DAC6 tightens the reigns on M&A deals across the globe

EU Directive 2018/822 or DAC 6 (acronym of “Directive on Administrative cooperation”) is in the minds of many European tax practitioners. In this article we will set out its importance for the European M&A market.

Beyond this mysterious acronym, the European Union is pursuing its efforts to prevent tax fraud and tax evasion (and thus create legal and business ” fairness ” within the European Union) by constraints the taxpayer or the intermediary to report to their tax administration specific cross-border structuring  which are considered as aggressive (reporting of the cross-border schemes initiated after 25 June 2018).  

This effort followed other previous regulations and notably the DAC 2 directive regarding the reporting from the financial institution to the Tax Administration of the clients with a foreign tax residence.  

In order to avoid the use of aggressive schemes and explain the objectives of its regulation (which is applicable to all type of taxes except notably the Value added tax, duty tax), the European legislator outlined specifics characteristic of the schemes to be reported (called “hallmarks”) which must be, in certain circumstances combined with a preliminary investigation which is to determine if the scheme has a “main advantage or one of its main advantages” in obtaining a tax advantage.  

The DAC 6 regulation has been subject to many discussions and notably regarding the delimitation of the hallmarks transposed directly in the domestic law and the concept of intermediary regarding specific professions subject to deontological rules (e.g. the legal privilege for the French lawyers) but it will for sure impact M&A tax advisory.    

On top of that, the COVID crisis postponed the deadline for the first reports and allow the countries to choose the date of the first report (postponement limited to 6 months). Many countries have chosen to postpone the date of first report (notably France and Italy but not Germany).  

Time is running short and DAC6 will be implemented in the near future in most EU countries. As illustrated in this blog article, this new regulation must be taken into consideration by companies and their advisors in the structuration of the group and in the M&A tax transaction in order to avoid the various applicable sanctions (reporting sanctions and tax fraud sanctions).  

Reporting rules should not impact the due diligence process… 

Based on local regulation and analysis of Mazars’ local experts, it is common in Europe that a tax due diligence does not lead to a reporting requirement under DAC 6. This applies both for the professional in charge of the due diligence, as well as for the prospective purchaser of the Target entity. Our European panel all agree on this analysis, whether or not there are already guidelines or not (e.g. for Croatia and Hungary). 

Standard tax due diligence focused on assessment of determining a company’s tax position in relation to a prospective transaction (mostly covering past periods) as a rule shall not meet any hallmarks triggering tax schemes reporting obligations. Therefore, such assignments do not include tax advisors involved in a tax due diligence assessment, intermediaries for the purpose of DAC6. Parties acting in the frame of a tax due diligences do not act a priori as an intermediary as it is not related to the design or implementation of a structure but only to the review of this latter in the context of a specific transaction (e.g. sale, acquisition). 

…But it does not mean that M&A Tax practice is neutral from a DAC6 point of view 

Identifying DAC6 reported transactions and structuring advices need to be included in tax due diligence assignments and the framework of decision making in relation to whether to reported may need to be reviewed. SPA’s need to be amended for possible risks following fines that may be imposed following non-compliance to DAC6 reporting regulations.  

Indeed, structuring advice can be given in the course of a DD process, pre-closing or post-closing. Additional services rendered in the meantime or right after the tax due diligence (i.e., review of the share purchase agreement, tax structuring upon acquisition, cash repatriation strategies upon sale, etc.) could fall within the scope of DAC 6 reporting, to the extent it is considered as a cross-border arrangement  

Many of the hallmarks leading to a possible reportable transaction have been defined broadly on purpose. The guidance and explanation of these definitions has been limited up to now. And each EU country has published its own guidance and own exceptions.  

German experts for instance note that the preparation of an expert opinion regarding the tax consequences of a given structure should not lead to a reporting obligation. Polish experts pointed out that it is still the unclear where is the line between informing the Client about a country’s legislation or providing structuring related advice. They are still in the process of getting assurance from the Ministry. 

The line between “neutral advice” on the tax consequences of a given structure and tax structuring advice can be thin. Spain, Croatia and Poland have pointed out the difficulties to define that line.  

However, a hallmarks analysis and main benefit test should be done.  At a minimum on a high-level basis, to be aware of a potential reporting requirement that a proposed advice could trigger. DAC6 analysis therefore needs to be included in the scope of every structuring advice relating to a cross border transaction. 

To the light of these experts’ panel and preliminary comments on DAC6 regulation, it is clear that DAC6 will become an important check for tax DD process and tax structuring, even if the tax scope of work does not fall in the reporting requirement.   

Although this post focuses on the European tax market; DAC6 also impacts those outside of Europe who have transaction touchpoints between and within the EU boundaries. Stay tuned, more to come in future posts as DAC6 continues to unravel.

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