On Wednesday 22 December, the European Commission officially presented a proposal for a directive to detect ‘shell entities’ used for tax evasion and avoidance in the European Union.
This proposed directive will allow us to “step up the fight against tax evasion and fraud by tightening the screws on shell entities”, said EU Commissioner of Taxation Paolo Gentiloni. He cited numerous examples from media investigations showing the “misuse” that can be made of these ‘letterbox’ companies by “large companies, but also individuals in order to protect their art collections or real estate assets”. It is not, however, a question of banning shell entities altogether, even if, the Commissioner noted, “I am not campaigning for ‘good’ shell companies”.
Financial actors (banks, hedge fund managers, and insurance companies) already regulated by EU financial law are not included in the scope of the rules. “We need to concentrate our firepower on the weakest links, on the companies most likely to escape the rules”, a European official said on Tuesday, considering that financial players are sufficiently regulated.
As described previously (see EUROPE 12858/1), the process proposed for detecting shell entities starts with a self-assessment of companies based on three cumulative criteria: - does the company’s relevant income exceed 75% of total income over the last two tax years?; - are the majority of transactions cross-border?; - are the employees and management of the company outsourced?
“If the answer is yes, the company will be subject to new tax reporting requirements” detailing the economic substance (premises, bank accounts, staff) of its activities and, if it is classified as an empty shell, “it will not be able to access tax relief”, Mr Gentiloni said.
The future directive, which will have to be adopted by unanimity of the Member States in the EU Council, will allow the tax authorities of one Member State to ask their counterparts in another EU country to audit a company that may be a shell company. And it will promote transparency, as all information on companies falling within the scope of the rules will be exchanged automatically between the competent authorities in a central repository.
“We in the European Parliament are pleased to see that the Commission has quickly taken on board our very clear request to ban shell companies”, MEP Aurore Lalucq (S&D, France) told EUROPE, referring to “strong political signals” from the European Commission. She welcomed the burden of proof on companies and the inclusion of substantive criteria, which corresponds to the Parliament’s request in its report on combating harmful tax practices, which she herself steered (see EUROPE 12808/25).
Mrs Lalucq also raised the issue of tax intermediaries, which will be the subject of specific work in the Parliament’s FISC sub-committee. “It is not normal that these intermediaries are not subject to the same rules as banks, which must report suspicious transactions”, she said.
“The biggest risk” is that this proposal becomes “yet another victim of the Council’s hesitation”, where unanimity is required on tax issues, warned Markus Ferber (EPP, Germany), referring to the blockage on the reform of the code of conduct against harmful tax practices (see EUROPE 12848/9). And he advocated a legislative initiative that addresses the issue of shell companies established in third countries and interacting with the EU.
The European Federation of Tax Advisers (ETAF) stressed in a statement the importance of having proportionate rules that would only target abusive structures. Pointing to the “added value” of the role of tax advisors as intermediaries between taxpayers and tax administrations, ETAF’s president, Philippe Arraou, said that “such a bridging function should neither be disregarded nor should it be subject to general suspicion”.
See the proposed directive: https://bit.ly/3ee6b07
Upcoming initiatives. Following this proposal for a directive dealing with the situation of shell entities in the EU, the European Commission will present a legislative initiative in 2022 to address the challenges related to ‘letterbox’ companies established outside the EU.
The European Commission will also come forward next year with a proposal that will require certain multinationals to publish their effective tax rates, as well as an 8th ‘DAC’ directive, on administrative cooperation, which will provide tax administrations with the information needed to cover crypto-assets. (Original version in French by Mathieu Bion)