cross-border arrangements

Regulation of cross-border arrangements – Directive DAC-6

Directive 2018/822/EU better known as DAC-6 is introduced into tax aspects of Croatian legislation and is applicable from 1 January 2020.

The directive is related to exchanging information between the EU Member States that might suggest tax evasion. Namely, cross border-arrangements that contain at least one hallmark which indicates the risk of tax evasion will be necessary to report to the Tax Authorities.

The directive does not apply to VAT, customs duties and compulsory social security contributions. An arrangement is cross-border if it meets any of these criteria:

  • At least one of the participants has a dual residency for tax purposes;
  • permanent establishment linked to any of the participants is established in a different jurisdiction and the arrangement forms part of the business of the permanent establishment;
  • At least one of the participants in the arrangement carries on activities in another jurisdiction without being resident for tax purposes or creating a permanent establishment situated in that jurisdiction;
  • Such an arrangement has a possible impact on the automatic exchange of information or the identification of beneficial ownership.

Cross-border tax planning arrangements may concern all taxpayers, including natural persons, legal persons and legal arrangements (i.e. trusts and foundations).

Although this regulation came into force on 1 January 2020 it will apply retroactively to all arrangements that have been implemented or are in process of implementation after 25 June 2018. Since provisions of the Directive are very unclear in order to cover as many transactions as possible, identifying these transactions will not be an easy task. If the States will be applying Directive differently, there is a possibility that the Tax Authorities will interpret the prescribed hallmarks also differently. Furthermore, after the adjustment period, the hallmarks are expected to change (due to new types of arrangements which will probably happen).

Persons who created the arrangement or have participated in it are primarily obliged to report it (e.g. tax and financial advisors). However, the taxpayer itself may also have a reporting obligation. The Tax Authorities need to be informed of the arrangement before its implementation.

This additional administrative procedure will be particularly felt by large corporations that have many cross-border transactions that will need to implement a system in order to evaluate and monitor such transactions.

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