INSIGHT: DAC 6 Transposition in France—Much Ado About Nothing?

By an Ordinance dated October 21, 2019, France joined the ranks of EU member states that transposed into their domestic law Council Directive (EU) 2018/822, published on May 25, 2018, amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements. This Directive, commonly referred to as “DAC 6,” provides for new reporting on cross-border arrangements considered as potentially aggressive. France is, unsurprisingly, willing to adopt a very extensive view as to the scope of this new disclosure requirement.

This Directive is part of a worldwide trend initiated mainly by the Organization for Economic Co-operation and Development (OECD) through its report issued in the framework of Action 12 of its BEPS (base erosion and profit shifting) project, which recommended that states should introduce a regime for mandatory disclosure rules on aggressive cross-border tax planning arrangements. Several states, among them EU member states, have already adopted such reporting requirements, including the U.K., Ireland and Portugal. Though the French government had on several occasions considered the opportunity to implement such requirement, it had been deferred each time.

Pursuant to DAC 6, arrangements must be reported only if they contain certain indications or “hallmarks” of tax avoidance listed in Annex IV of the Directive and covering two categories:

• hallmarks whose mere existence entails the obligation to report the arrangement; and
• those which require it to be demonstrated, in addition, that the main benefit or one of the main benefits reasonably expected to be derived from the arrangement is the obtaining of a tax advantage (main benefit test).

At the heart of this new reporting obligation, intermediaries will primarily be responsible for reporting the arrangements either because:

• they are involved in designing, marketing, organizing or managing the implementation of a reportable cross-border arrangement (generally referred to as a “promoter”); or
• they provide assistance or advice in such implementation (generally referred to as a “service provider”).

The Directive provides for a very extensive definition of the intermediaries who are required to report. In that respect, the concept of “intermediary,” that one might at first consider as covering only lawyers or advisers, is actually so broad that it may also include, for example a holding company. A holding company of a group may qualify either as a promoter or as a service provider when assisting an affiliate in the implementation of a restructuring.

In this context, at the end of December 2019 the French government introduced this new disclosure requirement into French domestic law (transposition through new Sections 1649 AD to AH and 1729 C ter of the French Tax Code) mainly by replicating the Directive.

As in the Directive, and unlike in some other European countries (such as Poland), French reporting will only cover cross-border arrangements considered as “potentially aggressive,” based on the exact same hallmarks as those listed in the Directive and the same definition of the “main benefit test.”

No clarification was provided on those concepts; precision was brought as to the fact that the scope of the reporting requirement obligation will encompass any arrangement in the form of an agreement, a scheme or a plan whether legally binding or not, which may be composed of a series of arrangements and comprise more than one step or part.

As regards taxes covered, again the scope of French law matches the scope provided for by the Directive, thus covering all taxes except for value-added tax (VAT), customs and excise duties and compulsory social security contributions.

As far as legal professional privilege (LPP) is concerned, after tough debate the French government ultimately decided to fully preserve such privilege. Indeed, while introducing the principle of reporting borne primarily by intermediaries, France used the option granted by the Directive and adapted the reporting obligation in the case of intermediaries subject to LPP under Section 226-13 of the French Penal Code (e.g., lawyers, chartered accountants, notaries). Such intermediaries are now required to report arrangements only with the taxpayer’s consent. Absent such consent, intermediaries will have to inform any other intermediary not subject to LPP or, absent any such intermediary, the taxpayers, about their reporting obligation.

This position is the result of tough negotiations between lawyers and the government. The French National Bar Association expressed its concern on examining the first draft legislation, as it provided for a dual reporting system based on:

• reporting by intermediaries subject to LPP on an anonymous basis, i.e., disclosing only information on the arrangement without disclosing any information about the client; and
• reporting by the taxpayer on all information required (e.g., parties involved) using a reference number previously assigned to the intermediary.

A similar approach has already been adopted by other member states, such as Germany, which provides for a declaration on a no-name basis on certain information when the taxpayer has not waived certain intermediaries subject to LPP, including lawyers.

Although still criticized, the new French position seems more respectful of LPP. It will, however, require adapting the relationship with clients on this matter who, on the one hand, will be tempted to leave the declaration to intermediaries in order to avoid an additional reporting burden and, on the other hand, will naturally be willing to review what will be reported by the intermediary.

What is to be Reported?

Bringing us back to the heart of the matter: what is to be reported?

As mentioned above, French law does not include per se any indication on the practical application of the obligation, leaving it to the French tax authorities.

Unfortunately, and as expected, the preliminary guidelines issued to date by the French tax authorities on March 9, 2020 (which are currently subject to public consultation until April 30, 2020) are not of much help, as opposed to the guidelines issued by other foreign tax administrations (e.g., HM Revenue & Customs in the U.K.).

