Tax Arrangements for Cross-Border Group Financing and Cash Pools
Have you converted receivables from subsidiaries into equity in or after July 2018? Or were there adjustments to your internal group financing? Do you use standardized documentation for Treasury transactions, for example? Has your institution processed cross-border payments between subsidiaries through a cash pool? If so, you should analyze whether such transactions will have to be reported to the tax authorities in Germany as of July 2020 – even retroactively. In Germany, reporting violations will be fined up to EUR 25,000; in Poland, even up to 5 million Euro – for each case!
The basis for this is the Council Directive 2011/16/EU on Administrative Cooperation in the Field of Taxation (DAC 6), put into force by the EU in June 2018. This EU regulation only sets a minimum standard, which means that its implementation will vary from EU member-state to another. Some countries (such as Poland, Sweden and Portugal) have already integrated the regulations into their national tax and/or indirect tax laws. On 9 October 2019, the German cabinet adopted a bill to introduce reporting requirements for cross-border tax arrangements. At this time, the national regulation to be implemented closely resembles the EU regulation.
In contrast to the draft bill of January 2019, the new bill does not stipulate extending the reporting requirements to certain domestic tax structures.
Practice shows that – contrary to original intentions – not only transactions with the specific goal of tax evasion, but also a large number of every-day business transactions are subject to the DAC 6 reporting requirements. Besides the tax function other business units, such as Treasury, are also affected by this. It is therefore not only tax advisors who will be affected by these reporting requirements, but often the enterprise as such: normal business transactions are often not clearly exempt from the reporting requirements and are often performed without consulting external advisors.
In the end, debt-to-equity swaps (that is, the transformation of group-internal loans into equity in subsidiaries by means of contributing loans) lead to future (higher) dividend payments rather than interest income from loan relationships. On the level of shareholders, dividend income is often taxed at a lower rate than interest income (or may even not be taxed at all). As a result, proceeds can be converted into income that is taxed at a lower rate. If a subsidiary in country A withdraws capital from the cash pool of its German holding company to pay another subsidiary in country B, which then returns the profits to the holding company in the form of dividends, this changes the tax situation of the German holding company (dividends vs. interest). Even though such transactions are not normally performed with the intention to avoid taxes, they still are deemed as such if the so-called main-benefit-test is satisfied, because the cross-border transactions lead to a reduction of the shareholder's tax burden, subject to reporting requirements in accordance with, for instance, Article 138 AO-E in Germany.
From experience, the implementation of the relevant reporting regulations requires the setting up of a reporting process, which should ideally become part of an already existing tax compliance management system. Besides the identification of possible transactions, this process should provide a consistent group-internal assessment of all individual business transactions, as well as subsequent notifications of the relevant local tax authorities. Therefore, Treasury should analyze all relevant cross-border transactions retroactively as of July 2018 and check whether these led to a reduction of the tax burden in a group company that is subject to DAC 6 before the new reporting regulations take effect.
Simplified reporting solutions, such as using Excel sheets, will not provide the necessary security for enterprises, because of the tight schedules, the high complexity and the wide scope of the reporting requirements. Instead, a fully developed solution guaranteeing a predefined workflow is necessary.
However, merely buying some kind of technical solution will not be sufficient. Compliance in regard to DAC 6 will be ensured consistently across all EU member countries if it is based on full impact analyses, individual reporting processes with clearly defined and documented responsibilities as well as practice-oriented trainings.
Source: KPMG Corporate Treasury News, Edition 97, December 2019
Author: Christian Stender, Partner, Tax Services, firstname.lastname@example.org
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