On 21 June 2022, the tax administration issued the Completion of frequent questions and replies including practical examples in relation to the reporting obligation regarding reportable cross-border arrangements (“DAC 6”), in which they bring about individual clarifications of when and under what conditions the reporting obligation may arise for taxpayers and their advisors under the Act on International Cooperation in Tax Administration.
In this material, the General Financial Directorate (“GFD“) specifies the interpretation of certain concepts and gives practical examples of situations which are not subject to the reporting obligation.
You should pay attention especially to the last practical example dealing with interest-free or low-interest loans provided to Czech companies from their foreign shareholders. The tax administration states that such a way of financing, which is fully in compliance with Section 23(7) of the Income Tax Act, means a deviation from the arm’s length principle, thus fulfilling the definition of Hallmark E1 – use of unilateral safe harbour rules. According to the GFD interpretation, the provision of interest-free or low-interest loans provided to Czech companies from their foreign shareholders should have been subject to the reporting obligation ipso facto, as this hallmark does not require the Main Benefit Test to be satisfied.
For the cases of the capitalisation of receivable, it is stated that it may meet the Hallmark B2 – conversion of income. Anyway, the Main Benefit Test has to be satisfied in order for the reporting obligation to arise. Thus, if the main or one of the principal purposes of the capitalisation of receivable is not gaining a tax benefit (e.g., achieving lower dividend taxation compared to interest taxation among involved entities), the capitalisation of receivable should not be subject to the reporting obligation, except for situations where it is not part of a wider reportable arrangement.
Another addressed example is the sale of shares in the Czech subsidiary by its foreign parent company which, in itself, should not be a cross-border arrangement (and thus not subject to the reporting obligation) provided it is not part of a wider reportable arrangement.
In the general part of the material, the manner of evaluating the Main Benefit Test is specified, among other things, as well as the status of tax-transparent entities (e.g., investment funds or general partnerships) and their owners in relation to the reporting obligation. Also, it gives examples of what can be understood under the meaning “act jointly”, and clarifies the reporting obligation of tax and other advisors in relation to their involvement in preparing/forming cross-border arrangements or, on the contrary, in the case of arrangements already implemented.
We recommend that you check to what extent the reporting obligation may be applicable to you/your company, and, where appropriate, consider the necessary measures. If you are not sure if you or your company are subject to this obligation, do not hesitate to contact us.