INSIGHT: Dissecting ‘DAC 6' Reporting Rules with German, Spanish Guidance

A new set of reporting rules becomes effective in the respective EU Member States July 1, 2020, with retroactive effect to June 25, 2018. The new mandatory reporting requirement is included in the recently amended EU Directive on Administrative Cooperation in the field of Taxation (also referenced as “DAC 6” as it is the 6th major amendment to the Directive on Administrative Cooperation), and regards the reporting of potentially aggressive tax planning structures that you are about to (help) put in place or may have already (helped) put in place on or after June 25, 2018.

What is the Governing Law?

EU Directive 2011/16/EU (known as the EU Directive on Administrative Cooperation in Direct Taxation), as amended by Council Directive 2018/822/EU. In Germany, the Federal Cabinet has approved on Oct. 9, 2019, a government draft of a law for the introduction of the obligation to report cross-border arrangements, which shall implement the Directive in domestic law (the “German Draft Law”). Even though the German parliament has not approved this government draft yet, it is expected that it will be adopted more or less in line with the current draft.

In Spain, after a consultation process, on June 20, 2019, a draft law and draft second-level regulations were published. Furthermore, on Oct. 21, 2019, three forms meant to be used to comply with the regulations were published in draft format, for consultation: (i) Form 234 for the disclosure of tax planning arrangements, (ii) Form 235 to update information on “marketable” arrangements, and (iii) Form 236 to disclose the use of cross border planning arrangements. However, due to the current political scenario in Spain (political parties did not reach an agreement to form a Spanish cabinet following the elections that took place on April 25, 2019, and new elections will take place on Nov. 10, 2019), it is not expected that the government will approve the law and regulations implementing DAC 6 before a new cabinet is finally formed. It is also expected that the initial draft of the regulations will be subject to some changes related to legal privilege based on input provided in a publicly released report from the General Council of the Judiciary after mandatory consultation with that body by the Ministry of Finance.

No further draft official guidance or any other type of draft interpretation guidelines have been released by the Spanish and German tax authorities in relation to the Directive implementation project, so up to date there is little visibility on the outstanding aspects of DAC 6 implementation in both jurisdictions.

What is the Effective Date?

The actual filing of a report to the tax authorities in a designated format is supposed to commence as from July 1, 2020, but qualifying transactions put in place on or after June 25, 2018, are to be included in the reporting. The exchange of information obtained through the reports to all EU Member States is scheduled to commence on Oct. 31, 2020. These dates in principle apply to all EU Member States (although reportedly Poland’s reporting rules became effective Jan. 1, 2019, and required de facto reporting by June 30, 2019, for certain cross-border arrangements).

Who is Obliged to Report?

The primary obligation to report is on so-called “intermediaries” defined as those persons who are involved in designing, offering, marketing and organizing, or managing the implementation of a so-called reportable cross-border transaction, as well as those who provide assistance with implementation or advice with respect thereto.

To be an intermediary, you must be either (i) a tax resident in an EU Member State, (ii) have a permanent establishment in a Member State through which services are rendered, (iii) be incorporated in a Member State, or (iv) be registered with a professional association related to legal, taxation, or consultancy services in a Member State. The order of who is designated as a qualifying intermediary in the previous listing is also relevant for determining what intermediary has the primary responsibility to report in case there are more intermediaries involved.

If a qualifying intermediary does not (have to) report (for example because of an applicable privilege or right to a waiver), another intermediary or the taxpayer will be obliged to report. According to the Directive, if and to the extent an individual designs, offers, markets and organizes, or manages the implementation of a reportable cross-border transaction and operates as representative of a professional services firm, the firm will be considered the intermediary. In the Spanish and German draft implementation law and regulations there are no signs of further clarification as to who may be caught by the rules as “intermediary.” One of the outstanding uncertainties could potentially include whether a professional asset manager acting on behalf of a collective investment vehicle (e.g. a fund management company, or an investment advisor) could potentially qualify as such.

Further, it may need to be determined if an intermediary has a reporting obligation in another EU Member State. Noting the wording in the Directive and the subsequent local interpretation and legislative guidance, there is good reason to very carefully review whether an intermediary has a reporting requirement or not in a respective country and consider whether that reporting requirement alternatively may be in another EU Member State. For example, Poland’s rules reportedly even cover intermediaries beyond those that are resident in or based in EU Member States.

