The main benefit test

The main benefit test is defined in Part I of the Annex to the Directive.

It applies when a cross-border arrangement falls within certain of the hallmarks provided by the Directive:

1. generic hallmarks under category A of Part II: this, in short, includes arrangements where the relevant taxpayer commits to confidentiality, where there is a fee fixed by reference to the amount of the tax advantage or where there is standardised documentation and/or structure; 
2. specific hallmarks under category B of Part II: in short, acquisition of a loss-making company, conversion of income into capital and circular transactions;
3. points (b) (i), (c) and (d) of paragraph 1 of category C of Part II: in short, cross-border payments between associated companies where the recipient does not impose any corporate income tax (or imposes corporate tax at a rate of zero or almost zero), or where the payments benefit from a full tax exemption or from a preferential tax regime.

All these hallmarks are reportable only when they fulfil the main benefit test.

It should be noted that according to the Annex of the Directive, “the presence of conditions set out in points (b) (i), (c) or (d) of paragraph 1 of Category C cannot alone be a reason for concluding that an arrangement satisfies the main benefit test”.

According to Annex IV Part I of the Directive: “That test will be satisfied if it can be established that the main benefit or one of the main benefits which, having regard to all relevant facts and circumstances, a person may reasonably expect to derive from an arrangement is the obtaining of a tax advantage”.

The main benefit test relies on the following concepts: “Tax” and “Tax Advantage”.

The Directive amends Directive 2011/16/EU and has therefore the same scope as far as taxes established by Member States are concerned.

Art. 2 of Directive 2011/16/EU applies to all taxes of any kind levied by a member state, or its administrative subdivisions, apart from VAT, customs duties, excise duties covered by other EU legislation on administrative cooperation, and compulsory social security contributions.

However, for the purposes of defining ‘tax advantage’ in order to interpret the Directive, it is reasonable to consider that tax is defined more broadly, and does not only include taxes levied by EU Member States, but also equivalent taxes levied in other jurisdictions. This means that the tax advantage derived from any arrangement does not have to be realised in the EU, and so an arrangement could still generate a tax advantage, and meet the main benefit test even if the tax advantage arises in a non-EU Member State.

The FTA adopted this broad approach in their guidelines, as did the Belgian, German, Luxembourg and Dutch tax authorities.

One should however be aware that some authors take the view that only tax advantages obtained within the EU fall within the scope of the Directive, because it is included in Directive 2011/16/EU.

This is also the position of some tax authorities: HMRC in its guidelines (IEIM641020), has accepted that “tax advantage” should be restricted to taxes levied in EU Member States.

The Directive does not define the concept of “tax advantage”. Neither does Art. 6 of ATAD which also refers to “tax advantage” when establishing a general anti-avoidance rule for corporate income tax purposes.

Against this background, one may however note that the two concepts are identical. If a tax authority of a Member State has provided guidance on the definition of “tax advantage” in the process of commenting on ATAD, it would be reasonable to consider that this definition is also relevant for the purpose of interpreting DAC6.

One may also note that the recommendation of the European Commission of 6 December 2012 on aggressive tax planning (2012/772/EU), which is considered to be relevant by the Dutch tax authorities in order to interpret the Directive, 1 provided a definition of “tax benefit” (which is close to “tax advantage”) in § 4.7: 

“In determining whether an arrangement or series of arrangements has led to a tax benefit as referred to in point 4.2, national authorities are invited to compare the amount of tax due by a taxpayer, having regard to those arrangement(s), with the amount that the same taxpayer would owe under the same circumstances in the absence of the arrangement(s). In that context, it is useful to consider whether one or more of the following situations occur:

1. an amount is not included in the tax base;
2. the taxpayer benefits from a deduction;
3. a loss for tax purposes is incurred;
4. no withholding tax is due;
5. foreign tax is offset”.

The Italian Ministry of Economics and Finance has defined the “tax advantage” as the difference between the taxes payable based on a cross-border arrangement and the taxes which would be payable in absence of that arrangement. Only taxes covered by Directive 2011/16/EU should be taken in consideration for the purpose of this calculation.

The FTA consider that a tax advantage shall be deemed to exist where the cross-border arrangement results, inter alia, in a tax refund, tax relief or reduction, reduction of tax liability, deferral of taxation or tax exemption (BOI-CF-CPF-30-40-10-10 n°140)..

The Belgian tax authorities consider that the main benefit test is not met by the mere avoidance of a double taxation (Q&A, § 5.7).

A complementary interpretation of the concept of “tax advantage” may be found in the Consultation document and guidelines published by HMRC (§ 7.6; IEIM641020) which provides a list of “tax advantages” which includes:

• relief or increased relief from tax repayment or increased repayment of tax;
• avoidance or reduction of a charge to tax or an assessment to tax avoidance of a possible assessment to tax;
• deferral of a payment of tax or advancement of a repayment of tax; and avoidance of an obligation to deduct or account for tax.

