Commission clamps down on shell companies

The European Commission released its first proposal for a directive aiming to prevent the misuse of shell entities for tax purposes. Companies without sufficient economic substance will be denied benefits ensuing from double taxation treaties and EU directives.

The directive defines companies with an increased risk of not having sufficient economic substance. These are companies that meet the following prerequisites:

  • More than 75% of the company's turnover for the two previous years is passive income (dividends, interest, etc.) or more than 75% of the value of its assets is real estate or private property.
  • At the same time, the company generates most of its revenues from cross-border transactions or, the other way round, pays most of its income to abroad.
  • At the same time, the company’s management and administration have been outsourced.

Companies meeting all the three above prerequisites will have to self-assess whether they have sufficient economic substance and present their conclusions together with appropriate evidence in their income tax returns. In the assessment, companies should apply the following indicators of substance:

  • The company has premises for its activities (either owned or leased for its exclusive use).
  • The company has an active bank account in the EU.
  • The manager of the company or a sufficient number of employees are physically present at the company's headquarters during the performance of their main activity.

If a company does not meet one or more of the indicators of substance and does not prove that it has commercial reasons for its existence, it will be considered a shell entity for tax purposes. Tax administrations will share data on shell companies as part of an EU-wide exchange of information.

Shell companies will not be issued a tax residence certificate by the tax administration and will be denied the benefits of double taxation treaties and EU directives. For instance, if an EU resident pays a dividend, interest or royalty through a shell company to a third country, a double taxation treaty between the state whose resident made the payment through the shell company and the state which received the payment from the shell company should be applied.
According to the current proposal, the directive should apply to EU-based shell companies from 2024. We expect the European Commission to propose further measures for shell companies outside the EU.

Sdílet článek