In December 2021, the European Commission published a draft that is to be implemented as the third revision of the 2011 EU Anti-Tax Avoidance Directive (ATAD). It seeks to provide for a more efficient tool against the use of shell companies for tax avoidance purposes. Early 2023, the European Parliament voted its opinion amending the draft so as to strengthen its effectiveness.
Measures
Over the last fifteen years, the international community has adopted a range of measures to fight against tax avoidance. Part of these efforts is the ATAD, which targets so-called shell companies. Registered in zero- or low tax jurisdictions or in jurisdictions where taxes can easily be circumvented, shell companies are entities without substantial economic activity that individuals and companies essentially use for tax purposes. The Commission’s draft directive of December 2021 establishes a multiple-step filtering procedure where EU entities would need to check via three gateways whether they are “at risk” of lacking substance and being misused for tax purposes. The three gateways are:
- more than 75 % of an entity’s income is “relevant income” within the meaning of the ATAD;
- more than 60 % of the book value of the entity’s assets has been located outside the company’s EU member state (MS) for at least two years, or more than 60 % of the entity’s relevant income is earned through cross-border transactions; and
- the entity has outsourced the administration of its day-to-day operations and decision-making.
If the entity passes all three gateways, it must fulfil certain reporting obligations vis-à-vis its tax authority on an annual basis.
If it does not meet the test, the entity will be deemed a shell. It the entity further fails to rebut such a presumption, it will be subject to range of alternative sanctions: the refusal on the part of the MS of the tax residence to issue a tax residence certificate, the issuance a certificate with a warning statement, to inform the source country that it should not grant the benefits of its tax treaty with the MS of the shell for payments towards the shell, and the taxation of the relevant income of the shell company in the MS where the shareholders of the shell entity are residing.
In addition, an EU-wide central directory will allow for the automatic exchange of information on EU shells. It will also comprise information on when a tax authority has accepted an entity’s rebuttal or exempted a company from the scope of the directive. MSs will also be able to request another MS to launch a tax audit.
According to its (non-binding) opinion of January 2023, the European Parliament amended the Commission’s draft on various points. The amendments include slightly lower thresholds below which a company is exempt of the reporting requirements of the directive, enhanced reporting requirements for companies, as well as penalties of at least 2% of an entity’s revenue in the relevant tax year for failure to report correctly and at least 4% of revenue for making false declarations (in the case of zero or revenue falling below a threshold set by the national tax authority, the penalty should be based on the entity’s total assets). Provided that all MSs agree, the revised ATAD will enter into force on 1 January 2024.
THE GOVERNANCE LAW FIRM