The Spanish draft rules do not provide additional clarification as to how intermediaries should interact for purposes of the reporting obligation, where there are several intermediaries involved in the same transaction that could be potentially liable to report. Based on the Spanish draft regulations, in theory all intermediaries are (potentially) liable to report. An intermediary is only released from that obligation if it receives notification from another intermediary that the transaction already has been reported. This is one of the areas where more detailed rules would be welcome. Alternatively, intermediaries may need to implement protocols to deal with multiple intermediary scenarios. Similarly, the German Draft Law provides explicitly that all intermediaries have parallel reporting obligations, i.e. all intermediaries need to report unless they can provide evidence that another intermediary has already reported the cross-border arrangement properly with a competent tax authority (see also below).

Who is Exempt from Reporting or Has a Less Strict Reporting Requirement?

• Anyone who is not a qualifying intermediary.

• Anyone who is a qualifying intermediary but who has proof (ideally a reference number of a previously made report) that the requested reportable information has already been filed timely in an(other) EU Member State.

• Anyone who is a qualifying intermediary and who under domestic law is entitled to a waiver from filing the required information on the reportable transaction because the reportable information would breach the legal professional privilege under the national law of that Member State. In that case the reporting obligation shifts to another intermediary or to the taxpayer, however. The intermediary qualifying for a waiver/privilege may have a duty to inform other intermediaries.

The Spanish draft regulation extends the privilege to all intermediaries and treats all of them as equal (e.g. lawyers, economists, accountants, consultants, etc.). But the draft law limits this privilege to “private non-patrimonial data” which is a term not defined by the Spanish regulations but suggests that only very limited data such as personal data (i.e. name and identification details of the relevant taxpayer) would be covered by the privilege, and to “confidential” data gathered in the context of contentious work, or while providing legal advice (related to taxation). Therefore, the expectations in the Spanish market are that in practice, legal privilege is likely to prevent intermediaries who are lawyers from reporting only in very limited circumstances. That said, after review of the first draft, the General Council of the Judiciary suggested that a higher level of protection of the legal privilege as applicable to lawyers should be implemented, also following Italian and Portuguese draft rules implementing the DAC 6 Directive, and by reference to Spanish rules implementing the anti-money laundering Directive. This suggestion would undermine the initial approach followed by the Spanish lawmakers, which focused on creating a level playing field for all types of intermediaries.

At this point in time, it is not clear where the line is to be drawn for legal privilege to apply to lawyers providing neutral advice (as opposed to legal advice related to contentious matters) in relation to a transaction that meets the DAC 6 hallmarks. If the change suggested by the General Council of the Judiciary is not implemented in the final Spanish regulations, the draft law could imply that if the intermediary is not released from its legal privilege obligation with respect to identification details of the taxpayer involved in the reportable transaction, the burden would be transferred to the taxpayer, who would be liable to report its own identification details and link such disclosure to the previous disclosure filed by the intermediary on a no-names basis. On the other hand, the intermediary may be released from the privilege by the taxpayer by way of a proper authorisation and in such case the intermediary may report all the data required as is explained below. The Spanish draft law does not clarify at this time whether an intermediary invoking legal privilege has a duty to investigate whether any other intermediaries are involved.

Finally, the Spanish draft regulations specify that compliance with the DAC 6 Directive and the regulations implementing the same will not constitute a breach of any confidentiality restrictions on disclosure of information imposed by law or contract. This does not imply any type of responsibility with respect to the taxpayer for the persons who are obliged to report and disclose.

The German Draft Law refers with respect to privilege to all intermediaries, which are subject to a legal obligation of confidentially. This covers not only lawyers, but for example also certified tax advisors (Steuerberater) and certified public accountants (Wirtschaftsprüfer). Such intermediaries, if not released by their clients from their legal obligation of confidentially, must only report their identity, their role, and the cross-border arrangement as such, but may not report any information about the taxpayer(s) using the cross-border arrangement. If there is no release from the taxpayer, the taxpayer shall be obliged to report his identity etc. after he has been informed by the intermediary about (i) his reporting obligation, (ii) the possibility to release the intermediary from his obligation of confidentially, (iii) his reporting duty in case no release is granted, and (iv) the reference number received by the intermediary upon his reporting of the cross-border arrangement. The taxpayer then needs to use for his reporting the reference number received by the intermediary.

