Concept of cross-border arrangement

According to the Directive (§ 18 of the revised Art. 3 of Directive 2011/16/EU on “Definitions”):

“Cross-border arrangement” means an arrangement concerning either more than one Member State or a Member State and a third country where at least one of the following conditions is met:

1. not all of the participants in the arrangement are resident for tax purposes in the same jurisdiction;
2. one or more of the participants in the arrangement is simultaneously resident for tax purposes in more than one jurisdiction;
3. one or more of the participants in the arrangement carries on a business in another jurisdiction through a permanent establishment situated in that jurisdiction and the arrangement forms part or the whole of the business of that permanent establishment;
4. one or more of the participants in the arrangement carries on an activity in another jurisdiction without being resident for tax purposes or creating a permanent establishment situated in that jurisdiction;
5. such arrangement has a possible impact on the automatic exchange of information or the identification of beneficial ownership.

For the purposes of points 18 to 25 of these Articles, Art. 8an and Annex IV, an arrangement shall also include a series of arrangements. An arrangement may comprise more than one step or part.”

We shall not focus on all aspects of this definition but rather focus on two main points, “arrangement”, “cross-border arrangement” and “marketable arrangement”.

There is no definition of the concept of “arrangement” in the Directive, other than the last sentence of the definition which includes series of arrangements and clarifies that an arrangement may comprise more than one step.

According to the OECD report on Action 12 of the BEPS Action plan (§ 243), “the definition of arrangement should be sufficiently broad and robust to capture any scheme, plan or understanding; all the steps and transactions that form part of that arrangement and all the persons that are a party to, or affected by, that arrangement”.

An example provided in paragraph 243 of the OECD report, which illustrates that an arrangement may comprise many different parts:

In the context of a group financing (or re-financing), the arrangement would cover the initial transaction that introduced new capital into the group and all the subsequent steps and intra-group transactions that explain how the capital was deployed: including transactions taken in contemplation of, or as a consequence of, the financing or refinancing. In the context of the acquisition of a new entity, the arrangement would include not only the acquisition itself but also the financing of the acquisition and any post-acquisition restructuring.

One may observe that this broad definition of “arrangement” converges with the wording of Art. 6 Anti-Tax Avoidance Directive (ATAD) which obliges Member States to “ignore an arrangement or a series of arrangements”. Any commentary provided by tax authorities regarding the concept of arrangement within the meaning of ATAD should therefore also apply to understand the Directive. For instance, in France, the administrative guidelines published on the rule transposing Art. 6 ATAD state that the rule applies “to an isolated operation or act or to operations or acts taken together”(BOI-IS-BASE-70 n° 10).

The European Commission’s recommendation of 6 December 2012 on aggressive tax planning stated that “an arrangement means any transaction, scheme, action, operation, agreement, grant, understanding, promise, undertaking or event” (§ 4.3).

Besides, according to the European Commission Services’ summary record of 24 September 2018, “a verbal act could be sufficient for making an arrangement reportable. In the case of a book from a bookshop with a tax-planning subject, the connection between the arrangement, as it stands in the book, and its readers would be too remote”.

According to the FTA, the concept of arrangement may apply to the creation, imputation, acquisition or transfer of income or sources of income to an existing company. It can also comprise the setting up, the acquisition or the winding up of a legal entity, or the subscription to a financial instrument (BOI-CF-CPF-30-40-10-10 n°10).

The Croatian by-law on the automatic exchange of information in a tax area also provides a rather wide definition of “arrangement” and states that an arrangement implies a transaction, action, activity, scheme, plan or proposal, agreement, understanding, promise or commitment (which has been completed or will be completed) and related sequence or set of circumstances. Furthermore, the arrangement can be concluded or developed by one or several persons, either in Croatia or abroad. It can be part of a bigger arrangement or can be in relation to other arrangement or arrangements.

