DAC 6 – practical examples for reporting of cross-border arrangements

The basic prerequisite for the taxpayer to establish whether the cross-border arrangement is subject to a reporting obligation is the concurrence of two facts: 1) the existence of a specific arrangement proposed by someone, and 2) the existence of a tax advantage, or concealing income or assets, or circumventing a common standard for OECD reporting. If this concurrence does not occur, it will not be a cross-border arrangement that would be subject to reporting. In the event the concurrence does occur, the fulfilment of at least one of the hallmarks (in some cases with an application of a main benefit test in the form of a tax advantage) is further verified.

The Financial Administration commented on the issue of how to proceed when assessing the main benefit test as follows:

• A tax advantage ensues from the arrangement, but this is not the result of a hallmark – the reporting obligation does not arise.
• A tax advantage ensues from the arrangement, which is the result of a hallmark – it is necessary to assess whether the acquisition of a tax advantage is the main benefit or one of the main benefits of the given arrangement. Based on this assessment, the reporting obligation either arises or it does not.
• The main benefit test is not fulfilled if the tax advantage does not constitute a tax saving (e.g., it is an administrative simplification). 

In addition, the Financial Administration uses examples to summarise whether the selected arrangements are cross-border arrangements subject to reporting obligations or not. We have selected answers to the transactions that are encountered most frequently in practice. 

Provision of interest-free/low-interest loans from a foreign partner

• The granting of a loan using the exception of Section 23 (7) of the ITA, which allows for a deviation from the arm's length principle, is subject to a reporting obligation. 

Sale of a foreign parent company’s share in a Czech subsidiary to another foreign entity

• The sale of the share does not in itself fulfil the definition of a cross-border arrangement subject to a reporting obligation (but beware of a composite arrangement - an arrangement comprised of multiple steps or parts).

Payment of dividends

• The payment of dividends does not in itself fulfil the definition of a cross-border arrangement subject to a reporting obligation, unless one of the purposes is to obtain a tax advantage (see concurrence).

Assumption/use of tax losses on the basis of a cross-border merger

• The merger does not in itself fulfil the definition of a cross-border arrangement subject to a reporting obligation (but pay attention to contrived steps that do not in themselves have economic justification other than a reduction in tax of the user of the arrangement, i.e. the acquisition of a loss-making company, the termination of its activities and the use of losses).

Capitalisation of a debt on the basis of a loan

• If one of the main purposes is not obtaining a tax advantage, it will not be a cross-border arrangement subject to a reporting obligation (but beware of the case where the objective is to achieve a lower taxation of dividends compared to the taxation of interest among the arrangement participants).

The provision of a loan from a foreign parent company

• The provision of the loan does not in itself fulfil the definition of a cross-border arrangement subject to a reporting obligation, unless one of the purposes is to obtain a tax advantage (see concurrence)

Transactions in the ordinary course of trade with foreign partners

• This type of transaction does not fulfil the definition of cross-border arrangements subject to reporting.

If you would be interested in the entire report published by the Financial Administration, you can find it at the attached link. 

If you have any questions on the issue of the reporting obligation of cross-border arrangements, please do not hesitate to contact our experts.

Author: Pavla Vítková, Tax Manager