July 23, 2020
Dutch Government issues Decree with tax authorities’ guidance on reportable cross-border arrangements
The Dutch Government issued a decree, on 30 June 2020, containing tax authorities’ guidance (the Guidance) on the application of the Dutch legislation which implements the European Union (EU) Directive 2018/822 on the mandatory disclosure and exchange of cross-border tax arrangements (referred to as DAC6 or the Directive).
The Dutch Tax Authorities (the Tax Authorities) state that the Guidance may be updated on the basis of answers to questions that may arise in the near future. The Guidance is broadly aligned to the requirements of the Directive.
In a separate decree issued on 26 June 2020, the Netherlands officially announced the deferral of the DAC6 filing deadlines by six months. Under DAC6, taxpayers and intermediaries are required to report cross-border reportable arrangements from 1 July 2020. However, Member States are permitted to defer by up to six months the time limits for the filing and exchange of reportable arrangements in accordance with the amendments to EU Directive 2011/16 adopted and announced by the Council of the EU on 24 June 2020.1
The Council of the EU Directive 2018/822 of 25 May 2018 amending Directive 2011/16/EU regarding the mandatory automatic exchange of information in the field of taxation, entered into force on 25 June 2018.2
The Directive requires intermediaries (including EU-based tax consultants, banks and lawyers) and in some situations, taxpayers, to report certain cross-border arrangements (reportable arrangements) to the relevant EU member state tax authority. This disclosure regime applies to all taxes except value-added tax (VAT), customs duties, excise duties and compulsory social security contributions.3 Cross-border arrangements will be reportable if they contain certain features (known as hallmarks). The hallmarks cover a broad range of structures and transactions. For more background, see EY Global Tax Alert, Council of the EU reaches an agreement on new mandatory transparency rules for intermediaries and taxpayers dated 14 March 2018.
As discussed in the previous EY Global Tax Alert, Netherlands passes Act to implement Mandatory Disclosure Rules, dated 7 January 2020 addressing the Dutch Mandatory Disclosure Regime (MDR) legislation, the Dutch implementation legislation is broadly aligned with the Directive. The same applies to the newly issued Guidance.
This Alert summarizes where the Guidance deviates from interpretation in earlier tax alerts4 on Dutch MDR legislation or where it gives new clarifications. It also addresses how the deferral will practically work out.
Under the Directive, an arrangement is reportable if:
In accordance with DAC6, under the Dutch MDR legislation, cross-border arrangements are defined as arrangements concerning more than one Member State or a Member State and a third country.
The Guidance contains an example in relation to what qualifies as “cross-border” from a Dutch perspective. According to the Guidance, a legal merger between two Dutch sister companies held by a foreign parent company qualifies as cross-border.
Hallmarks A-E of the Directive
The hallmarks can be distinguished as hallmarks which are subject to the main benefit test (MBT), and those which by themselves trigger a reporting obligation without being subject to the MBT.
Most elements of the hallmarks included in DAC6 and mirrored in the Dutch legislation are not defined. The Guidance provides some clarification on these elements by giving examples. The most relevant examples are included below.
Hallmark A3 (standardized documentation and structures)
The Guidance provides three examples that are in principle not reportable under hallmark A3 concerning standardized documentation and structures.
Hallmark B2 (conversion of income)
Hallmark B2 covers the conversion of income into capital, gifts or other categories of revenue which are taxed at a lower level or are exempt from tax. Five examples are provided to clarify this hallmark, but they still contain many uncertainties.
Some elements are not clear in this example. For instance, whether it is relevant to consider the tax treatment in the country of residence of the shareholder (in relation to the withholding tax in the Netherlands after application of the tax treaty). It is also unclear in respect of such arrangements, who the Relevant Taxpayer is, e.g., the nonresident shareholder who is subject to tax or the withholding agent (i.e., Dutch company making the repurchase), and thus has the reporting obligation (in the absence of an intermediary being involved in the arrangement). Based on the ranking order rule in Dutch tax law, it may be concluded that the withholding agent has the principal reporting obligation.