However, the FTA state that the simple fact for a taxpayer to wait for the expiry of a legal period to carry out a transaction exempt from tax should not be qualified as an arrangement (BOI-CF-CPF-30-40-10-10, n° 30).

The Belgian tax authorities give examples of what they qualified as an arrangement:

• the restructuring of a company;
• the merger, absorption, division of a company;
• the relocation of a company;
• the creation of a subsidiary;
• the conclusion of a contract;
• the conclusion of a life insurance contract.

The Directive relies on the assumption that only “cross-border” arrangements will be reportable.

However, some domestic regimes have extended the scope of reportable arrangements to include purely domestic arrangements.

One should therefore systematically check whether this is the case.

As an example, Polish legislation lays down a reporting obligation in a purely domestic situation, when the tax scheme user meets the so-called ‘qualified beneficiary’ criterion:

• the income/costs or the accounting value of the beneficiary’s assets in the previous or present accounting year exceed EUR 10,000,000; or
• the beneficiary is related to such an entity; or
• an agreement on items or rights has a market value exceeding EUR 2,500,000.

The definition provided by the Directive makes it clear that cross-border arrangement does not necessarily involve Member States only.

Meaning of “concerns”: the Consultation Document and guidelines published by HMRC (§ 2.4; IEIM630040)) notes that “whether or not an arrangement ‘concerns’ multiple jurisdictions will be crucial in determining whether there is a reportable cross-border arrangement. HMRC is of the view that in order for the arrangement to ‘concern’ multiple jurisdictions, those jurisdictions must be of some material relevance to the arrangement”. The UK tax authorities take the view that “whether any particular arrangement concerns multiple jurisdictions will be a question of fact and degree” (§ 2.6; IEIM630040).

Here is an example provided by HMRC’s guidelines:

An arrangement, in order to be qualified as cross-border, should also meet a condition of residence or activity of the participants in two different states, a Member State and another state, member of the EU or not.

It is therefore crucial to clarify the concept of “participant”, which is not defined by the Directive.

Italian legislation implementing the Directive defines the “participant” as either the intermediary or the taxpayer.

The FTA take a broad interpretation of this notion considering that participants in the arrangement are relevant taxpayers, associated companies when they are active in the arrangement and any other person or entity who is active in the arrangement (BOI-CF-CPF-30-40-10-10 n° 70).

The Belgian tax authorities consider that an intermediary should be a participant when he is active in the arrangement (Q&A mentioned above § 3.2.2).

However, the Dutch tax authorities confirmed that an intermediary is not a participant: therefore, a purely domestic transaction does not become reportable by virtue of the involvement of an intermediary located in another State.

This solution seems more satisfactory than the Belgian and French ones, as one may note that it is not so clear from the Directive whether an intermediary should be considered as a “participant”. 

The FTA also add that the criterion concerning the possible impact on the automatic exchange of information regarding financial accounts in the meaning of DAC2, is to be assessed at the level of an intermediary or a taxpayer who has implemented an arrangement that has the effect of undermining the declaration made by a Financial Institution.

The Directive defines this concept under § 24 of the revised Art. 3 of the Directive on “Definitions”, as “a cross-border arrangement that is designed, marketed, ready for implementation or made available for implementation without a need to be substantially customised”.

Art. 8ab(2) of the Directive requires Member States to take necessary measures to require that a periodic report be made by the intermediary every three months providing an update which contains new reportable information as referred to as a marketable arrangement that has become available since the last report was filed.

There is a great similarity between the notion of “marketable arrangement” and hallmark A.3 on arrangements that have substantially standardised documentation and/or structure and are available to more than one relevant taxpayer without a need to be substantially customised for implementation (see our comments on hallmark A.3 § 6.10).

The FTA specify that in practice, a marketable arrangement is an arrangement to which different taxpayers can subscribe without the need for additional analysis or opinion and without the possibility of amending a substantial provision or formulating an option (BOI-CF-CPF-30-40-10-10 n°40).