MDR: specific hallmarks of tax schemes

From this article, you will learn:

• How to verify whether an arrangement displays a specific hallmark?
• What to look for when applying double taxation avoidance methods when analysing obligations under the MDR?
• Can the simplifications in transfer pricing resulting from the Guidelines of the Organisation for Economic Co-operation and Development be considered as specific hallmarks of tax schemes?

When checking whether a company is required to report tax schemes, it is worth remembering that the Polish legislator has extended the scope of obligations imposed on companies by the EU DAC6 directive. Therefore, in order to properly disclose information about MDR, it is necessary to know not only the Polish definition of the main benefit test, but also all the hallmarks. We will take a closer look at the specific hallmarks in this article.

What is the role of hallmarks in a tax scheme?

According to the definition in the Tax Ordinance, a tax scheme is an arrangement that:

1. has a generic hallmark and fulfills the main benefit test (both of these conditions should be met together),
2. has a specific hallmark (in which case the arrangement does not even have to satisfy the main benefit test), or
3. has other specific hallmark (which also exempts it from the need to satisfy the main benefit test).

Let us take a look at all 9 specific hallmarks of tax schemes defined by the Polish legislator in the Tax Ordinance.

Overview of specific hallmarks: in what situations is it not necessary to satisfy the main benefit test?

Art. 86a § 1 item 1 letter a – the arrangement covers cross-border payments between related entities that constitute tax deductible costs and:
– the recipient of the payment does not have a place of residence, registered office or management board in any of the countries,
– the recipient of the payment has a place of residence, registered office or management board in the territory or in a country applying harmful tax competition, indicated in implementing acts issued on the basis of the provisions on personal income tax and the provisions on corporate income tax and in the EU list of jurisdictions not cooperating for tax purposes adopted by the Council of the European Union.

In order for the above specific hallmark to occur, both conditions must be met simultaneously. Cross-border payments between related entities must therefore be subject to inclusion in tax deductible costs, and the recipient of the payment cannot have a place of residence, registered office or management in any of the states or countries applying harmful tax competition.

To verify the second condition, you should refer to the list of countries included in the regulation of the Polish Minister of Finance on the determination of countries and territories applying harmful tax competition. 

Art. 86a § 1 item 1 letter b – in relation to the same fixed asset or intangible asset, depreciation write-offs are made in more than one country.

This specific hallmark occurs if an arrangement covers a situation in which a taxpayer (or several taxpayers) make actual depreciation write-offs under the tax laws of different countries in relation to the same fixed asset or intangible asset. 

An example of this hallmark may be the simultaneous depreciation of the same fixed asset by its owner and lessee (in the case of entities with their place of residence, registered office or management board in two different countries).

Art. 86a § 1 item 1 letter c – the same income or assets benefit from methods aimed at avoiding double taxation in more than one country.

This hallmark occurs if a taxpayer has the ability to use different methods of avoiding double taxation in relations to the same income under the rules of different tax jurisdictions. 

This situation may result from the application of: 

• domestic tax solutions, or
• methods of avoiding double taxation determined unilaterally by a given country, or
• methods of avoiding double taxation determined bilaterally on the basis of a bilateral double taxation avoidance agreement, or
• multilateral agreements.

Art. 86a § 1 item 1 letter d – under the arrangement, assets are transferred and the remuneration determined by the two countries for tax purposes differs by at least 25%.

The indicated specific hallmark covers a situation where a taxpayer transfers assets (e.g. on the basis of a sales agreement, lease agreement, contribution of an asset to another company) between two countries and the remuneration for this (which, as a rule, constitutes tax income or tax burden) recognised under the regulations of the two countries differs for tax purposes by at least 25%.

A transfer of assets in this sense includes both a transfer between related entities – including a transfer between a company and its foreign establishment – and a transfer between unrelated entities.

Art. 86a § 1 item 1 letter e – the arrangement may result in circumvention of the reporting obligation resulting from the Act of 9 March 2017 on the exchange of tax information with other countries or equivalent acts, agreements or arrangements regarding automatic exchange of information on financial accounts, including agreements or arrangements with third countries or exploit the lack of equivalent provisions, agreements or arrangements or their improper implementation. 

The reporting obligation under the MDR provisions applies to an arrangement that may:

• result in circumvention of the reporting obligation arising from the Act on the exchange of tax information with other countries (or equivalent acts, agreements or arrangements on the automatic exchange of information on financial accounts) – including agreements or arrangements with third countries, or 
• exploit the fact that individual countries lack equivalent regulations, have not concluded appropriate agreements or arrangements, or have implemented them incorrectly.

Art. 86a § 1 item 1 letter f – there is an opaque legal ownership structure or it is difficult to determine the beneficial owner due to the use of legal persons and organisational units without legal personality or legal structures: 
– which do not conduct significant business activity using premises, personnel and equipment in the conducted business activity, 
– which are registered, managed, located, controlled or established in a country or territory other than the country or territory of the place of residence, registered office or management of the beneficial owner of the assets held by such legal persons and organisational units without legal personality or legal structures
– if it is impossible to indicate the beneficial owner of legal persons and organisational units without legal personality or legal structures, within the meaning of the provisions of the Act of 1 March 2018 on Counteracting Money Laundering and the Financing of Terrorism.

The information obligation under the MDR provisions will, as a rule, be updated if an opaque legal ownership structure is established within the framework of the arrangement or if the beneficial owner is difficult to determine (due to the use of legal persons and organisational units without legal personality or legal structures referred to in the above provision). 

Fulfillment of any of the above conditions (indents one, two and three) is a sufficient premise for displaying this specific hallmark.

In order to verify whether an opaque structure exists in a given case, it is necessary to exercise the due diligence generally required in business relationships, including – for example – verification of the counterparty's registration documents or verification of the authorisation of the counterparty's representatives. 

Art. 86a § 1 item 1 letter g – the arrangement uses a unilaterally introduced simplification in the application of transfer pricing regulations in a given country, and a simplification resulting directly from the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, as well as other international transfer pricing regulations, guidelines or recommendations, shall not be deemed to be a unilaterally introduced simplification.

The simplification referred to in the case of the above hallmark is, for example, a "safe harbour" solution for loans, credits and bond issues.

Art. 86a § 1 item 1 letter h – there is a transfer of rights to intangible assets that are difficult to value.

The term "intangible assets that are difficult to value" should be understood as intangible assets (including legal assets, as well as rights to these assets) which, at the time of their transfer between related entities, met the following conditions:

• they did not have a reliably determined comparable value, and
• there was a high level of uncertainty in:
  • forecasts of future cash flows or expected revenues from the transferred intangible assets, or
  • assumptions used in the valuation of the transferred intangible assets.

Art. 86a § 1 item 1 letter i – there is a transfer of functions, risks or assets between related entities if the expected annual financial result of the transferring entity or entities before interest and tax (EBIT) in the three-year period after the transfer would be less than 50% of the expected annual EBIT if the transfer had not taken place.

This specific hallmark should be taken into account where the implementation of the arrangement will result in a transfer of assets, functions and risks, thereby resulting in a decrease in EBIT.