In line with the DAC 6 directive, the Spanish draft regulation will consider as an intermediary any person that knows or could be reasonably expected to know that they have undertaken to provide, directly or by means of other persons, aid, assistance or advice with respect to designing, marketing, organizing, making available for implementation or managing the implementation of a reportable cross-border arrangement. However, the current draft regulations says nothing—unlike other draft implementation regulations in other Member States such as The Netherlands or the U.K.—about the right of intermediaries that provide assistance with implementation of a reportable transaction or advice with respect to a reportable transaction (referenced as so-called “assisting intermediaries”) but that do not design, offer, market and organizes, or manage the implementation of a reportable cross-border transaction to provide evidence that they were unaware of being involved with a reportable transaction.

The German Draft Law is in this respect a bit narrower as its intermediary definition comprises only persons who market, design, organize, make available for implementation or manage the implementation of a reportable cross-border arrangement for third parties. This means that, at least according to the wording of the German Draft Law, it is not sufficient if a person just “could be reasonably expected to know” of the cross-border arrangement or if it just provides assistance, e.g. a lawyer who just prepares the documentation for a cross-border arrangement (not designed by him) upon instruction of an intermediary should not be regarded as intermediary and should not have reporting obligations. If a qualifying intermediary is required to report to several EU Member States, the reporting system provides that reporting is only required in one EU Member State, namely in the EU Member State that is listed first on a list consisting of:

• the EU Member State where the intermediary is a fiscal resident;

• the EU Member State where the intermediary has a permanent establishment through which the services related to the reportable cross-border transaction are rendered;

• the EU Member State where the intermediary is incorporated or falls under the applicable legislation;

• the EU Member State where the intermediary is registered with a professional organization related to the rendering of legal, tax, or advice services.

Consequently, the qualifying intermediary is exempt from having to report in EU Member States lower on the list if it can reference that the information has been provided and reported in an EU Member State that is higher on the above list.

If and to the extent the taxpayer is the party with the primary obligation to report the reportable cross-border transaction, the reporting system provides that reporting is only required in the EU Member State that is listed first on the following list:

(a) the EU Member State where the taxpayer is a fiscal resident;

(b) the EU Member State where the taxpayer has a permanent establishment, which is the beneficiary of the reportable cross-border transaction;

(c) the EU Member State where the taxpayer receives income or generates profit, even though the taxpayer is not a fiscal resident of an EU Member State and has no permanent establishment in an EU Member State;

(d) the EU Member State where the taxpayer conducts activities, even if the taxpayer is no fiscal resident of an EU Member State and has no permanent establishment in an EU Member State.

Consequently, the taxpayer is exempt from having to report in EU Member States lower on the above list if it can reference that the information has been reported in an EU Member State that is higher on the above list.

If and to the extent there are several taxpayers that qualify to report the same reportable cross-border transaction, the reporting system provides that reporting is only required by one taxpayer, namely the taxpayer who is listed first on the following list:

(a) the taxpayer that has agreed to the reportable cross-border transaction with the intermediary;

(b) the taxpayer that manages and controls the implementation of the reportable cross-border transaction.

Consequently, the taxpayer lower on the above list is exempt from the reporting obligation if it can reference that the information has been provided and reported in an EU Member State by the taxpayer that is higher on the above list.

In Spain, the exempt intermediary (e.g. due to a legal privilege or a waiver) must communicate such circumstance within a period of five days from the day following the commencement of the obligation to report to the other intermediaries involved in the arrangement and to the relevant taxpayer. In the same way, the intermediary or the taxpayer who filed the communication of the arrangement must communicate such circumstance within five days to the other intermediaries or taxpayers involved in such arrangement. The Spanish draft regulation foresees penalties of 600 euros in case of failure to communicate these circumstances, doing it late or omitting data.

