(Last updated: 26 July 2021)
EU DAC 6 Directive introduces disclosure requirements for cross-border tax arrangements
On 25 June 2018, EU Directive 2018/822 amending 2011/16/EU (Council Directive on administrative cooperation in the field of taxation) on mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements entered into force. Briefly, the Directive – also known as DAC 6 – requires intermediaries – and in some circumstances taxpayers – to report information on certain cross-border tax arrangements to the tax authorities if the arrangements contain specific hallmarks. The objective of these EU-wide disclosure requirements is to combat potentially aggressive tax planning through greater transparency. Member States will be able to identify potentially harmful structures at an earlier stage, with faster adaptation of tax laws helping to prevent erosion of the country's tax base. Although the focus is on aggressive or potentially aggressive arrangements, the scope of the Directive is very broad and may also trigger disclosure requirements with regard to standard arrangements which are known to be legal and common transactions with a cross-border dimension.
EU Member States transposed DAC 6 into national law with effect from 31 December 2019. The new regulations have been applicable since 1 July 2020. The first exchange of information among the EU Member States commenced on 31 October 2020.
Although the Directive has only applied since 1 July 2020 – in Germany in the form of the national Transposition Law of 21 December 2019 – urgent attention was required in advance because the disclosure requirements have retroactive effect:
They already apply to cross-border arrangements where "the first step in the implementation" took place between the Directive's entry into force on 25 June 2018 and the start date for application on 1 July 2020. The relevant reports had to be submitted by 31 August 2020 – subject to the time limit being extended by EU law.
Update: Deferral of DAC 6 disclosure time limits in response to the COVID-19 pandemic
In Germany, intermediaries and users are required to report relevant cross-border tax arrangements electronically to the Federal Tax Office (BZSt), starting from 1 July 2020. Currently the Directive and German Transposition Law require compliance with the following time limits when submitting these reports:
- "Historical" cases: cross-border tax arrangements whose first step was implemented after 24 June 2018 (entry into force of DAC 6) and before 1 July 2020 must be notified to the Federal Tax Office by 31 August 2020.
- "New" cases: cross-border tax arrangements implemented from 1 July 2020 onwards must be notified to the Federal Tax Office within 30 days after the end of the "event day" within the meaning of section 138f (2) nos. 1 to 3 of the Fiscal Code (Abgabenordnung – AO).
In order to provide relief to parties affected by the disclosure requirements during the coronavirus crisis, the European Commission published a proposal for a council directive on 8 May 2020. Its main aim was to defer the disclosure time limits for cross-border tax arrangements by three months (initially). The European Commission also proposed that, given the uncertainty about the development of the COVID-19 pandemic, it could be authorised to extend the deferral period for submission and exchange of information once by a period of three months. It was not possible to reach a quick political agreement on this Commission proposal, despite the considerable time pressure on the Member States.
A compromise was nonetheless achieved on 3 June 2020 at the meeting of the Committee of Permanent Representatives of the Member States (COREPER II) on the amended draft proposal for a directive dated 28 May 2020. The proposal was approved on 19 June 2020 by the EU Parliament and finally agreed on 24 June 2020 by the Council. Under this proposal, Member States will be granted the option of deferring the DAC 6 disclosure time limits by 6 months, as follows:
- "Historical" cases: the time limit for disclosing cross-border tax arrangements relating to the period from 25 June 2018 to 30 June 2020 has been deferred from 31 August 2020 to February 2021.
- "New" cases: the 30-day time limit for disclosing cross-border tax arrangements from 1 July 2020 begins on 1 January 2021.
- First-time quarterly disclosure concerning marketable arrangements within the meaning of section 138h AO of the German transposition law is to be submitted by April 2021.
- The first exchange of information between EU Member States relating to cross-border tax arrangements has been deferred from 31 October to April 2021.
