The European Commission will unveil on Wednesday 22 December a proposal for a directive to tackle, from 2024, the issue of shell companies used for tax evasion, a legislative initiative presented by EU Taxation Commissioner Paolo Gentiloni in response to the recent Pandora Papers scandal (see EUROPE 12806/14).
While “important progress” has been made in recent years through the ‘ATAD’ (2016/1164) and ‘DAC’ (2011/16/EU) Directives, “legal entities with no minimal substance and economic activity continue to pose a risk of being used for improper tax purposes, such as tax evasion and avoidance, as confirmed by the recent massive media revelations” through the OpenLux (see EUROPE 12676/7) and Pandora Papers investigations, the European institution admits in a draft legislative text, of which EUROPE has obtained a copy.
To counter this, the European Commission suggests setting up a process to identify tax-evading shell companies in the EU, excluding certain financial actors and listed companies already regulated by the relevant prudential regulatory framework.
Any company established, for tax purposes, in an EU country, regardless of its size, would first be required to self-assess against three relevant cumulative gateway criteria: - does the share of relevant income over two tax years exceed 75% of the total?; - does the company engage in cross-border activity?; - in the previous two fiscal years, has the company outsourced the management of day-to-day operations and decision-making on important functions?
Companies that meet all three criteria will be considered to be at risk. They will then have to justify in their annual tax return how they meet the following ‘indicators of minimum substance’ each tax year: - the company has its own premises in the Member State or premises for its exclusive use; - it has at least one active bank account of its own in the EU; - a manager resides in the vicinity of its premises and is dedicated to the activities of the business or, alternatively, a sufficient number of employees are engaged in the main activities of the business and reside in the vicinity.
A company that does not meet the above-mentioned substance criteria will then be considered a shell company for the tax year under review. However, it will still be able to demonstrate that it was not set up for tax evasion purposes by showing its business logic, the scope of the role played by its employees, and its decision-making power over the revenues generated.
It will be up to the administration of the country of tax residence to assess this information. The latter could certify for the relevant tax year that the company is not a shell company. It could also do so over a period of six years, provided that the legal and factual circumstances attested to by the company do not change.
Once a company is classified as a shell, its tax benefits are removed. Its Member State of tax residence will not issue a certificate of tax residence or, failing that, will issue a certificate with a warning to prevent its use for the purpose of obtaining EU tax advantages.
If the tax benefits to the company are removed, then it will be necessary to determine how and where the income streams to and from the company and the assets held will actually be taxed.
Under the pending proposal, all Member States will automatically have access to information on EU shell companies through a central directory. An EU country will also be able to ask another country to audit a company if it suspects it is an empty shell. The State receiving the request would be required to inform the requesting country promptly once the results of its tax audit are known.
Finally, the draft legislation leaves it to the Member States to define effective, proportionate and dissuasive sanctions for infringement of the future rules. However, there is a financial penalty of at least 5% of turnover if a company does not comply with the obligation to submit a specific tax return within the prescribed period or if it issues a false return.
See the legislative proposal: https://bit.ly/3JbAbaU (Original version in French by Mathieu Bion)