It is unclear what should be considered the conversion element in this case, especially when this way of working is not unusual for companies. Furthermore, it seems that the tax treatment of the foreign company is taken into account in this case, this is in contrast to other examples where this does not seem to be relevant.
Hallmark B3 (roundtripping of funds)
Hallmark B3 concerns arrangements which include circular transactions resulting in the round-tripping of funds, namely through interposed entities without other primary commercial function or transactions that offset or cancel each other or that have other similar features. The following scenarios do not explore the specific concepts concerning this hallmark but are included in the Guidance as examples of falling within the scope of hallmark B3:
Hallmark C1 (cross-border payments between associated enterprises)
The Guidance provides five examples for hallmark C1. Hallmark C1 covers deductible cross-border payments between associated enterprises that additionally meet one specific condition.
This example appears to concern hallmark C1(b)(ii) regarding non-cooperative jurisdictions, but this may also lead to the general conclusion that the moment of agreeing a contract that is the basis for a (possible) C1-payment is the decisive moment to test if any of the C1 hallmarks apply (and thus the testing point is not each time a payment is made).
Informal capital contributions relating to expenses (e.g., deemed interest) are thus reportable under hallmark C1(c). Note that informal capital contributions relating to assets will be reportable under hallmark C4 (transfers of assets where there is a material difference in the amount being treated as payable).
It is unclear if the approach in this example also applies to back-to-back loans (i.e., is there a formal or economical approach when determining the recipient), United States Global Intangible Low-Taxed Income (GILTI) rules and subpart F legislation.
Hallmark C2 (double depreciation)
This hallmark covers deductions for depreciation on an asset that are claimed in more than one jurisdiction.
Hallmark E2 (hard-to-value-intangibles)
The Guidance clarifies that agreeing on a price adjustment clause is not relevant for purposes of determining whether an intangible is a hard-to-value intangible.
Hallmark E3 (intragroup transfer of functions/risks/assets with significant EBIT impact)
Hallmark E3 concerns arrangements involving intragroup cross-border transfers of assets, functions and/or risks with significant earnings before interest and taxes (EBIT) impact. The one example concerning this hallmark involves a merger between a Dutch company and a foreign subsidiary, where the latter is the disappearing company. All assets are legally transferred to the Dutch company, but a permanent establishment continues (part of) the business in the country of the disappearing entity. The (expected) EBIT of the disappearing entity (i.e., the transferor) drops from profit making to zero due to the merger, which makes this a reportable arrangement. Thus, note that it does not matter that a permanent establishment continues (part of) the activities in the jurisdiction where the subsidiary was established for such merger to be reportable under hallmark E3.
Main benefit test
In accordance with DAC6, under the Dutch MDR legislation, the MBT 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. This is dependent on the objective facts and circumstances.
Under the Directive, intermediaries with EU nexus have the primary obligation to report arrangements to the tax authority. The Directive gives Member States the option to exempt intermediaries from the obligation to report where the reporting obligation would breach legal professional privilege (LPP). If there are no intermediaries who can report, the reporting obligation will shift to the taxpayers.
It is explicitly mentioned in the Guidance that an intermediary with EU nexus can have a reporting obligation regardless of the tax residency of the participants to the arrangement.
In principle all intermediaries involved in a reportable cross-border arrangement have a reporting obligation. However, an intermediary can be exempt if it has proof of filing by another intermediary in the arrangement. The proof of filing seems to be sufficient when an intermediary can evidence that a reference number has been received for the respective arrangement at the moment of filing with the tax authorities in any EU Member State.