It is important to note that this Directive only extends the time limit for meeting the disclosure requirements; the date on which the regulations begin to apply remains 1 July 2020. Cross-border tax arrangements implemented during the deferral period must be disclosed at the end of the moratorium.
Update: No plans to defer disclosure time limits in Germany
It had been unclear whether Germany would make use of the option under EU law to extend the time limits. It has now been confirmed that there will be no moratorium in Germany. As such, the existing rules on time limits remain in force for historical and new cases. Apart from Germany, the countries that have decided against deferring the time limits include Finland and Austria. A number of other EU states (including France, Luxembourg and Belgium) have already stated that they will make use of this option.
Implementation of DAC 6 in Germany
The process initiated in Germany in 2018 to implement DAC 6 reached the finishing line in December 2019: on Thursday, 12 December 2019, the Bundestag approved the federal government bill introducing a requirement to disclose cross-border tax arrangements in the version as amended by the Finance Committee on 11 December 2019.
The Act of 21 December 2019 was promulgated in the Federal Law Gazette Part I 2019 No. 52 on 30 December 2019 and entered into force on 1 January 2020.
In March 2020, the Federal Ministry of Finance published an initial consultation draft on application of the provisions relating to the requirement to disclose cross-border tax arrangements. An updated, but not yet finalised draft version of the application-related circular as at 14 July 2020 was published by the German Federal Central Tax Office on 6 August. The draft has already been applied by the tax authorities in this form. The final application-related circular from the Federal Ministry of Finance has been available since 29 March 2021.
Update: In a German Ministry of Finance (BMF) circular of 26 July 2022, the tax authorities revised marginal no. 255 of the application circular dated 29 March 2021. The amendment deals with the disclosures and supplementary information that an intermediary must provide when new users join a marketable arrangement.
Previous history of the legislative process: Back in September 2018, the Federal Ministry of Finance drew up an internal consultation draft on transposing DAC 6. On 30 January 2019, a first (unpublished) draft bill was distributed for inter-ministerial consultation. Unlike the working draft, the draft bill provided for an extension of the disclosure requirements to cover purely national tax arrangements. The Federal Ministry of Finance and legislators backed away from this again in the official draft bill of 26 September 2019 and in the government draft of 9 October 2019 that directly followed it. The version of the law that was passed by the Bundestag, which dates from 11 December 2019, and the transposition law then promulgated on 30 December 2019 likewise do not provide for any disclosure requirement in relation to national tax arrangements. However, it remains to be seen whether the Federal Ministry of Finance will take up the issue of a disclosure requirement for national arrangements again in future draft legislation.
The following overview summarises what will change for taxpayers and their advisors as a result of DAC 6 and the German transposition law.
What circumstances must be disclosed?
The material scope of the disclosure requirements essentially includes specific types of tax, the cross-border arrangement, and certain hallmarks of the arrangement.
Type of tax covered
The disclosure requirement for cross-border tax arrangements includes income tax, corporation tax, trade tax, inheritance tax, gift tax and real estate transfer tax, for example. It does not cover (import) VAT, customs duties and harmonised excise duties (such as taxes on energy, electricity, spirits and tobacco), social security contributions and fees.
Cross-border nature of the arrangement
DAC 6 stipulates that arrangements are subject to disclosure if certain cross-border criteria are met, such as more than one EU Member State being involved or, under certain circumstances, at least one Member State and one or more third countries.
Hallmarks of the arrangement – overview
A cross-border arrangement is reportable if it includes at least one specific hallmark within the meaning of DAC 6. With regard to the hallmarks of an arrangement, a distinction must be made between hallmarks which are subject to disclosure irrespective of any tax advantage provided by the arrangement, and hallmarks which only apply if the “main benefit” test is satisfied. This relevance test is regarded as largely satisfied if the expected main advantage or one of the main advantages of the arrangement is the obtaining of a tax benefit.