An issue which may arise in practice may be whether the obtaining of a “tax advantage” also includes the avoidance of a “tax disadvantage” such as double taxation. A cautious answer to this question would be to say that any advantage provided by a tax treaty should be considered as a “tax advantage” for the purpose of the Directive.

Concept of “main benefit”: a literal interpretation of “main benefit” requires an objective assessment of the taxpayer’s situation before and after entering into the arrangement. The “main benefit” test should therefore not be confused with the “main purpose” test within the meaning of Art. 6 of ATAD, which provides that a Member State shall ignore an arrangement or a series of arrangements which have been put into place for “the main purpose or one of the main purposes of obtaining a tax advantage”.

In theory, this means that “main benefit” is broader than “main purpose”, an outcome which is in line with the spirit of the Directive which aims at improving the tax authorities’ knowledge of existing cross-border arrangements even though they are not abusive.

This interpretation is in line with the content of the OECD report on Action 12 of the BEPS action plan which states that “[the main benefit test] compares the value of the expected tax advantage with any other benefits likely to be obtained from the transaction and has the advantage of requiring an objective assessment of the tax benefits” (§ 81).

It is endorsed by HMRC (Consultation Document, § 7.5; IEIM641010) which states that “the test is an objective one. It is not necessary to examine the specific motives or intentions of a person entering into an arrangement. In other words it does not matter if the person was seeking a tax advantage from the arrangement, or what other reasons they might have had for entering into the arrangement, what matters is whether the arrangement is such that a tax advantage is the main benefit or one of the main benefits that the person entering into the arrangement would reasonably be expected to obtain from the arrangement”.

However, some Member States seem to reduce the scope of the main benefit test by accepting that the policy intent of the author of the tax rule should be taken into account in the process of transposition of the Directive.

According to HMRC (Consultation Document, § 7.7; IEIM641030), the main benefit test is passed only where the obtaining of the tax advantage cannot reasonably be regarded as consistent with the principles on which the provisions are based and the policy objectives of those provisions. In other words, there is no tax advantage if the tax consequences of the arrangement are entirely in line with the policy intent of the legislation upon which the arrangement relies. This will mean that the use of certain products which are designed and intended to generate a certain beneficial tax outcome will not inherently mean that the main benefit test is met.

This interpretation seems to be shared by the Dutch, French and Luxembourg tax authorities.

According to the Luxembourg Tax Administration (Clarification of Interpretation, main benefit test, appendix, hallmarks), in order to determine whether the arrangement conforms to the legislator’s intention, all the constituent elements of the arrangement must be taken into consideration. An arrangement, taken as a whole, does not meet this intention, for example by taking advantage of the intricacies of a tax system or the inconsistencies between two or more tax systems in order to reduce the tax payable, and fulfils the criterion of the main benefit test.

Moreover, the FTA state that the importance of the tax advantage is determined, in particular, on the basis of the value of the tax advantage obtained in relation to the value of the other benefits derived from the arrangement. They add that the main benefit shall be appreciated objectively as opposed to a subjective analysis that would take into account the motivations or intent of the participants. Therefore, the fact that a person is not primarily seeking a tax benefit is irrelevant to determine whether the cross-border arrangement meets the main benefit test.

The FTA provide the following example:

In a case where a tax benefit and a commercial benefit are the main benefits derived from the arrangement, and where there is also a marginal benefit relating to the geographic positioning, one of the main benefits is a tax advantage.

The FTA also indicate that the main benefit derived from the cross-border arrangement in France should not satisfy the main benefit test when it is compliant with a tax incentive consistent with the legislator’s intent.

However, the compliance with a foreign legislation’s intent is not taken into account by the FTA guidelines.

A purely quantitative approach is taken by the Italian Ministry of Economics and Finance, which has specified that the main benefit test is met when the tax advantage related to the taxes covered by Directive 2011/16/EU is higher than 50% of the aggregate (tax and non-tax) advantages which can be derived from the cross-border arrangement (i.e. when the tax advantage is higher than the non-tax advantage). This implies a calculation of the tax as well as non-tax advantages which may indeed be very difficult to carry out in many cases.

Condition of “reasonable expectation”: the main benefit test relies on the idea that “a person may reasonably expect” a tax advantage to derive from a cross-border arrangement.

This “reasonableness” test is explained in the following way in the OECD report on Action 12 of the BEPS Action plan (§ 249 and 250):

"In order to prevent mandatory disclosure imposing an undue burden on taxpayers, disclosure in the reporting jurisdiction should only be required where the taxpayer could reasonably have been expected to be aware of the cross-border outcome under the arrangement.

A person can reasonably be expected to be aware of a cross-border outcome where the person has sufficient information about the arrangement to understand its design and to appreciate its tax effects. This will include any information obtained by a taxpayer under the obligation to make reasonable enquiries (described below) but, in the context of transactions with unrelated parties, the test should not be taken as requiring a person to gather more information than it could have been expected to obtain in the course of ordinary commercial due diligence on a transaction of that nature”.

The OECD report on Action 12 also provides some detail on the concept of the “reasonable enquiries” which are supposed to be conducted to identify the tax impact of a particular arrangement