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On 25 November 2020, the French Tax Authorities (FTA) published the final version of their guidelines on the scope and rules of application of France’s DAC 6 rules and hallmarks. The FTA’s final comments do not make substantial changes to the drafts published for consultation in March and April 2020. However, they do provide some clarifications.
Clarification of French DAC 6 rules
Scope of cross-border arrangement
The guidelines indicate that a “participant in the arrangement” includes the relevant taxpayer, associated enterprises that are active in the arrangement, and any other person or entity that is active in the arrangement.
Moreover, the guidelines specify that intermediaries no longer are considered potential “participants” in the arrangement, which is in line with the EU DAC 6 Directive.
However, France no longer has to be the state of residence or activity of the participants. Instead, the fact that the arrangement “concerns France” is a sufficient condition to render the arrangement reportable.
- Intermediaries: There are two categories of intermediaries, which may have an impact on the intermediary’s reporting obligations:
- Designer intermediary: This could be a parent company or any other company within its group that designs/organizes a reportable cross-border arrangement (new precision).
- Service provider intermediary: Any person who, depending on the facts and circumstances, personal expertise, etc., knows or could reasonably be expected to know that they have undertaken to provide aid/assistance/advice regarding the creation/organization of a reportable cross-border arrangement. The guidelines allow a service provider intermediary to demonstrate that they did not know and could not reasonably be expected to have known that they were participating in a reportable cross-border arrangement. For this purpose, the person may rely on all relevant facts and circumstances as well as available information and their expertise and understanding of the matter. It is still unclear how this negative proof can be properly provided in practice, however.
The guidelines also clarify who is required to report a cross-border arrangement when an intermediary is subject to legal privilege, such as an attorney-at-law. The guidelines specify that, when a private individual is associated with an entity with or without legal and fiscal personality (e.g., a law firm) or is bound to such an entity by a collaboration or service contract, and the individual acts in the entity’s name or on its behalf, it is the entity, represented by a duly authorized person, that is considered to be the reporting intermediary.
An intermediary subject to legal privilege must ask their client to release them from any duty of confidentiality so they may report the cross-border arrangement. A client may notify the intermediary by any means as long as it clearly establishes the notification date (a registered letter with proof of receipt no longer is the exclusive form of notification).
Furthermore, a client’s approval or refusal to release the intermediary from the legal privilege may be given expressly by any means. In case of refusal, the intermediary must notify the client of all information available to them (including a summary of the content of the arrangement, preferably in English) to enable the client to file the report themselves.
- Relevant taxpayer: The guidelines indicate that, in the case of a partnership or fiscally transparent entity, the relevant taxpayers are the entity’s partner(s) unless the entity has elected a tax regime that renders it liable for its own tax liabilities.
The FTA has confirmed that reporting on the declarant’s personal tax account at impots.gouv.fr will be available as from 1 January 2021. Until then, only manual reporting will be available.
Regarding the section to be completed for reporting purposes:
- Identification of associated enterprises: Associated enterprises that did not participate in the cross-border arrangement do not have to report the arrangement. The declarant must indicate, for each taxpayer concerned, the enterprises associated with it insofar as they have participated in the arrangement.
- Details of the hallmarks that make the cross-border arrangement reportable: Detailed information about an arrangement’s hallmarks should be drafted in French but it is recommended that they be drafted in English as well. This also applies to the arrangement summary.
- Details of the national provisions that form the basis of the reportable cross-border arrangement: The guidelines specify that a simple reference to the relevant articles of law will be insufficient. Again, the information should be drafted in French but also in English.
- Identification of any other person likely to be affected by the reportable cross-border arrangement: The guidelines clarify that any other person identified as likely to be concerned by the arrangement must be resident in an EU member state and should take an active part in the arrangement.
It should be noted that, following the reporting, the absence of a reply from the FTA does not constitute an approval regarding the validity of the arrangement.
Clarification of hallmarks
Hallmarks subject to the main benefit test (MBT)
- Confidentiality (hallmark A.1): The prohibition against disclosure must be linked to information regarding the tax engineering of the arrangement.
- Multiple hallmarks (hallmark C.1): For partnerships and tax transparent entities, OPCs (organismes de placement collectif or collective investment schemes), OPCVMs (organismes de placement collectif en valeurs mobilières or collective investment schemes in transferable securities), and FIAs (fonds d’investissement alternatifs or alternative investment funds), the beneficiary is the shareholder, the partner, or the unit holder of the transparent entity, as applicable.
- Deduction for depreciation of the same asset in several jurisdictions (hallmark C.2): The hallmark applies when a depreciation deduction for the same asset is claimed in more than one jurisdiction without double income being recorded for accounting and tax purposes. Thus, e.g., should an entity be “checked” and treated as fiscally transparent for US federal income tax purposes, the deduction for the same depreciation in France and the US should not, by itself, trigger the application of this hallmark (as long as income is reported in both countries).
Specific hallmarks related to cross-border transactions, automatic exchanges of information and beneficial owners, and transfer pricing
- Transfer of assets with significant valuation differences (hallmark C.4): This hallmark does not apply to mergers and similar transactions covered by the EU Merger Directive (Directive 2009/133/EC of 19 October 2009 on the common system of taxation applicable to mergers, divisions, partial divisions, transfers of assets and exchanges of shares concerning companies of different Member States and to the transfer of the registered office of an SE or SCE between Member States). However, the hallmark applies to a single transfer of assets.
- Intra-group transfer of assets/functions/risks with a 50% or greater impact on the transferor’s EBIT within three years (hallmark E.3): The FTA interprets this hallmark as follows:
- EBIT, i.e., annual earnings before interest and taxes, means operating result as defined by the French statutory chart of accounts.
- A reduction in the result is determined based on the information available at the time of the transfer, and the reduction must be inherent to the functions/risks and/or assets transferred.
- This hallmark does not apply to mergers and similar transactions covered by the EU Merger Directive.