September 22, 2020
Czech Republic publishes final bill amending Act on International Cooperation in Tax Administration to implement Mandatory Disclosure Rules
The Czech bill amending the Act on International Cooperation in Tax Administration implementing the European Union (EU) Directive on the mandatory disclosure and exchange of cross-border tax arrangements (referred to as DAC6 or the Directive) was published, on 14 August 2020, in the Czech Collection of Laws.
The final Czech Mandatory Disclosure Rules (MDR) legislation is effective from 29 August 2020.
Also, on 7 September 2020 the Czech Government approved a six-month deferral to the initial MDR reporting (deferral regulation) which was officially published on 10 September 2020. The deferral regulation generally follows the Council amendment to the EU Directive 2011/16 allowing Member States an option to defer for up to six months the time limits for the filing and exchange of information on cross-border arrangements under DAC6.1
The final Czech MDR legislation is broadly aligned to the requirements of the Directive.
The Council of the EU Directive 2018/822 of 25 May 2018 amending Directive 2011/16/EU regarding the mandatory automatic exchange of information in the field of taxation (the Directive or DAC6), entered into force on 25 June 2018.2
The Directive requires intermediaries (including EU-based tax consultants, banks and lawyers) and in some situations, taxpayers, to report certain cross-border arrangements (reportable arrangements) to the relevant EU member state tax authority. This disclosure regime applies to all taxes except value added tax (VAT), customs duties, excise duties and compulsory social security contributions.3 Cross-border arrangements will be reportable if they contain certain features (known as hallmarks). The hallmarks cover a broad range of structures and transactions. For more background, see EY Global Tax Alert, Council of the EU reaches an agreement on new mandatory transparency rules for intermediaries and taxpayers, dated 14 March 2018.
EU Member States were obliged to adopt and publish national laws required to comply with the Directive by 31 December 2019.
The key differences between the final Czech legislation and the Directive are summarized below. This Alert also highlights notable clarifications provided by the Explanatory Memorandum which accompanied the draft Czech legislation.
Scope of taxes covered
The scope of taxes covered under the Czech final legislation is fully aligned with the Directive and applies to all taxes except VAT, customs duties, excise duties and compulsory social security contributions.
Under the Directive, an arrangement is reportable if:
Under DAC6, cross-border arrangements are defined as arrangements concerning more than one Member State or a Member State and a third country. The hallmarks can be distinguished as hallmarks which are subject to the main benefit test (MBT), and those which by themselves trigger a reporting obligation without being subject to the MBT. The overall definition of reportable arrangements included in the final Czech legislation aligns with the DAC6 definition.
As regards the term "arrangement" – which is not further defined in the Czech law – the Explanatory Memorandum states that it may be defined as follows: a reportable cross-border arrangement is deliberately designed or deliberately communicated describable and sufficiently concrete instruction to act in a certain way consisting of one or several steps – fulfilling at least one hallmark and having a cross-border impact – which is at least in broad aspects communicated (regardless of whether provided for a consideration or for free).
Hallmarks A-E of the Directive
Most elements of the hallmarks included in DAC6 are not expressly defined. The Explanatory Memorandum to the Czech final legislation provides some clarification (although it is overall rather limited) on some of these elements.
Main benefit test
In accordance with DAC6, the MBT will be satisfied if it can be established that the main benefit or one of the main benefits which, having regard to all relevant facts and circumstances, a person may reasonably expect to derive from an arrangement, is the obtaining of a tax advantage.
According to the Explanatory Memorandum, the "essence" of the MBT is an analysis as to whether there is causal link between a hallmark and a tax benefit that may be expected if an arrangement is implemented. If an arrangement leads to a tax benefit particularly because a hallmark is met (and should the hallmark not be met, the tax benefit would not be achieved) – then the MBT is met. If, however, an arrangement leads to a tax benefit regardless of whether a hallmark is met – then the MBT is not met as it is not the particular hallmark that leads to the tax benefit.
Under the Directive, intermediaries with EU nexus have the primary obligation to report arrangements to the tax authority. The Directive gives Member States the option to exempt intermediaries from the obligation to report where the reporting obligation would breach legal professional privilege (LPP). If there are no intermediaries which can report, the obligation will shift to the taxpayers.
The LPP exemption is also included in the final Czech MDR legislation and certain advisers are exempt from the disclosure obligation due to professional duty of confidentiality. Professional confidentiality is the obligation to maintain confidentiality pursuant to the Czech Act on Tax Advisory, the Czech Act on Advocacy, the Czech Act on Notaries, the Czech Act on Auditors, or the laws of another EU Member State to the extent applicable to an exchange of information on reportable cross-border arrangements.
Under DAC6, for intermediaries (and relevant taxpayers), the trigger events for reporting under the Directive (from 1 July 2020) are when the reportable arrangement is "made available for implementation"; or when the reportable arrangement is "ready for implementation"; or when "the first step of implementation has been made." The same trigger events apply in the final Czech MDR legislation.
Under the Directive, reporting starts from 1 July 2020 and exchanges between jurisdictions from 31 October 2020. However, reports will retroactively cover arrangements where the first step is implemented between 25 June 2018 and 1 July 2020.
The Czech reporting deadlines fully align with DAC6.
Deferral of DAC6 reporting deadlines
On 7 September 2020 the Czech Government approved a six-month deferral to the initial MDR reporting (deferral regulation) which was officially published on 10 September 2020. The deferral regulation generally follows the Council amendment to the EU Directive 2011/16 allowing Member States an option to defer for up to six months the time limits for the filing and exchange of information on cross-border arrangements under DAC6. In practice, the new reporting deadlines under the Czech MDR legislation are as follows:
The Czech Tax Administrator may impose a fine on intermediaries and/or relevant taxpayers for failure to meet the relevant MDR obligation – such as the reporting obligation or informing another intermediary/relevant taxpayer on exemption due to LPP or the obligation to keep related documents (generally for 10 years) - of up to CZK500,000 (up to approx. €20,000).
Determining if there is a reportable cross-border arrangement raises complex technical and procedural issues for taxpayers and intermediaries. Taxpayers and intermediaries who have operations in Czech Republic should review their policies and strategies for logging and reporting tax arrangements so that they are fully prepared for meeting their obligations.
1 See EY Global Tax Alert, Council of the EU adopts amendments for deferral of MDR filing deadlines, dated 24 June 2020.
2 For background on MDR, see EY Global Tax Alert, EU publishes Directive on new mandatory transparency rules for intermediaries and taxpayers, dated 5 June 2018.
3 DAC6 sets out a minimum standard. Member States can take further measures; for example, (i) introduce reporting obligations for purely domestic arrangements; (ii) extend the scope of taxes covered; (iii) bring forward the start date for reporting.
For additional information with respect to this Alert, please contact the following:
Ernst & Young, s.r.o., Prague
PDF version of this Tax Alert