Contrary to this, the German Draft Law does not contain strict deadlines in which the exempt intermediary must communicate such circumstance to the relevant taxpayer, and there exists no explicit obligation to inform other intermediaries (as generally all intermediaries are obliged to report). However, the German Draft Law contains rules, which say that the exempt intermediary must inform the relevant taxpayer without undue delay after he has received the reference number for the cross-border arrangement reported by him (without disclosing the relevant taxpayer) about the reference number and that 30-day term in which the reporting needs to be done (see “When Must Reporting be Done?”) starts for the relevant taxpayer only with the lapse of the day on which he has received the reference number for the cross-border arrangement from the intermediary.

What Information Must be Reported?

The Directive targets “reportable cross-border arrangements.” These are transactions that involve at least one EU Member State and are determined based on meeting at least one of the “hallmarks” that are listed in Annex IV to the Directive. In Spain as well as in Germany, despite the fact that (i) it was initially announced by Spanish Government officers that they were seriously considering extending the reporting obligation to purely domestic transactions, and (ii) the first German draft of the implementation law contained reporting obligations regarding purely domestic transactions, the current versions of the Spanish draft law and regulation and the German Draft Law strictly follow the cross-border approach of the Directive.

If a cross-border transaction qualifies as a reportable transaction, the information that needs to be reported includes the following:

• Identification of the respective intermediaries and relevant taxpayers, including their name, date, and place of birth (in case of an individual), residence for tax purposes, TIN, and, where appropriate, the persons that are associated enterprises to the relevant taxpayer;

• Details of (all) the hallmarks set out in Annex IV of the Directive that (apply and) make the cross-border arrangement reportable;

• A summary of the content of the reportable cross-border arrangement, including a reference to the name by which it is commonly known, if any, and a description in abstract terms of the relevant business activities or arrangements, without leading to the disclosure of a commercial, industrial, or professional secret or of a commercial process, or of information the disclosure of which would be contrary to public policy;

• The date on which the first step in implementing the reportable cross-border transaction has been made or will be made;

• Details of the national (tax) provisions that form the basis of the reportable cross-border arrangement;

• The value of the reportable cross-border arrangement;

• The identification of the Member State of the relevant taxpayer(s) and any other Member State which are likely to be concerned by the reportable cross-border arrangement;

• The identification of any other person in an EU Member State likely to be affected by the reportable cross-border arrangement, indicating to which EU Member State such person is linked.

When Must Reporting be Done?

Reporting by intermediaries must be done within a 30-day term that starts running:

• On the day after the reportable cross-border arrangement is made available for implementation; or

• On the day after the reportable cross-border arrangement is ready for implementation; or

• When the first step in the implementation of the reportable cross-border arrangement has been made,

whichever occurs first.

As regards the reporting deadlines and processes, a distinction can be made with respect to reportable transactions that are “marketable” and those that are “bespoke.” In the first category, the reporting obligation is phased: the relevant information needs to be reported within 30 days after the day that marketable arrangement is made available for implementation, but in addition, every next three months a periodic update is required. This assumes that the marketable arrangement will need to be personalized and updated with taxpayer information after it has been made available, as it is likely to be made available to other taxpayers as well. In the case of bespoke reportable transactions, the reporting is due within 30 days of the day that transaction is ready for implementation.

To Whom is Reporting Done?

It is envisaged that reporting is done to the national tax authorities of the relevant EU Member States, through a digital reporting system. Each reportable cross-border arrangement, even if it affects different EU Member States, will have a single identifiable reference number.

What Arrangements are Reportable?

The arrangements regard transactions that meet certain hallmarks. It should be noted that the reportable cross-border transactions listed in the Directive—based on Article 2 of the Directive—regard all taxes other than value added tax and customs duties, or excise duties. The Directive also does not apply to compulsory social security contributions payable to EU Member States. Care is required in considering the scope of the Directive under domestic law of the EU Member States, however. For example, Poland reportedly does include VAT under the covered taxes. The Annex to the Directive lists the relevant hallmarks. There are two groups of hallmarks, some with the explicit requirement that the arrangement meets a “main benefit test” and some that do not have to meet the main benefit test.

Group 1 of the hallmarks includes both generic hallmarks and specific hallmarks, linked to a main benefit test. These transactions need to be reported (only) if the main benefit (reasonably to be expected) or one of the main benefits (reasonably to be expected) of the arrangement is obtaining a tax advantage. The main benefit test is an objective one, but arguably has a lower threshold than a “main purpose” test does. What matters is whether obtaining a tax advantage is the main benefit or one of the main benefits the party entering into the arrangement reasonably expects to obtain from the arrangement. This main benefit can be distilled from comparing the tax costs of the taxpayer without and with implementation of the reportable cross-border transaction.

