I. Introduction

Since 1 January 2020, the “Gesetz zur Einführung einer Pflicht zur Mitteilung grenzüberschreitender Steuergestaltungen (Law on the Introduction of an Obligation to Report Cross-border Tax Arrangements)” has been in force, thus implementing the 6th version of the Directive on Administrative Cooperation (“DAC 6”). According to this law, so-called cross-border tax arrangements must be reported to the Federal Central Tax Office as of 1 July 2020. Fines of up to EUR 25,000 are possible for violations.
According to the explanatory memorandum to the law, the purpose of the new regulations is to promptly identify and reduce tax evasion practices and profit shifting in order to prevent erosion of the German taxation base.

II. Matters subject to reporting obligations

Since 1 July 2020, so-called cross-border tax arrangements have been subject to reporting obligations. In accordance with section 138d para. 2 German Fiscal Code (Abgabenordnung, “AO”) these include arrangements

a) in all types of taxes, except VAT, harmonized excise duties and customs duties,

b) which involve more than one EU Member State or at least one EU Member State and one third country, and

c) which fulfill at least one so-called characteristic in accordance with section 138e para.1 or 2 AO.

The question of whether a so-called characteristic is present is complex. The relevant characteristics (also called “hallmarks”) are divided into so-called conditional and unconditional characteristics:
The following circumstances in particular belong to the so-called conditional characteristics:

• agreement on certain confidentiality clauses,
• agreement on a performance-related remuneration,
• standardized documentation or structure,
• arrangements with unprofitable companies,
• conversion of income into non-taxed or lower taxed income, or into non-taxable income,
• circular transfers of assets and
• certain cross-border payments between affiliated companies.

It is called a conditional characteristic because it additionally presupposes that the (or one of the) main advantage of the arrangement from the point of view of a reasonable third party is the achievement of a tax advantage (so-called main-benefit-test).
In contrast to conditional characteristics, unconditional characteristics already lead to the existence of a notifiable arrangement without applying the main-benefit-test. These include in particular:

• certain deductible cross-border payments between affiliated companies.
• the exploitation of qualification conflicts,
• the undermining of the obligation to disclose financial accounts,
• arrangements with non-transparent chains and
• certain transfer pricing arrangements.

III. Reporting obligation using the example of a management participation

Whether a factual situation fulfills one of the mentioned characteristics is always to be judged in individual cases and depends on the respective arrangement. This can be seen, for example, in so-called management participations.
Management participations are incentive measures, which are often used when a company is purchased (especially by private equity funds). In order to create an incentive for the employed managers to further promote and advance the company and to participate in the resulting increase in value, they are offered the opportunity to acquire shares in the company. If the investment has a cross-border connection, e.g. through the intermediary of a foreign holding company (there is frequently a Luxembourg structure), or because one of the managers is resident abroad, a reporting obligation may apply. In particular, the following can be considered as characteristics.
Management participation agreements often contain confidentiality clauses. If these do not contain an opening clause, due to which the disclosure of the organization is permitted towards tax authorities, the characteristic of section 138e para. 1 no. 1 a) AO can be fulfilled, because according to it, confidentiality clauses, which forbid a disclosure of the tax-privileged organization towards tax authorities, are reportable.
Furthermore, management participation may be subject to the reporting obligation if it is a “standardized documentation or structure, which is available for more than one user without having to be substantially customized for use” (section 138e para. 1 no. 2 AO). An attempt is being made to prevent this by tailoring the participation agreement to the individual participant.
An arrangement that leads to the conversion of income into non-taxed or lower taxed income or non-taxable income may also be subject to a reporting obligation (section 138e para. 1 no. 3 b) AO).
In each case, it is important to note that these are conditional characteristics, so that the main-benefit-test must also be fulfilled in order to trigger a reporting obligation, i.e. the main advantage of the arrangement from the perspective of a reasonable third party must be the attainment of a tax advantage.
Whether a management participation agreement is subject to the reporting obligation can therefore not be answered in a general way and has to be examined in each individual case. Attention must be paid to the above-mentioned points when drafting contracts in order to avoid unintentionally triggering a reporting obligation.

IV. Contents and persons subject to reporting obligations

If there is a cross-border tax arrangement, the following information must be reported to the Federal Central Tax Office:

• name, address, domicile and tax identification number of the user, the so-called intermediary as well as any affiliated companies,
• details of the characteristics that must be reported,
• a summary of the content of cross-border tax arrangement,
• date of the first step of the implementation of the arrangement,
• details of relevant legislation in all Member States concerned,
• the economic value of the arrangement,
• the EU Member States affected by the arrangement and
• information on EU residents directly affected by the arrangement.

In principle, the reporting must be carried out by the so-called intermediary, e.g. the tax advisor who conceived the arrangement. However, the reporting obligation can also be incumbent on the user himself, e.g. if the intermediary is subject to a legal obligation of confidentiality and the user does not release him from this obligation.
If a cross-border tax arrangement has been reported to the German Federal Central Tax Office, the intermediary will subsequently receive two numbers, namely the so-called registration number (“Arrangement ID”) for the reported cross-border tax arrangement and a disclosure number (“Disclosure ID”) for the report received. The user must then include these two numbers in his tax return for the year in which the tax benefit of the cross-border tax arrangement is to be applied for the first time.

V. Deadlines and sanctions

Very short deadlines apply to the reporting of cross-border tax arrangements. Arrangements from 1 July 2020 onwards must be reported within 30 days. The period begins at the end of the day on which first

• the arrangement is made available for implementation,
• the user of the arrangement is willing to implement it, or
• at least one user of the arrangement has taken the first step in implementing the arrangement.

There is a retroactive reporting obligation for arrangements made between 25 June 2018 (entry into force of DAC 6) and 30 June 2020 with a deadline (which has in principle already expired) of 31 August 2020.
Violations of the reporting obligation can be punished as an administrative offense with a fine of up to EUR 25,000. A violation is defined as a missing, incorrect, late or incomplete declaration, as well as a missing, incorrect, late or incomplete indication of the registration or disclosure number in the tax return.

VI. Conclusion

As a result of the implementation of DAC 6, there is now an extensive and not easily comprehensible catalog of facts subject to reporting obligations. In addition, the short deadline of 30 days forces a quick detection and reporting. The intermediary in particular should therefore always keep an eye on the examination of a possible reporting obligation in cross-border tax arrangements.