Firstly, the French tax authorities explain the concept of “arrangement” by giving examples.

According to the draft guidelines, an arrangement may apply to the creation, allocation, acquisition or transfer of income or sources of income. It can also comprise the setting up, the acquisition or the winding up of a legal entity, or the subscription to a financial instrument.

With respect to intercompany financing or refinancing, for example, the guidelines state that the arrangement in such a case would include the initial funding transaction as well as all subsequent steps and all intercompany transactions that allow to know and understand the utilization of the injected funding, and notably transactions performed for or as a consequence of the financing or refinancing.

All these examples clearly illustrate the broad view of the French tax authorities on reportable arrangements.

The French tax authorities have also clearly specified in their guidelines that for a taxpayer to simply wait for the expiration of a legal period to perform a tax-free transaction does not constitute, per se, an arrangement (they give the example of a French company waiting for the expiration of a two-year holding period to sell the shares it holds in a Spanish company in order to benefit from the French participation exemption regime on the capital gain).

As far as the main benefit test is concerned, the following clarifications have been introduced and should be emphasized:

• First, the definition of a tax advantage: according to the draft guidelines, a tax advantage should in particular consist in a tax repayment, a tax relief or reduction, deferral of tax or absence of taxation. However, it seems that no indication is given on whether the obtaining of a tax advantage also includes the avoidance of a “tax disadvantage” such as double taxation, which in practice may be crucial;
• Secondly, regarding the localization of the tax advantage: contrary to what was expressed by the French tax authorities during several public conferences, they have ultimately taken a broader position as to the localization of the tax advantage, aligning with several other EU member states. It is necessary to consider the tax advantages at stake, irrespective of whether this arises within the EU or in a third-party state;
• The authorities have also confirmed that the main benefit test requires an objective assessment, without taking into account the motivations or intentions of the participants when setting up the arrangement;
• Last, and like other EU administrations, the French authorities specified that, in the presence of a tax advantage obtained in France, the main benefit test should not be met when the tax advantage at stake has been granted in accordance with the intention of the French legislator. The authorities give the example of products which are designed and intended to generate a certain beneficial tax outcome such as share savings plans (plan d’épargne en actions). The French tax authorities only refer to the French legislator’s intention, unfortunately leaving out tax advantages obtained in other states and which may be in line with the local legislator.

Apart from the above very general clarifications, the current version of the guidelines appears quite frustrating, as the key elements—the hallmarks—are not defined, the draft guidelines only referring to additional guidelines to come on this matter. Although the French tax authorities should issue additional guidelines on the hallmarks, we may expect that this broad and unclear approach will continue, with not much practical guidance provided as to the scope of hallmarks.

Such clarifications are crucial and highly anticipated, given that the wording used for the hallmarks is very extensive and could, at first sight, include several transactions even though not necessarily “potentially aggressive,” and all industries. As an illustration, among other sectors, the private equity market is very likely to be affected, as certain funding and financing arrangements should fall within the scope of hallmarks.

Impact Assessment

In terms of what consequences may arise as a result of a breach of the reporting requirement in France, the applicable penalty in France amounts to 10,000 euros ($10,800) per infringement (reduced to 5,000 euros in case of first infringement) with a cap set at 100,000 euros per entity per year (no penalty is applicable to individuals, irrespective of their function, unlike in certain EU member states such as Poland). Absent any reporting, taxpayers may also expect the French tax authorities to apply bad faith penalties more frequently, which could be critical considering the recent and dramatic extension of the criminalization of tax law in France.

However, above all, even without recourse to impact assessments, many legal advisers and taxpayers have already expressed the opinion that the hallmarks provided for by the Directive mainly relate to arrangements that are already prohibited or highly regulated by law. As far as France is concerned, this would notably be the case of hallmark B1 covering the acquisition of a loss-making company followed by a change of business only in order to benefit from said losses, or hallmark C1 relating to deductible payments made to recipients not tax resident in any jurisdiction or in a “cooperative” jurisdiction, not subject to tax, or subject to a lower tax rate.

Most of the impact assessments performed by French groups led to the same conclusion; many taxpayers regretting an additional reporting burden which appears, at least to a certain extent, to be outdated.

Finally, one may wonder whether legal advisers will actually be willing to report that they were involved in designing, marketing, organizing or managing the implementation of a mainly tax-driven arrangement, or even provided assistance or advice in the framework of the implementation of such type of arrangement. This question should be even more relevant for taxpayers, considering the risk that such reporting may ultimately lead to criminal charges.

Hence the question: much ado for nothing (or at least nothing), based on the experience of states that already adopted such requirements several years ago?

Johann Roc´h is a Partner and Sandrine Pedro is a Senior Associate with CMS Francis Lefebvre Avocats.

The authors may be contacted at: johann.roch@cms-fl.com; sandrine.pedro@cms-fl.com

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.