According to section 138d (3) of the Fiscal Code (Abgabenordnung – AO) as amended by the German transposition law, a tax benefit of this nature exists in particular if the tax arrangement is intended to obtain a tax refund, grant or increase tax rebates, or eliminate or reduce tax that is due. A tax benefit also exists if it is expected to arise outside the scope of the German law. However, the transposition law also provides that the Federal Ministry of Finance (BMF), together with the federal states, can make it clear in BMF circulars when no tax benefit within the meaning of the law is to be assumed, in particular because the tax benefit is effective in Germany alone and is provided for by law ("white list"). In particular, the list is intended to clarify when the main benefit test is considered not satisfied and there is consequently no disclosure requirement. The BMF cited the following cases in the annex to the latest application circular:
- Use of exemption limits and allowances
- Exercise of tax options
- Meeting the requirements for tax exemption under section 5 of the German Corporate Tax Act (Körperschaftsteuergesetz – KStG) or section 3 of the Trade Tax Act (Gewerbesteuergesetz – GewStG)
- Transactions that are subject to the Research Incentives Act (Forschungszulagengesetz – FZulG)
- Conclusion of retirement plans and basic pension agreements that are certified in accordance with sections 5 and 5a of the Certification of Retirement Plans Act (Altersvorsorgeverträge-Zertifizierungsgesetz – AltZertG)
- Matrimonial property clauses making use of section 5 of the Inheritance Tax and Gift Tax Act (Erbschaftsteuer- und Schenkungsteuergesetz – ErbStG)
- Amendment of articles of association to meet the requirements of section 13a (9), ErbStG
- Conclusion of pooling agreements within the meaning of section 13b (1) no. 3, ErbStG to benefit shares in corporations
- Pensions, compensation and benefits within the meaning of section 3 no. 8 and 8a of the Income Tax Act (Einkommensteuergesetz – EStG)
- Company pension schemes for employees within the scope of section 3 no. 55, 55c, 63 and 66; sections 4d (3) and 4e (3) in conjunction with sections 10a, 79 ff. and 100, EStG
- Transfer of entitlements in accordance with section 3 no. 55c and 55d, EStG
- Conclusion of contracts where the contributions made may be recognised as pension expenses in accordance with section 10 (1) no. 2, 3 or 3a, EStG
- Recognition of half the difference between the payments made and received according to section 20 (1) no. 6 sentence 2, EStG, in the case of endowment life insurance policies
- Insurance policies reported within the scope of the recording procedure under section 50d (6) in conjunction with (5), EStG
- Long-term increases or decreases in shareholdings aimed at producing a different legal outcome from a tax viewpoint (e.g. avoidance of section 8b (4) sentence 1, KStG, meeting the investment requirement as defined in section 26 no. 6 sentence 1, Investment Tax Act (Investmentsteuergesetz, InvStG) and
- Setting up an affiliation for income tax purposes in line with sections 14 to 19, KStG, as well as section 2 (2) sentence 2 and section 7a, GewStG
- Relocation of domicile in order to make use of or avoid the cross-border commuter rules as laid down in the double taxation treaties (DTT)
- Additional (private) stay in the foreign country of work in order to exceed the 183-day time limit imposed by the treaties.
Overview of hallmarks for the disclosure requirement in relation to cross-border tax arrangements: DAC 6 hallmarks as defined in Annex IV Part II Category A-E; trans-posed by section 138e of the Fiscal Code (Abgabenordnung – AO) in the version that entered into force on 1 January 2020.
Who does the disclosure requirement for tax arrangements apply to?
The disclosure requirement for cross-border tax arrangements mainly applies to intermediaries. According to the proposed legal definition, this means primarily any person who designs, markets, organises or makes available for use a reportable cross-border tax arrangement, or who manages its implementation by third parties. The disclosure requirement is linked to involvement in the various stages of tax planning, from its origin through to implementation. Having said that, someone who has only been involved in implementing individual partial steps of a cross-border tax arrangement without knowing it and without reasonably being expected to know it, will not be regarded as an intermediary, according to the explanatory notes.
