Background to DAC6
Under DAC6, intermediaries (such as tax advisers, accountants and lawyers) and under certain conditions the taxpayer itself, are obligated to submit information on ''reportable cross-border arrangements'' to their domestic tax authorities in one of the EU Member States. Any information submitted is subsequently exchanged between the tax authorities of the EU Member States. Generally, an arrangement is (potentially) reportable if an arrangement meets (at least) one ''hallmark category''. For more information on the DAC6 Directive and the obligations of intermediaries and taxpayers, we kindly refer to our previous tax alert here.
Delay of DAC6 reporting deadlines
The EU mandatory disclosure regime known as DAC6 enters into effect on 1 July 2020 and reporting obligations were set to begin within 30 days from that date. In light of the COVID-19 pandemic, Member States can opt for a six-month delay of the reporting deadlines (to be clear, the legislation will still come into effect on the original date). We have reported on the European Commission proposed reporting delay here.
On 26 June 2020, the Dutch tax authorities confirmed the extension of the Dutch reporting deadlines under DAC6 with 6 months. This means that actual reporting will commence on 1 January 2021. Any reportable arrangements arising between 1 July 2020 and 1 January 2021 will need to be reported ultimately by 31 January 2021. Arrangements arising as of 1 January 2021 will have the standard 30-day reporting deadline. Any arrangements of which the first step of implementation was taken between 25 June 2018 and 1 July 2020 (the transitional period) will need to be reported ultimately by 28 February 2021.
Dutch interpretation of hallmarks
The DAC6 Directive provides a list of hallmarks outlining a list of broad key indicators for a potentially reportable arrangement. An arrangement is reportable if an arrangement meets at least one hallmark category. For certain specific hallmarks, the DAC6 Directive requires the “main benefit test” to be fulfilled before an arrangement becomes subject to reporting.
Hallmarks are key indicators for potentially reportable arrangements. Since the scope of the hallmarks is very broad and therefore open for interpretation, the Dutch DAC6 Guidance (''Dutch Guidance'') provides more detail on the interpretation and expected application of the different hallmarks.
Please note that the Dutch Guidance only reflects the position of the Dutch tax authorities and does not constitute legislation. This means that an intermediary or the relevant taxpayer can hold the Dutch tax authorities to statements made in the Dutch Guidance, but this does not necessarily mean that the positions taken in the Dutch Guidance can be upheld before the Dutch and/or European courts.
Below we will discuss the most relevant considerations provided in the Dutch Guidance in relation to a cross-border arrangement, the main benefit test and the hallmarks.
Dutch Guidance on a cross-border arrangement
The Dutch Guidance states that the term "cross-border" should not be interpreted narrowly and could cover a variety of situations, such as a legal merger between two Dutch companies with a foreign parent company. Parts of the Kingdom of the Netherlands that are not located in Europe (i.e. Aruba, Caribbean Netherlands, Curaçao and Sint Maarten) should be regarded as foreign jurisdictions. An arrangement between the Netherlands and another part of the Kingdom of the Netherlands would therefore qualify as a cross-border arrangement.
Dutch Guidance on the main benefit test
The main benefit test is described as being fulfilled if "the main benefit or one of the main benefits which a person may reasonably expect to derive from an arrangement is the obtaining of a tax advantage."
The Dutch Guidance states that the main benefit test will typically be met in two separate situations: either (i) the arrangement would not be implemented if the expected tax benefit would not be obtained or (ii) the arrangement includes elements added to obtain a tax advantage. In both situations, the tax advantage should still be the main (or one of the main) benefit(s) expected from the arrangement.
To assess whether the main benefit test is met, the Dutch Guidance proposes to review if the arrangement would remain the same if the tax benefit was not derived from the arrangement. If this is the case, the main benefit test should not be met because in that case the tax benefit would not be decisive. If the arrangement is implemented differently because the tax benefit was not obtained, then the main benefit test is met. The Dutch Guidance also refers to the definition of the main benefit test in the consultation document of the UK on the implementation of DAC6.
Hallmark category A3: standardized structures
Investment funds often use standardized documentation. The Dutch Guidance confirms that hallmark A3 is usually not met in relation to these arrangements. Typically, a possible tax benefit is not the main reason why investors participate. The expected profits on the investment are in general the main reason why investors participate. As long as a possible tax benefit is not the main (or one of the main) reason(s) for the investment, the main benefit test (which is required under hallmark category A3) should not be met.
· The Dutch Guidance also confirms that foreign exchange hedging instruments are not reportable under this hallmark. Although standardized documentation is used, the instrument would typically need to be customized for the relevant taxpayer.
· Standard loan agreements used for intra-group loans could qualify as standard documentation, but will in most cases not be reportable because the main benefit test would not be met.
Hallmark category B2: converting income to reduce tax burden
·As a result of the application of a treaty for the avoidance of double taxation, the repurchase of shares by a Dutch company from its foreign shareholder can be exempt from Dutch dividend withholding tax. Whereas opting for the distribution of dividend may result in dividend withholding tax being due. The Dutch Guidance states that an arrangement whereby a Dutch company decides to repurchase its own shares from its foreign shareholder, instead of distributing a dividend, only to avoid Dutch dividend withholding tax, is reportable. If there are sound business reasons for the repurchase of shares, the arrangement may be non-reportable.
