Obligation to report cross-border tax arrangements

In particular in the course of a cross-border company transaction, structural considerations for the tax-optimal acquisition of the target company are made. The goal is to set up a structure that optimises tax as far as possible, e.g. by exploiting tax rate differentials or reducing or avoiding withholding tax on future dividends.

EU Directive 2018/822 dated 25/06/2018 was implemented in national German law by a law that introduces a duty to report cross-border tax-planning arrangements. The goal of these regulations is to reveal aggressive cross-border tax-planning arrangements and so increase tax transparency. From these reportings, it should be possible to derive future guidance for tax legislation.

What has to be reported?

The obligation to report covers basically cross-border tax-planning arrangements relating to any type of tax apart from VAT, customs duty and harmonised consumption taxes (e.g. energy, electricity and tobacco tax). In particular, it covers corporation tax, trade tax, income tax, inheritance and gift tax, as well as non-harmonised consumption taxes, such as the tax on coffee.

A tax-planning arrangement is the deliberate introduction or change of an actual or legal situation that is relevant for tax. A tax structure is cross-border when more than one EU member state or at least one EU member state and one or more third countries are involved, with the parties being resident in different countries. A reporting obligation exists in Germany if one of the persons subject to the reporting obligation has a nexus to Germany. However, the reporting obligation is only triggered if the relevant hallmarks are fulfilled. With regard to the hallmarks, a distinction is to made between mandatory hallmarks and conditional hallmarks. If a mandatory hallmark is fulfilled, then this on its own triggers a reporting obligation, while the existence of a conditional hallmark only triggers a reporting obligation if the so-called “main benefit test” is met in addition. This means whether the main benefit or one of the main benefits of the arrangement is to obtain a tax advantage.

The conditional hallmarks are, amongst others, agreements for performance-related remunerations or confidentiality clauses, the acquisition of loss-making companies, the conversion of income into non-taxable income or income taxable at a lower level as well as transactions with circular transfers of assets.
The mandatory hallmarks that will immediately trigger a reporting obligation are, amongst others, multiple exemptions from double taxation, the transfer of assets with significant differences in the tax value applied and certain transfer pricing arrangements. In addition, the evasion of reporting obligations relating to financial accounts as well as non-transparent chains (masking the identity of the economic beneficiary) are mandatory hallmarks.

Who has to report and when?

The primary reporting person is the intermediary who designs the structure. An intermediary is any party that markets cross-border tax-planning arrangements, designs, organises and provides them for use for third parties, or who manages their implementation by third parties, in particular tax consultants, lawyers, auditors or financial services providers. Only in exceptional cases (e.g. if the intermediary is bound by confidentiality or if no intermediary is involved in the arrangement, i.e. an in-house arrangement is created) the primary reporting obligation rests with the user (please note: the EU directive uses the deviating term “relevant taxpayer”).

In principle, since 01/07/2020 a reporting must be made within 30 days from the first instance of an event requiring reporting. However, there is a retroactive effect from 25/06/2018. This means that tax-planning arrangements that are subject to reporting, that were first implemented between this point in time and 30/06/2020, must be retroactively reported by 31/08/2020. Due to the corona crisis, the EU has, for the time being, given the Member States the option to extend the deadline for reporting obligations by up to six months. However, it appears that Germany does not intend to implement the extension. A corresponding final BMF circular was not yet available at the time of this publication.

The tax authorities must be informed of the arrangement in a timely, organised and automated manner. Where a reportable tax-planning arrangement exists, a reporting must first be sent to the Federal Central Tax Office. This usually occurs in two stages. Firstly, the intermediary reports data about the arrangement anonymously. Subsequently, the user communicates his/her specific user data. The tax authorities assign a disclosure number to each reporting received, and a registration number to the tax-planning arrangement reported, which the taxpayer has to declare in his/her tax return.

Any violation of the reporting obligation constitutes an administrative offence. This can be punished with a fine of up to EUR 25,000 per incident. It is currently unclear whether a non-objection period will be granted due to the technical implementation challenges on the part of the Federal Central Tax Office. This will also be stated in the BMF circular which is still pending.

Conclusion

Company transactions are often international in character, which means every transaction needs to be checked to see whether it is a reportable event. In this process, not just the transaction itself, but more particularly the post-merger integration phase need to be considered. The review and its results should be documented in detail in order to avoid the risk of a fine in the case of discrepancies.