Classification as an intermediary does not depend on belonging to a particular professional group. In addition to members of the legal, tax and auditing professions, in practice financial services providers such as banks, fund initiators and insurance companies as well as asset and investment advisors including family offices may be affected by the disclosure requirements. In addition, group financing companies in particular may also be subject to disclosure requirements.
With regard to the intermediary, there is a deviation from the Directive in that DAC 6 further stipulates that, under certain conditions, assistance and support services must also be disclosed. In Germany, there is (still) no disclosure requirement for auxiliary intermediaries in the transposition law. In other EU Member States (e.g. Poland), however, auxiliary intermediaries are subject to the requirement.
The intermediary must also be linked to EU jurisdiction, e.g. by being domiciled in an EU Member State or by operating a permanent establishment in a Member State, through which services are provided for the arrangement in question. If the intermediary has a specific domestic connection to Germany (e.g. is domiciled in Germany), it is accordingly also subject to reporting requirements in Germany.
A tax arrangement may also be subject to reporting requirements in more than one EU Member State if an intermediary has a domestic connection in more than one EU Member State, or if several intermediaries with different domestic connections are involved in the arrangement. With regard to the disclosure requirement of a (domestic) intermediary, it is also irrelevant whether Germany itself is affected by the cross-border tax arrangement or whether the effects occur solely outside the country.
An intermediary can only avoid double reporting by providing proof that it has already duly complied with its own disclosure obligation in another EU Member State, or that the relevant information on the same reportable arrangement has already been provided by another intermediary.
If there is no intermediary subject to disclosure requirements, for example, or if the intermediary is (partially) exempt from disclosure requirements due to professional secrecy obligations, e.g. in the case of lawyers, tax advisors and auditors, the users (taxpayers) of the tax arrangement may be subject to disclosure requirements under certain circumstances. A user is considered to be any person to whom a reportable cross-border arrangement is made available for implementation, or who is ready to implement an arrangement of this type or has implemented the first step of such an arrangement.
Specifically, in the case of cross-border tax arrangements that a user designs for their own use (in-house arrangements), the rules applicable to intermediaries apply accordingly. In this case, the user is subject to an independent disclosure requirement. In other EU Member States, the user may have to ensure that the intermediary complies with its disclosure obligations, otherwise the disclosure requirement may revert to the user.
How and when are disclosure obligations to be fulfilled?
The disclosure obligations under DAC 6 generally apply from 1 July 2020. Intermediaries or users must comply with their disclosure obligation within 30 days after the occurrence of the reportable event (in practice, it may be difficult to establish this date precisely). They must submit the information electronically to the German Federal Central Tax Office (BZSt), using the officially prescribed form.
The data is then entered into the secure central directory set up by the EU Commission. The automatic exchange of information between EU Member States commenced on 31 October 2020, using this platform.
It is important to note that cross-border tax arrangements were subject to a retroactive disclosure requirement during the transitional period between the entry into force of DAC 6 and its start of application. If the first step of a reportable cross-border tax arrangement was implemented after 24 June 2018 and up to and including 30 June 2020, it had be reported by 31 August 2020.
Please note: Possible changes to time limits in response to the COVID-19 pandemic should be taken into account.
What data must be disclosed?
In addition to abstract information about the intermediary, the relevant hallmarks and the content of the arrangement, the data record must also contain individual information about the user and the other persons concerned, as well as the date of implementation.
The details are laid down by the transposition law in the principal procedural regulations, section 138f and section 138g of the Fiscal Code (AO), for intermediaries and users. Section 138f (3) sentence 1 of the AO stipulates for the intermediary, and under section 138g of the AO analogously for the user, that the data record must include the following abstract information (numbers 1 and 4 to 9) and individual information (numbers 2, 3 and 10):
For each data record received, the Federal Central Tax Office (BZSt) will assign a registration number ("ArrangementID") to the cross-border tax arrangement and a disclosure number for the report received ("DisclosureID"). The intermediary must also inform the user of these numbers. One of the reasons for this is that the user is required to indicate in their tax return that a cross-border tax arrangement has been implemented; to do so, the user must state the registration and disclosure numbers.