· The Dutch Guidance also refers to international employee contract assignments whereby a Dutch company hires workers from a foreign company and the Dutch company effectively functions as the employer. These arrangements should be considered reportable if the tax burden on employees' wages in the jurisdiction of the foreign contractual employer is lower compared to the Netherlands.
· The application of the Dutch 30% expatriate tax facility, which enables qualifying employees to receive 30% of their wages free of tax in the form of a fixed allowance, should not be a reportable cross-border arrangement.
Hallmark category B3: circular transactions
· Arrangements whereby capital contributions are made by a foreign parent company to a Dutch company, whereby the capital contribution is immediately lent back out to the foreign parent company to create interest income at the level of the Dutch company, are reportable. These arrangements would typically be set up in cases where the Dutch company is a loss-making company.
Hallmark category C1: deductible cross-border payments
· The Dutch Guidance confirms that the recipient under hallmark category C1 is considered the direct recipient. In case a Dutch company pays interest to a foreign parent company (the direct recipient) which is not subject to tax, it is irrelevant if this interest is also included in the taxable income of a different ultimate parent company based on CFC rules. Such arrangement is reportable, because the ultimate parent company does not qualify as the recipient under hallmark category C1.
· Territorial tax system: this covers a situation where a payment is made to foreign parent company in a jurisdiction with a territorial taxing system. Deductible payments by the Dutch company to the foreign parent company are not included in the taxable base of the foreign parent company and are therefore reportable under DAC6.
· Interest free loan: in case a foreign company grants an interest free loan to a Dutch company and only the Dutch company makes a transfer pricing adjustment by imputing the interest, the arrangement would be reportable.
· If a jurisdiction is added to the list of non-cooperative jurisdictions in the future, this will not have retroactive effect. Payments made before the jurisdiction was added to the list will not be reportable.
Hallmark category C2: multiple jurisdictions claim deduction for same depreciation
· Multiple deduction for the same depreciation, for example, can occur when transparent entities are used in a legal structure. If due to a discrepancy between domestic legislation depreciation costs are deductible in two jurisdictions or more, the arrangement is reportable. It can be expected that such arrangements are typically captured by the ATAD2 Directive, as a result of which multiple deduction would already be disallowed. If that is the case, the arrangement should no longer be reportable.
· Multiple deduction for the same depreciation can also occur in relation to financial lease arrangements between a lessee and lessor located in different jurisdictions. The financial lease arrangement is reportable if both lessee and lessor are entitled to deduct depreciation costs since the economic and legal ownership is separated by the financial lease arrangement.
Hallmark category C4: transfer of assets with differences in the amount payable
· Transfer pricing adjustments as a result of the application of the arm's length principle may be considered reportable in case of cross-border situations, if the adjustment is only made in one of the jurisdictions involved. A transfer by a foreign company of assets to a Dutch company for book value, where the Dutch company records the fair market value for Dutch tax purposes, would be reportable.
Hallmark category D2: non-transparent ownership structures
· This category includes arrangements undermining reporting obligations or privacy structures aiming to conceal the ultimate beneficial owner. Based on the Dutch Guidance, institutional investors, and persons fully owned by one or more institutional investors, will not be considered to conceal the ultimate beneficial ownership with respect to this category.
Hallmark category E1: use of unilateral safe harbor rules
· Unilateral safe harbor rules are rules that provide certain taxpayers with the possibility to apply (simplified) transfer pricing obligations instead of the general domestic transfer pricing rules. If the safe harbor rule is bilateral, multilateral or based on international consensus, the use of the safe harbor rule is not reportable.
· Unilateral safe harbor rules are reportable if the safe harbor rule is ''effectively used''. This means that if a company is eligible to apply the safe harbor rule, but is not effectively relying upon that safe harbor rule, the arrangement is not reportable. For example, a foreign company grants a loan to a Dutch company and based on the arm's length principle interest is imputed for Dutch tax purposes. In its home jurisdiction, the foreign company may rely on a unilateral safe harbor rule to compute the interest charged. If the foreign company takes into account an interest rate that falls within the arm's length range, but which also happens to fall within the unilateral safe harbor range, the unilateral safe harbor rule is not effectively used. In such case, the arrangement is not reportable.
Hallmark category E2: hard-to-value intangibles
· The Dutch Guidance refers to the definition of hard-to-value intangibles included in the OECD Transfer Pricing Guidelines. The Dutch Guidance specifies that to be qualified as a hard-to-value intangible it is not relevant if a price adjustment clause has been agreed upon.
· The Dutch Guidance specifies that a transaction is reportable if only the legal ownership of the IP is transferred or if only the DEMPE functions are transferred.
Hallmark category E3: Intragroup cross-border restructurings
· The Dutch Guidance states that cross-border mergers meet this hallmark, when the EBIT of the legal entity ceasing to exist was positive in the foregoing year: As a result of the legal entity ceasing to exist, the EBIT will be reduced to zero (less than 50% of the EBIT). Based on the Dutch Guidance it is not relevant whether a permanent establishment will continue (part of) the activities of the legal entity ceasing to exist. Therefore, cross-border mergers where one or more Member State is involved will typically be reportable.
With the Dutch Guidance now in hand, we help our clients pro-actively identify any reportable cross-border arrangements that have occurred since 25 June 2018. We strongly recommend you to reach out to your Baker McKenzie contact in case you would like to receive additional information on how to identify such reportable cross-border arrangements.