Group 1/Category A (generic hallmarks)

1. An arrangement where the taxpayer or participant in the arrangement is required to keep secret how the arrangement secures a tax advantage vis-à-vis other intermediaries or the tax authorities and that meets the main benefit test.

2. An arrangement where the intermediary’s fee is contingent on the tax benefit derived and that meets the main benefit test.

3. An arrangement with standardized documentation and a standardized structure that does not need to be substantially customized and that meets the main benefit test.

Group 1/Category B (specific hallmarks)

4. An arrangement where steps are taken to acquire a loss-making company, subsequently discontinuing that company’s business and using or transferring its losses to reduce tax liability (of that or another company), and that meets the main benefit test.

5. An arrangement that converts income into capital, gifts, or other categories of revenue taxed at a lower level than income (or is not taxed at all), and that meets the main benefit test.

6. An arrangement that includes circular (round-trip) transactions through interposed entities without other commercial functions that cancel each other out, and that meet the main benefit test.

Group 1/Category C (specific hallmarks related to cross-border transactions)

7. An arrangement that involves deductible cross-border payments between associated enterprises and the recipient of the payments is resident in a jurisdiction that imposes (i) no corporate tax, or (ii) a zero-rate tax, and that meets the main benefit test.

8. An arrangement that involves deductible cross-border payments between associated enterprises and the payment benefits from a full exemption from tax in the jurisdiction where the recipient is resident for tax purposes, and that meets the main benefit test.

9. An arrangement that involves deductible cross-border payments between associated enterprises and the payment benefits from a preferential tax regime in the jurisdiction where the recipient is resident for tax purposes, and that meets the main benefit test.

Group 2 consists of hallmarks without a main benefit test.

Group 2/Category C (specific hallmarks related to cross-border transactions)

10. An arrangement that involves deductible cross-border payments between associated enterprises and the recipient of the payments is not resident in any tax jurisdiction.

11. An arrangement that involves deductible cross-border payments between associated enterprises and the recipient of the payments is listed by the collective EU Member States as a third country jurisdiction having a harmful (non-cooperative) tax regime.

12. An arrangement where the same asset is subject to depreciation in more than one jurisdiction.

13. An arrangement where more than one taxpayer can claim relief from double taxation in respect of the same item of income in more than one jurisdiction.

14. An arrangement (or series of arrangements) that includes transfers of assets and where there is a material difference in the amount treated as payable in consideration for the assets in those jurisdictions.

Group 2/Category D (specific hallmarks concerning automatic exchange of information and beneficial ownership)

15. An arrangement (or series of arrangements) that circumvent EU legislation or that circumvents agreements on the automatic exchange of information (also with non-EU countries) (The Directive provides six different examples).

16. An arrangement that involves a non-transparent legal or beneficial ownership chain: that does not carry on a substantive economic activity supported by adequate staff, equipment, assets, and premises; and that are incorporated, managed, resident, controlled, or established in any jurisdiction other than the jurisdiction of residence of one or more of the beneficial owners of the assets; and where the beneficial owners are made unidentifiable.

Group 2/Category E (hallmarks concerning transfer pricing)

17. An arrangement that involves unilateral safe harbour rules for transfer pricing.

18. Arrangements that involve the transfer of hard-to-value intangibles.

19. An arrangement that involves an intra-group cross-border transfer of functions and/or risks and/or assets if projected EBIT during three years after the transfer are less than 50% of the projected annual EBIT without such a transfer.

Spanish draft regulation states a general reference to the hallmarks listed in the Directive, without reproducing them in the local implementation law. However, thereafter it does set several tweaks to some of the hallmarks, including the following:

• An extended definition of main benefit which is linked to the expectation to obtain tax savings. According to the draft regulations, the concept of tax saving will include any reduction of taxes, including the deferral in the accrual of taxes or the generation of tax losses or other tax credits. The draft rules clarify that the tax saving may be achieved in any of the jurisdictions concerned (not only Spain or Germany) by any of the entities involved in the transaction.

• Cross-border expenses are also extended to include cross-border “payments.”