In the event that the intermediary is subject to a statutory (i.e. not a contractual) obligation to maintain confidentiality, without having been released from this obligation by the user, intermediaries can be exempted from disclosure requirements in certain circumstances. In Germany, however, this exemption was be implemented only in part. This means that with regard to the "abstract information" (numbers 1 and 4 to 9), the intermediary always remains subject to disclosure requirements, even if under an obligation to maintain confidentiality. In these cases, however, the intermediary's disclosure requirement can be met by the user providing this information on behalf of the intermediary (i.e. by submitting just one data record). Only the requirement to disclose the individual information (numbers 2, 3 and 10) may pass to the user if the intermediary has informed the user in advance about the option of exemption from the obligation to maintain confidentiality and the transfer of the disclosure requirement, and has provided the user with the necessary information specified in numbers 2, 3 and 10 as well as the registration and disclosure numbers, insofar as the user is not aware of this information.
To the extent that the intermediary is aware that at least one other intermediary, in addition to itself, is subject to a requirement to disclose the same cross-border tax arrangement within the scope of this legislation or in another Member State of the European Union, it can also include in the data record the information referred to in number 1 with regard to the other intermediaries known to it. In this case, the disclosing intermediary must inform the other intermediaries of the registration number.
Penalties for breaching disclosure requirements
If a reportable cross-border arrangement is not reported, incorrectly reported, incompletely reported or reported too late, fines of up to EUR 25,000 may be imposed for each single breach.
In other EU Member States, penalties are likely to be considerably tougher in some cases. In Poland, for example, there is already the threat of payments that far exceed the German fines.
In addition to disputes with the tax authorities, professional advisors could easily suffer reputational damage. Even given compliance with the disclosure requirements, there is thus a strong case for intermediaries to have an agreed communication strategy in place with regard to the tax arrangements as part of a commitment to corporate social responsibility.
MDR – what are your duties?
Intermediaries face challenging duties due to the (retroactive) disclosure requirements. This includes:
- Identification of all potentially reportable arrangements in which you are involved as an intermediary.
- Collection of relevant data on potentially reportable arrangements.
- Identification of the specific disclosure requirement on the basis of the DAC 6 hallmarks and, if applicable, the "main benefit" test, as well as documenting the results of both reportable and non-reportable arrangements.
- Identification of and coordination with other intermediaries involved, including determining whether the disclosure by the other intermediary has actually been made (requirement of proof of exemption from disclosure requirement for the arrangement).
- Making the disclosure and informing the taxpayer (user) that disclosure has taken place.
- Establishment of efficient internal processes for identification, analysis and documentation of reportable arrangements as part of a functioning compliance management system. This requires the definition of clear lines of responsibility and communication. It should be noted that setting up and configuring an IT-supported reporting system may take several months in some cases.
- Provision of key information (kick-off event) and regular training courses for responsible employees on all matters relating to disclosure obligations.
How can CMS support you?
We are available to provide expert assistance with developing individual solutions to meet your disclosure obligations, both in Germany and across the international CMS organisation.
Our services are carefully tailored to your requirements and include:
- Assessing the impact of the disclosure requirements on your company, including analysis of your business models
- Specific analysis of individual arrangements and products with regard to any disclosure requirement
- Systematic support for identifying, assessing, documenting and notifying reportable tax arrangements
Help with self-help
- Training employees on their disclosure duties and assessing disclosure responsibilities
- Advice around designing and introducing compliance management systems that meet MDR criteria and protect against penalties in the event that disclosure requirements are breached
- Coordination with international CMS offices in the case of disclosure requirements in other/multiple EU Member States
- Local representation in disputes with tax authorities, including in other EU Member States.