Trouble with the tax office?
For entrepreneurs in Germany - Save yourself the trouble with the tax office with these 3 tips (part 3 of 3)
Today in the third part of the series
Tip 3: Notification requirements for cross-border tax arrangements (aka DAC6)
DAC6 – Bureaucratic chaos for entrepreneurs: From July 1, 2020, new obligations to cooperate will apply to entrepreneurs with foreign activities. The basis for the new regulation is an EU directive that all member states are obliged to implement.
The new obligations are intended to help reduce profit shifting and tax avoidance practices in a cross-border context. This is because the notification of cross-border tax arrangements gives legislators the opportunity to adapt loopholes or undesirable arrangements by amending the law.
The new task for entrepreneurs with foreign activities is now: For all arrangements with a cross-border connection, it must be checked whether a reporting obligation is applicable.
The regulation in Germany includes income taxes (corporation tax, trade tax and income tax) as well as inheritance and gift tax and real estate transfer tax.
When is there a cross-border reference?
The DAC6 reporting obligation only covers cases in which at least two EU states or one EU state and one third country are affected.
The tax residency of the parties involved also plays a role here.
Every person involved in the design is considered a participant.
When is a design subject to notification?
A design is notifiable if, in addition to crossing the border, it also fulfills one of the legally regulated indicators. The legislator distinguishes between characteristics that directly trigger a reporting obligation and characteristics for which a so-called main benefit test must also be fulfilled.
A. DAC6 - Immediate reporting obligation
The following arrangements directly trigger a reporting obligation:
- Transfer pricing arrangements with intangible assets that are difficult to value or use of a unilateral arrangement
- Transfer of functions with a significant impact on the profit of the transferring company
- Payments to affiliated "stateless" companies
- Payments to related companies domiciled in non-cooperating countries
- Payments for multiple tax benefits (e.g. double deductibility of business expenses, multiple write-offs, white income, etc.)
- Asset transfers with different valuation approaches in the countries
- Arrangements that circumvent the exchange of information between states
- Arrangements in a non-transparent chain of participants
B. DAC6 - Obligation to notify if the main benefit test is available
First of all: The reasons for which the arrangement was made are decisive for a reporting obligation. If one of the reasons is to obtain a tax advantage, the test is generally considered to be met and the arrangement must be reported. A tax advantage (main advantage) exists if a reasonable third party must come to the conclusion, after considering all the circumstances, that the tax advantage is the cause of the arrangement.
The German tax authorities have determined that a tax advantage does not exist in certain situations (e.g. use of exemption limits and allowances, exercise of tax options, etc.). This so-called “whitelist“ conclusively contains the groups of cases that are exempt from the notification obligation.
The Cooperation with your tax advisor is also essential for the question of whether there is a notification obligation for tax planning. This could be the case in the following constellations:
- Confidentiality clauses have been agreed with regard to disclosure to third parties
- A success fee has been agreed with your tax advisor. This fee depends on the occurrence and the amount of the actual tax benefit
- There is a standardized documentation / structure of the design that is available for more than one user. This does not include individual consultation.
- Structures are proposed for the optimized use of losses when acquiring a company
- Income is converted into gifts or non-taxed or low-taxed income
- There are circular transactions involving companies with no economic activity.
Naturally, the law is formulated in very abstract terms. The following are some examples of what the legislator and the tax authorities consider to fall under the above-mentioned points: Debt-push-down arrangements, the contribution to subsidiaries and repayment as an interest-bearing loan, the transfer of a license to a subsidiary for the production of goods which are then bought back at a high price.
Certain payments to affiliated companies also trigger a notification obligation in conjunction with the existence of a tax advantage:
- The state of the recipient has a corporate income tax rate of 0 or close to 0 percent
- The payment is completely tax-free for the recipient
- The payment is subject to preferential tax treatment for the recipient (e.g. license box)
How is the DAC6 message sent?
Deadline
The report is submitted electronically via a portal at the Federal Central Tax Office. The data set is standardized across the EU.
The notification must be submitted within 30 days of the end of the event. The provision of the tax design for implementation, the user’s readiness for implementation and the first steps towards implementation by the user are deemed to be an event.
Information to be reported
In addition to the abstract information such as the legal provisions and a summary of the cross-border arrangement etc., individual information about the user, the affiliated company etc. must also be provided.
In principle, the intermediary (usually the tax advisor) must submit the notification. However, since a German tax advisor is subject to a statutory duty of confidentiality, the user of the arrangement must release him from this duty so that the report can be submitted. Without a release from the duty of confidentiality, the tax advisor must still report the abstract information, whereas the user of the arrangement must then report the individual information themselves. Tax advisors and companies should work hand in hand to jointly fulfill these formalities.
DAC6 - Notification in several EU countries?
If the report is submitted by an intermediary in one country, the other intermediaries in the other country no longer have to submit a report. However, caution is required here, as there may well be situations where the report is not submitted abroad.
What happens if you don't follow the rules?
Failure to notify the authorities is an administrative offense. This can be punished with a fine of up to EUR 25,000.
Please note: other EU countries have significantly higher fines if the reporting obligations are not met. In Poland, a breach of the reporting obligation can be penalized with up to EUR 5 million.
As these are cross-border reporting obligations, the sanctions of other EU countries must always be taken into account.
Declaration in the tax return
In addition to the actual reporting obligation, a cross-border tax arrangement must also be reported in the tax return. This must be done in the year in which the benefit is to take effect for the first time.
The information must be provided in the so-called Annex WA of the tax return.
Practical tip
At first glance, the new regulation seems abstract. Many companies assume that only larger corporations are affected by the obligation. However, this is a fallacy. Medium-sized companies can also be affected. A notification obligation should be checked for every arrangement with cross-border implications. In cases of doubt, a notification should be made.
It is important to note that these are only notification obligations. These should not be a knock-out criterion for your cross-border tax planning.
For further reading
The reporting obligation for cross-border tax arrangements arises from sections 138d to 138k of the German Fiscal Code. The consequences of a breach of duty are regulated in Section 379 (2) No. 1e, 1f, 1g of the German Fiscal Code.
The article uses simple language for better understanding and is also abbreviated with regard to the individual conditions required by law. An individual examination in your case is therefore recommended.
Please feel free to contact me!
Disclaimer
This article does not constitute legal or tax advice, but is for general information purposes only. Every situation is individual, so I always recommend professional advice to avoid tax disadvantages.
Last updated: 12.10.2021
