The priority given, for the purpose of DAC6 reporting, to the Member State of residence over the Member State in which an intermediary has a permanent establishment could pose a restriction on the freedom of establishment and the need to combat tax avoidance would seem insufficient to justify it.

DAC6 reporting hierarchy

DAC6 requires that intermediaries or, in some circumstances, taxpayers report certain information to the relevant EU tax authority in respect of cross-border arrangements which meet one of a number of criteria. It is possible that an intermediary may discover that they are subject to an obligation to report a transaction in more than one Member State. This situation is addressed by Article 8ab(3) of the consolidated DAC.

Article 8ab(3) says that “where the intermediary is liable to file information on reportable cross-border arrangements with the competent authorities of more than one Member State, such information shall be filed only in the Member State that features first in the list below: (a) the Member State where the intermediary is resident for tax purposes; (b) the Member State where the intermediary has a permanent establishment through which the services with respect to the arrangement are provided; (c) the Member State which the intermediary is incorporated in or governed by the laws of; or (d) the Member State where the intermediary is registered with a professional association related to legal, taxation or consultancy services.”

Where an intermediary resident in one Member State (resident State) has established a permanent establishment in another Member State (host State) in order to provide services to clients in the host State under the same legal conditions as the host State applies to advisers resident there, Article 8ab(3) would mean that the intermediary continues to be subject to the resident State’s jurisdiction (and legislation) on DAC6 in respect of the services provided through the permanent establishment in the host State. This could mean that the scope of legal professional privilege, as applied to services provided through the permanent establishment in the host State (where advisors, consultants or lawyers may benefit from a broad exemption), could be restricted by legislation of the resident State. Moreover, the intermediary may have to report domestic arrangements where clients in the host State have sought advice from the permanent establishment there, if the resident State’s legislation also targets domestic arrangements. 

Freedom of establishment

The priority given, for the purpose of DAC6 reporting, to the resident Member State over the host State could pose a restriction on the freedom of establishment under Article 49 TFEU, if the rules transposing DAC 6 are stricter in the resident State than the host State, as intermediaries will be less inclined to establish themselves in the host State (other than through setting up a subsidiary through which they could provide services to clients in the host State under the same conditions as advisers of the host State).

Article 8ab(3) could, therefore, be construed as a measure which, albeit applicable without discrimination on grounds of nationality, is liable to hinder or render less attractive the exercise by EU nationals of the freedom of establishment guaranteed by the TFEU. It may consequently be considered a restriction within the meaning of Article 49 TFEU, according to established case law (see, for example, judgments in Cases C- 299/02, paragraph 15 or C-140/03, paragraph 27), in particular if we take into account that something may still count as such a restriction even if it is of limited scope or minor importance (see, for example, the judgment in Case C-9/02, paragraph 43).

Whilst it may be argued that such a restriction should be regarded as justified by a pressing reason of public interest, namely the need to combat tax avoidance, (which is debateable, to say the least), the restriction does not seem to comply with the proportionality principle, as it goes beyond what is necessary to attain the objective pursued. A different order of precedence to that set out in Article 8ab(3) could meet the objective pursued without necessarily resulting in a de facto interference with an intermediary’s decision to render services in a different Member State to the one in which they are resident through a permanent establishment.

This post is part of a series. Please subscribe to the blog to be notified when the next post is published.