GFD’s new information on reporting obligation under DAC 6: practical part

The GFD outlines its position on each type of arrangement, i.e., it indicates whether an obligation to report such an arrangement arises under DAC 6:

Sale of a foreign parent company's interest in a subsidiary to another foreign entity. The sale of an interest in a Czech company between two foreign entities does not meet the definition of a cross-border arrangement. 

Payment of dividends as a standardised transaction. The payment of dividends is not in itself a cross-border arrangement unless one of the purposes of the transaction is to obtain a tax advantage.

Meeting the hallmark of loss utilisation in a cross-border merger. A merger is not in itself a cross-border arrangement.

Capitalisation of receivables arising from a loan. The capitalisation of receivables is only reportable if one of the main purposes of the arrangement is to obtain a tax advantage. The reporting duty may arise for a broader arrangement where the objective is to achieve a lower taxation of dividends compared to the taxation of interest.

Circular transactions. The hallmark of a circular transaction is met, e.g., in the following situation: Company A and Company C are tax residents in the same jurisdiction, while Company B as a special purpose vehicle (SPV) is a tax non-resident in that jurisdiction. If Company A owns Company B and, at the same time, Company B owns Company C, assets may in fact circulate. If financial resources are sent in this way from A via B to C for the purpose of making a foreign direct investment enjoying preferential tax treatment in the country of residence of Company A, this will be a reportable arrangement if the main benefit test is simultaneously met.

Near-zero tax rate. In relation to profit shifting hallmark, the GFD clarifies that a nominal tax rate of less than 1% is considered to be a 'near-zero tax rate'.

Provision of a loan by a parent company from another member state. Provided that one of its purposes is not to obtain a tax advantage or that it is not an interest-free or low-interest loan (see below), it is generally not subject to the reporting obligation.

Regular business transactions. Unless they are part of another complex arrangement, they are not subject to reporting obligation.

Multiple depreciation. Meeting the multiple depreciation hallmark does not involve situations where assets are depreciated by both the incorporator and the permanent establishment according to the principles of individual jurisdictions if the related income is allocated to them in each jurisdiction. Nor does multiple depreciation refer to the sale of an asset to another jurisdiction where the new owner subsequently begins to depreciate it. By contrast, multiple depreciation may include cross-border leases where the asset is depreciated by both the lessee and the lessor or where a foreign company owns a building in the Czech Republic through its subsidiary and both companies depreciate the building for tax purposes.

Transfer of financial resources to a jurisdiction not bound by the automatic exchange of information. A single instruction to transfer financial resources to such a jurisdiction cannot be considered an arrangement, and the activity of the financial institution in this context does not give rise to the obligation to report it as secondary intermediary.

Transfer of a Czech registered branch by its foreign incorporator to a Czech related entity.  If the tax base of both the transferor and the transferee is adjusted, two hallmarks are being met: the existence of an arrangement and the existence of a specific tax advantage. In this case, the first part of Hallmark E3 (i.e., cross-border transfer of functions, risks, or assets) is met. In addition, to further meet the hallmark, in the three years following the transfer, the transferor's projected annual earnings before interest and tax (EBIT) must be less than 50% of the transferor's projected annual EBIT the transferor would have achieved if the transfer had not taken place. The three-year period should be viewed as a period of 3 x 12 months following the date of the transfer, and a drop below the 50% threshold in at least one such period should be sufficient to meet Hallmark E3. It is not relevant whether the transfer was carried out at arm's length.

Provision of interest-free or low-interest loans. Any arrangement involving the use of rules simplifying the application of the arm's length principle in transfer pricing unilaterally adopted in any state falls under Hallmark E1. Such arrangements include situations where an interest-free or low-interest loan is granted between related parties under Section 23(7), the third sentence of the Income Tax Act (the creditor is a foreign tax resident, a member of a corporation that is a Czech tax resident, or an individual) whereby a departure from the general arm's length principle is allowed. If several such loans are provided, the reporting obligation arises only once in relation to one affiliated entity. Changes in the interest rate do not need to be reported, but a new report must be submitted if a loan is made to another affiliated entity.