Press Room

1 Apr 2020

US LLCs and DAC6 reporting


Background

DAC6 is the short name for EU Council Directive 2018/822/EU of 25 May 2018 that sets out circumstances in which EU intermediaries or a relevant taxpayer must report cross-border tax arrangements (i.e. transactions between parties not in the same jurisdiction). The purpose of which is to provide tax authorities with an “early warning mechanism” on new risks of tax avoidance and, therefore, enable them to carry out tax audits more effectively.

Hallmark C

Not all cross-border arrangements are reportable. Only those that fall within one of five Hallmarks (A-E) must be reported. This article considers only Hallmark C.

Hallmark C applies to deductible cross-border payments between two or more associated enterprises and a report is due where one of four conditions are met in relation to a cross-border payment. Here we are concerned only with condition 1 and in the context of deductible payments from an EU/EEA entity to a US LLC.

Hallmark C, condition 1, requires a report where “the recipient is not resident for tax purposes in any jurisdiction”.

We have debated how to apply this residence requirement in the context of LLCs. A US LLC’s default classification is a disregarded entity where it has one member or a partnership where it has more than one member (i.e. effectively transparent for tax purposes). From a UK perspective (and most other EU/EEA member states) it is a corporate (i.e. opaque for tax purposes). Consequently, the prudent approach would be to conclude that neither the UK or the US claim residence over an LLC and, therefore, it is not resident in any tax jurisdiction. This being the case, all deductible payments made by a UK company to a US LLC would require a report (and in principle the same applies to payments made by any EU/EEA company to a US LLC).

An alternative approach would be to consider that the LLC is transparent in the jurisdiction in which it is established (the US). This being the case, the recipient for the purposes of assessing the residence requirement is the member(s) in the LLC. If some or all of the members of the LLC were resident in a jurisdiction that (i) did not impose Corporation Tax (CT), (ii) imposed CT at a rate of zero or less than 1%, (iii) exempted the payment from tax or (iv) subjected it to a preferential rate of tax, a report would still be due.

However, Hallmark C(1) is subject to a “main benefit test”. This means that, if it can be demonstrated the main reason or one of the main reasons for the inclusion of the US LLC and its members’ was not to secure a tax advantage, then no report would be due. This may be useful where a minority of the members is resident in a jurisdiction that does not impose CT etc. However, for more complex structures, for example the fund and private equity industry (which frequently involve multiple layers of partnerships), this may be very difficult to demonstrate.

Reporting

DAC6 is effective for all cross-border tax arrangements where the first step was made on or after 25 June 2018. The first report for transactions between this date and 30 June 2020 will be within 30 days (i.e. by 31 August 2020). Thereafter, in respect of Hallmark C, the report must be made within the 30 days of (i) the earlier of the day it is ready for implementation and (ii) the day the first step in implementation is made. The first exchange of information is due on 31 October 2020.

The information to be reported is extensive (it is listed in the Directive) including identification of all EU taxpayers (including taxpayers in another member state that may be indirectly affected by the transactions), associated persons and intermediaries involved, details of the applicable Hallmark, a summary of the arrangement and business activities, details of the relevant local law, and the value of the transaction(s). Where the intermediary is based in the US, the reporting obligation will fall onto the EU based taxpayer; care will be needed in respect of terms of restriction in intermediaries engagement letters on the provision of information to third parties. Furthermore, it is reasonable to expect that all taxpayers and intermediaries will want to input in and review the submission.


Zoe Wyatt

Zoe is a Partner at Andersen Tax in the United Kingdom. Specialising in international tax, she develops the blue-print solution to her clients’ cross-border needs.

Email: Zoe Wyatt