• Any effective tax rate under 1% will be considered as a 0% rate.

• An exception whereby no hallmarks related to transfer pricing will be considered when there is an Advance Pricing Agreement validating the value of the arrangement.

What Happens with the Reported Information?

The standardized forms with information reported will be collected by national tax authorities and will be exchanged through the Common Communication Network (CCN) developed by the EU to EU Member States on a quarterly basis. The CCN is a secure network developed and operated by the Directorate General of the European Commission responsible for Taxation and Customs (DG TAXUD) to support common policies in the area of customs, excise, and taxation. It offers all national tax administrations a coherent, robust, and secure method of access to all DG TAXUD applications.

Furthermore, a central filing location will be designated in each EU Member State for cross-border reportable transactions. This may include hardcopy filings or (more likely) electronic filings that remain available for automatic exchange of information between the tax authorities of all the EU Member States.

Three years after the date of entry into force of the Directive (which was June 25, 2018) and every three years thereafter, the Commission is required to submit a report on the application of the Directive to the European Parliament and to the Council.

In Spain, the Tax Administration will publish in its webpage the most relevant cross-border arrangements reported and some information related to the arrangement if appropriate (e.g. the applicable tax regime, the classification of the arrangement, etc.). According to the Spanish Tax Agency these publications will be only for information purposes.

Will Reported Transactions be Audited?

Reportable cross-border transactions do not by definition qualify as tax avoidance or tax evasion. The reporting of the transactions serves first and foremost for risk assessment purposes and next to dissuade intermediaries to advise on or offer such transactions. That said, it should be expected that reported transactions will be scrutinized and audited by the tax authorities to determine if they do rise to the level of tax evasion.

What Happens if You Don’t Report?

The Directive instructs EU Member States to apply penalties for non-compliance, but EU Member States have discretion to decide on the applicable penalty regime. The German Draft Law provides fines of up to 25,000 euros for each violation of reporting obligations under the German Draft Law, but only for cross-border arrangements for which the first step of the reportable transaction will be implemented after June 30. 2020. In Spain, the draft legislation provides a penalty of 1,000 euros per data or set of non-reported data, with a minimum penalty of 3,000 euros and a maximum up to the fees agreed or the value of the tax advantage. These penalties are applicable to arrangements implemented before the regulations implementing DAC 6 in Spain comes into force.

The allegedly retroactive effect of penalties in a case like this is not only potentially contrary to the Spanish legal system but also to EU Law. In our view, the application of these penalties to arrangements before the local regulations were in force may be challenged in court.

According to Parliamentary history to the Directive, the EU Parliament requested the Member States to make publicly available a list of intermediaries and taxpayers on whom penalties have been imposed under the Directive including names, nationalities, and residences. At this time, it is not clear whether that instruction will be implemented, however.

What About Confidentiality of Information?

Only EU Member States and the EU Commission have access to the data stored on the CCN, but it will be subject to automatic exchange to all the EU Member States.

What Do You Need to Do Now?

As the Directive applies to reportable cross-border transactions that have been put in place or for which the first step of implementation was made on or after June 25, 2018, first and foremost, you will need to consider and assess whether any reportable cross-border transactions exist (marketable or bespoke) with respect to which you were a taxpayer or a qualifying intermediary since that time. To survey this, a series of to-the-point questions should be asked, and once it is determined that such reportable cross-border transactions indeed exist, it will need to be determined who will have the primary obligation to report the required information. The reporting deadline for these transactions is Aug. 31, 2020.

The Spanish regulation and the German Draft Law as published attempt to meet the basic requirements set by the Directive but several material aspects are still pending to be regulated in Germany and Spain. Due to the complex regulation of this Directive we recommend seeking assistance when engaging in cross-border transactions that may fall into the scope of the DAC 6, bearing in mind that it is uncertain whether there will be any further local guidance and that the breaching of these regulations may lead to severe penalties.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Bernulph von Crailsheim is a partner in Simmons & Simmons’ Frankfurt office, Juan Sosa is a partner in the firm’s Madrid office, and Monique van Hersksen is partner in the Amsterdam office.

The authors can be reached at bernulph.voncrailsheim@simmons-simmons.com, juan.sosa@simmons-simmons.com and monique.vanherksen@simmons-simmons.com.