In this article, we would like to draw your attention to the fact that at the end of August, an act implementing Council Directive (EU) 2018/822 (the so-called DAC 6 Directive) in the Czech legal system was promulgated. This directive implements a reporting obligation in relation to information on potentially aggressive cross-border tax-planning arrangements.

Reported information

The reporting obligation relates to cross-border arrangements implemented as of 25 June that contain at least one hallmarks set out in the directive.

The term arrangement includes:

• any contract, agreement, agreed procedure or transaction, which are sufficiently definite and may lead to obtaining a tax advantage.
• An arrangement may thus mean especially a recommendation, instruction, opinion or another written document commissioned by the client and written by a professional consultant, in order to lead to a certain tax advantage on their basis.

A cross-border arrangement is an arrangement, which:

• contains tax entities from multiple member states,
• is performed in more than one member state, or
• has an impact on the automatic exchange of information, or on identification of beneficial ownership.

The reporting obligation does not apply to strictly national arrangements.

A hallmark is understood to mean:

• features and elements of arrangements that present an indication of potential risk of tax avoidance and
• is listed in the annex to the directive, e.g.:
  • confidentiality clause with the aim of not publishing the tax advantage intended by the cross-border arrangement,
  • remuneration for consulting depending on the achieved tax advantage,
  • standardized arrangements, which are available for multiplex taxpayers,
  • transfer and use for tax losses,
  • transfer of income into assets or another category of income taxed with a lower rate or exempted from taxation,
  • circular transactions,
  • deductible cross-border payments made between affiliated companies in cases, where the recipient is a tax non-resident, or a tax resident in a jurisdiction, which lays down corporate income tax with a zero or nearly zero rate, or is evaluated as non-cooperating within the OECD, or these payments are completely or partially exempt, or they use advantages from a preferential tax regime in the country of residence of the recipient,
  • use of tax depreciation of assets in more than one jurisdiction,
  • arrangements violating reporting obligations in relation to automatic exchange of information,
  • arrangements containing a non-transparent legal chain or a non-transparent chain of beneficial owners,
  • specific hallmarks relating to transfer pricing (the use of one-sided rules of safe harbour, transfer of hard-to-valuate intangible assets, cross-border transfer of functions, risks or assets leading to a lowering of annual earnings before interest and taxes (EBIT) below 50 % of the expected annual EBIT if this transaction had not taken place, etc.).
• The fact that a cross-border arrangement meets a hallmark characteristic does not mean, by itself, that this arrangement is being used for avoiding tax liabilities and that any sanctions would be used against its user only on the basis of the information stated in this report.
• In the case of some hallmarks, an additional condition of the main benefit testneeds to be met, consisting on whether or not the main benefit or one of the main benefits of the transaction is to obtain a tax advantage.

Persons obliged to report information

An obliged person for the purposes of announcing a cross-border arrangement is especially its intermediary, i.e. usually a consultant, who suggests the reported cross-border arrangement, offers it on the market, organises or enables its implementation, or manages the implementation of such an arrangement.

To the extent, to which intermediaries (attorneys, tax consultants, notaries and auditors) are bound by statutory professional privilege, however, the taxpayer himself must fulfil the reporting obligation. The same rule applies even in a situation, when the cross-border arrangement has no intermediary.

Essentials of the reporting

The report on cross-border arrangements will be submitted electronically by means of a form published by the Financial Administration of CR.

Deadline for meeting the reporting obligation

Sanctions

In case of failure to comply with the reporting obligation, the tax administrator may impose a disciplinary fine reaching up to CZK 500,000 on the obliged entity.

Offer of our service 

It is clear from the above-mentioned information that the reporting obligation may apply to a significant range of various cross-border transactions performed by multinational enterprises almost on daily basis. 

With regard to the amount of potential sanctions and the application of similar rules within the European Union, we recommend paying increased attention both to transactions performed since June 2018 and those planned in the future.

For the purpose of avoiding potential sanctions and related consequences, we will be happy to help you assess performed and planned transactions, so that any potential risk would be duly and timely identified and minimised.

As part of our services, we will perform a detailed analysis of transactions, for which the reporting obligation may apply, and in case of identifying an obligation to report a cross-border transaction we will prepare and subsequently submit a report about this arrangement to the respective state authorities.  

If you are interested or you have any questions about this topic, please, do not hesitate to contact us.