DAC6: Hallmarks and the Main Benefit Test
Five categories of hallmarks
Whether a cross-border arrangement must be reported depends on the hallmarks. The directive divides them into five categories, labelled A to E.
Category A contains generic hallmarks, such as a confidentiality clause concerning the tax advantage, an adviser’s fee that depends on the tax advantage obtained, or standardised documentation offered to multiple clients without substantial customisation. Category B covers specific hallmarks, such as acquiring a loss-making company to use its losses, converting income into capital or into a lower-taxed category, and circular transactions without a clear commercial purpose. Category C concerns cross-border payments and transactions, including those between associated enterprises. Category D targets arrangements that circumvent automatic information exchange and opaque ownership structures. Category E relates to transfer pricing, such as the transfer of hard-to-value intangibles or of functions and risks within a group.
The main benefit test
For some hallmarks an additional condition applies: the main benefit test. It is met if the main benefit, or one of the main benefits, that may reasonably be expected from the arrangement is obtaining a tax advantage. Three points matter here. The assessment is objective, based on the facts and circumstances, not on what the client or the adviser intended. A tax advantage outside the EU also counts. Preventing a tax disadvantage, such as double taxation, is not a tax advantage. This last point is important, because many international structures exist precisely to prevent double taxation.
The test always applies to categories A and B, partly to category C, and not to categories D and E.
Category C: commercial transactions can be reportable
This is where most unexpected reporting obligations arise in practice. The first element, C.1, covers deductible cross-border payments between associated enterprises. Broadly speaking, enterprises are associated where there is an interest, voting right or profit entitlement of around a quarter or more, or significant influence over management. Such payments are reportable if the recipient falls within certain circumstances. Two of these have no main benefit test: the recipient is not tax resident anywhere, or the recipient is resident in a jurisdiction on the EU list of non-cooperative jurisdictions. In those cases a report is required, even if the payment is entirely commercial. For the other circumstances (no or a near-zero corporate tax rate, an exemption, or a preferential tax regime at the recipient) the main benefit test does apply.
Elements C.2 to C.4 apply regardless of whether the enterprises are associated, and likewise have no main benefit test. They concern deductions for the same depreciation claimed in more than one jurisdiction, relief from double taxation claimed more than once for the same income, and transfers of assets where the jurisdictions involved apply a materially different value.
Documentation is not a formality
Even where the conclusion is that a hallmark does not apply, it pays to record the assessment in writing. A reasoned conclusion that there is no reporting obligation carries far more weight than an assumption.