of converting income into capital or another type of income that is taxed at lower rates.
A design that uses circular transactions that result in the round tripping of assets by involving intermediary companies with no primary economic function or transactions that cancel or balance each other out or that have similar characteristics.

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C. Specific characteristics related to cross-border transactions

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An arrangement involving deductible cross-border payments between two or more affiliated companies and which meets at least one of the following conditions:
— The recipient is not a resident of any territory for tax purposes;
— although the recipient is a resident of a territory for tax purposes, that territory
a. but does not levy corporation tax or has a corporate income tax rate of zero or close to zero, or
b. is included in the list of third countries identified as non-cooperating countries by the Member States jointly or within the framework of the OECD;
— the payment is completely exempt from tax in the territory where the recipient is a tax resident;
— the payment benefits from a preferential tax regime in the territory where the recipient is a tax resident.

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In more than one territory, deductions are claimed for the depreciation of the same asset.
In more than one territory, an exemption from double taxation is sought for the same income or the same property.
There is an arrangement which provides for the transfer of assets and in which there is a significant difference in the value to be recognized for the asset in these participating territories.

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D. Specific characteristics relating to the automatic exchange of information and beneficial owners.

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An arrangement which may result in an undermining of the reporting requirement under legislation implementing Union law or equivalent agreements on the automatic exchange of financial account information, including agreements with third countries, or takes advantage of the absence of such legislation or agreement.

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E. Specific characteristics relating to transfer pricing

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Specific characteristics with regard to transfer pricing: These include the use of unilateral safe harbor rules; the transfer of hard-to-value intangible assets when reliable comparators do not exist and the projection of future cash flows or income is highly uncertain.

Who is required to report?

According to the Directive, the intermediary is generally required to report, i.e. the person who markets, designs, organizes or makes available for use by third parties (e.g. tax advisors or lawyers).

However, if the intermediary is not domiciled in an EU member state or is exempted from reporting due to professional secrecy, the reporting obligation falls on the taxpayer (= the person who makes use of the tax planning).

Why DAC6 also affects Swiss companies

Based on the above, DAC6 affects many Swiss companies with branches or subsidiaries in the European Union. Failure to comply with these new rules is not an option, as fines of up to several hundred thousand euros may apply. All Swiss companies with an EU connection should therefore start analysing their cross-border transactions now so that they are able to comply with reporting requirements.

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example:

Headquarters of a watchmaker in Switzerland, French subsidiary

- The Swiss head office receives license fees from the French subsidiary (subject to privileged taxation in Switzerland)
- Such a transaction would fall under Hallmark C of the Directive and would therefore have to be reported by the French subsidiary under DAC6.

Disclaimer: The content of this blog post is for informational purposes only and does not constitute professional advice. Each individual case should be reviewed individually and we recommend that you seek professional advice for specific questions.