The Revised Guidance comprises explanations relating to certain concepts used in the DAC 6 Law (for example, person, income, conversion, main benefit test (“MBT”)), and some of the hallmarks (for example, determination of tax residence (C.1.), hard to value intangibles (E.2.) and transfer of registered office from Luxembourg to another Member State (E.3.)).
1. Clarifications on certain concepts
The term “person”
The Revised Guidance has further clarified the scope of application of the term “person’’. This term includes:
- Physical persons;
- Legal persons;
- Associations of persons without legal personality which have the capacity to perform legal acts;
- Any other legal structures (regardless of their nature, form, or legal personality) owning or managing assets which, including the income derived from them, are subject to one of the taxes in scope of the DAC 6 Law.
The Guidance indicates that transparent entities are covered by this definition as well and, accordingly, fall within the definition of a ‘’relevant taxpayer’’. The latter refers to any person to whom a reportable cross-border arrangement is made available for the purpose of its implementation, or who is willing to implement a reportable cross-border arrangement.
The term “cross-border arrangement”
The Guidance incorporated an additional clarification concerning the cases in which cross-border arrangements are not present, namely, the following:
- All the participants in the arrangement are resident for tax purposes in one Member State (which is not Luxembourg), the intermediary is not a participant to the arrangement, and it is the only person having a link to Luxembourg;
- A participant exercises an activity through a permanent establishment (“PE”) in another jurisdiction, the arrangement falls within the activity of the PE, and all other participants to the arrangement are also located in that other jurisdiction.
However, the above scenarios do not apply when the mechanism may have an effect on the automatic exchange of information or the identification of the beneficial owners.
The main benefit test
The Revised Guidance suggests that, in order to ascertain whether there is a tax advantage, it is essential to compare the amount of tax owed by a relevant taxpayer, taking into account the arrangement put in place, and the amount of tax due by the taxpayer in case there would be no arrangement. Furthermore, it should be analyzed whether one of the following situations apply:
- An amount is not included in the tax base;
- The taxpayer benefits from a tax deduction;
- A loss has been realized for tax reasons;
- No withholding tax is due;
- Foreign tax is credited.
The above list is non-exhaustive. Therefore, even if none of the listed situations arise, a tax benefit may be considered to exist, regardless of whether it arose in the EU or a third country.
It is worth mentioning that the MBT is not fulfilled when the tax benefit acquired through the arrangement is consistent with the object or purpose of the applicable legislation and the intention of the legislator. In order to determine the intention, all of the constituent elements of the arrangement need to be taken into account
2. Guidance on certain hallmarks
Hallmark A.3. provides for situations where the documentation or a structure is standardized, i.e., can be made available to different taxpayers without having to be significantly modified. In line with the guidance, minor modifications (such as adjustments to the interest rate, maturity, or start date of the contract), should not affect the qualification of the arrangement as standardized.
Additionally, the Revised Guidance indicates that a marketable arrangement within the meaning of hallmark A.3. will always be considered as standardized. However, an arrangement that meets hallmark A.3. does not automatically comprise a marketable arrangement.
Hallmark B.2. covers transactions relating to income conversions. In order for an arrangement involving such conversion to be reportable, it must also fulfill the MBT. The Revised Guidance provides for further clarification on the terms “income”, “conversion” and “taxed at a lower level”.
It notes that the definition of income should be broadly understood. It should cover, but is not limited to, wages, dividends, royalties, interest, capital gains and inheritance.
In order to assess the income conversion, it must be noted that it is irrelevant whether the conversion takes place on the level of the payer, the beneficiary, or both.
Guidance has also been given regarding the meaning of “taxed at a lower level”. In this regard, it is necessary to observe the income from the perspective of the beneficiary. If applicable, taxation of the same entity in several countries should be taken into account.
Hallmark C concerns certain deductible cross-border payments between associated enterprises. In this regard, the Revised Guidance addresses the situations where the recipient of the payment is:
- Not a tax resident in any jurisdiction;
- A tax transparent entity;
- Resident for tax purposes in a non-cooperative jurisdiction.
In the first situation, tax residence should be determined by applying the relevant double tax treaty (“DTT”) or, if there is no DTT in place, in accordance with article 4 of the OECD Model Tax Convention (“OECD Model”). Where, in line with these criteria, a company is not tax resident in any jurisdiction, the hallmark is triggered.
As regards the situation where the payment is made to a tax transparent entity, the Revised Guidance states that, in order to determine whether the relevant taxpayer is the transparent entity or its shareholder / beneficial owner, it must first be established whether the transparent entity is considered to be a tax resident in the relevant jurisdiction.
Furthermore, the Guidance refers to Luxembourg domestic law, stating that partnerships are treated as fiscally transparent, and therefore cannot be considered as recipients of payments for the application of the hallmark at hand. Instead, the shareholder / beneficial owner of the transparent entity should be considered as the beneficiary.
With regard to the situation where the recipient is resident for tax purposes in a non-cooperative jurisdiction, the Guidance clarifies that the inclusion on either the list published in the Official Journal of the EU or the OECD’s list is to be assessed on the date triggering the reporting obligation.
This hallmark contains specific guidance for arrangements comprising the transfer of “hard-to-value intangibles”. The Revised Guidance specifies that this term includes intangibles or rights in intangibles for which, upon transfer between associated enterprises:
- There are no reliable comparables; and
- At the time of the conclusion of the transaction, the forecasts of future cash flows or income likely to be derived from the intangible asset or the assumptions used to value the intangible asset are highly uncertain, and make it difficult to forecast the level of ultimate success of the asset at the time of the transfer.
Hallmark E.3. refers to arrangements consisting of a cross-border merger or liquidation involving cross-border transfer of functions and/or risks and/or assets within the same group, where the projected annual earnings before interest and taxes (“EBIT”) of the transferor, during the three-year period after the transfer, are less than 50% of the projected annual EBIT of such transferor if the transfer had not been made.
The Revised Guidance further defines EBIT as the difference between the income and expenses as they appear in the profit and loss account, to which interest and tax expenses should be added.
The following situations are, in principle, excluded from the scope of hallmark E.3:
- Transfer of a registered office from Luxembourg to another Member State, while maintaining a PE, holding the same functions and/or risks and/or assets, in Luxembourg;
- Tax neutral cross-border merger between EU companies whereby all assets and liabilities remain linked to a PE of the acquiring company in the jurisdiction of the acquired company.
3. Reporting obligations
In-house tax team as an intermediary
In case where an internal tax team of an entity forming part of a multinational enterprise (“MNE”) designs a reportable arrangement for another entity within the same MNE, the former entity should be considered as an intermediary for the reason that it designs a reportable arrangement for the latter entity.
Permanent establishment as an intermediary
Even though a PE is not considered within the definition of the term “person”, its activity could be relevant for the head office to be regarded as an intermediary. In this context, the Revised Guidance provided for several situations in which this may be the case.
Finally, the Revised Guidance indicates that in case where multiple intermediaries are involved in a reportable cross-border arrangement, the obligation to report is binding to all of them, unless they can prove that the information has been already reported by another intermediary.
4. Our observations
The Revised Guidance provides interpretation of different concepts contained in the DAC 6 Law. The clarifications provided by the LTA should be taken into account both by the taxpayers and intermediaries when assessing whether a cross-border arrangement may be reportable.
Determining whether an arrangement is reportable in Luxembourg may raise complex technical questions. Tax team of Grant Thornton Luxembourg is at your disposal for careful consideration of the reporting obligation as well as potential implications of the Revised Guidance on your business.