DAC6 defines two categories of intermediaries: promoters and service providers (although the Dutch parliamentary proceedings referred to the latter as “auxiliary intermediary”). The Guidance elaborates on the term service provider and on the knowledge threshold of when someone qualifies as a service provider. First, a person that due to the nature of his service does not have the knowledge and ability to assess if a cross-border arrangement by reference to the hallmarks is reportable or not, does not qualify as a service provider. When the person receives more information than required for delivering the requested services, the person is not obliged to assess the extra information on the possibility of a reportable cross-border arrangement. On the other hand, when the person did not assess all the relevant information, he is still deemed to have the knowledge of all information that is relevant for providing the requested services (and thus to assess the potential MDR impact on the basis of this relevant information). Second, the MDR filing impact should only be assessed at the time of providing the service and on the information available at that time. No reporting obligation can arise at a later moment when new information is made available. Finally, the Guidance mentions that when a potential service provider is informed of a potential reporting obligation by an intermediary with LPP, this mere fact does not instantly mean that the potential service provider has the relevant information available to meet the knowledge threshold of becoming a service provider and having the obligation to report a cross-border reportable arrangement.
Under the Directive and the Dutch MDR legislation, a relevant taxpayer means any person to whom a reportable cross-border arrangement is made available for implementation, or who is ready to implement a reportable cross-border arrangement or has implemented the first step of such an arrangement. The Guidance states that the term relevant taxpayer is assessed independently on the basis of the Dutch Act on International Assistance in Taxation and is not dependent on any applicable tax laws.
Under the Directive, reporting would have started from 1 July 2020 and exchanges between jurisdictions would have been made from 31 October 2020. However, the Dutch Government formally announced by decree on 26 June 2020 that the reporting deadlines under the Dutch MDR legislation are amended and deferred by six months in accordance with the amendment (EU Directive 2018/855) to EU Directive 2011/16 adopted and announced by the Council of the European Union on 24 June 2020.5
The transitional period (from 25 June 2018 to 30 June 2020) remains as before and reportable arrangements from this period need to be filed ultimately by 28 February 2021. A new transitional period starts from 1 July 2020 until 31 December 2020. Arrangements from this period that are made available for implementation, are ready for implementation or where the first step of implementation has taken place need to be filed ultimately by 31 January 2021. The regular 30-day reporting obligation will start on 1 January 2021.
Although the deferral announcement does not say anything about a deferral of the notification obligation for intermediaries with LPP, we understand from discussions with the Dutch Government that notifications by intermediaries with LPP are deferred for six months as well. It is however permitted to notify other intermediaries and relevant taxpayers at an earlier stage.
The deferral announcement does not address the deferral of penalties, but in the legislative history of the Law implementing the Directive on reportable cross-border arrangements, it was mentioned that the Government will not generally seek to impose penalties relating to the reporting obligations in respect of the transition period (from 25 June 2018 to 30 June 2020).
From a practical filing point of view, the Tax Authorities will also delay making the submissions process available until January 2021.
Determining if there is a reportable cross-border arrangement raises complex technical and procedural issues for taxpayers and intermediaries. Taxpayers and intermediaries who have operations in the Netherlands should review their policies and strategies for logging and reporting tax arrangements so that they are fully prepared for meeting their obligations.
The MDR Team of the Dutch Tax Authorities understands that there will still be questions about the scope and interpretations of the Act implementing the EU Directive on reportable cross-border arrangements. We will keep in close contact with the MDR Team through the Dutch Association of Tax Advisors (NOB) in order to get answers to these cases. The Tax Authorities guidance may be updated regularly on the basis of such questions, answers and interpretations.
1. See EY Global Tax Alert, Council of the EU adopts amendments for deferral of MDR filing deadlines, dated 24 June 2020.
2. For background on MDR, see EY Global Tax Alert, EU publishes Directive on new mandatory transparency rules for intermediaries and taxpayers, dated 5 June 2018.
3. DAC6 sets out a minimum standard. Member States can take further measures; for example, (i) introduce reporting obligations for purely domestic arrangements; (ii) extend the scope of taxes covered; (iii) bring forward the start date for reporting.
4. See EY Global Tax Alerts, Netherlands issues Q&A notes as part of legislative process for mandatory disclosure regime, dated 18 November 2019 and The Netherlands publishes draft proposal on Mandatory Disclosure Rules, dated 26 July 2019.
5. See EY Global Tax Alert, Council of the EU adopts amendments for deferral of MDR filing deadlines, dated 24 June 2020.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Belastingadviseurs LLP, Rotterdam