European Commission’s Proposal to End the Misuse of Shell Entities for Tax Purposes within the EU

Background

On 22 December 2021, the European Commission presented a proposal for a new directive to fight against the misuses of shell entities for improper tax purposes.

This proposal has been issued to ensure that entities in the European Union that have no or minimal economic activity are unable to benefit from any tax advantages and do not place any financial burden on taxpayers.

What to Expect

The proposed new measures will establish transparency standards around the use of shell entities, so that their abuse can be detected by tax authorities in a more efficient way.

An entity falling into the scope of the provisions of this new directive will be required to report information in its tax return such as information in relation to the premises of the company, its bank accounts, the tax residency of its directors and that of its employees.

If a company is deemed a shell company because it fails the substance test, it will not be able to access tax relief and the benefits of the tax treaty network of its Member State and/or to qualify for the treatment under the Parent-Subsidiary and Interest and Royalties Directives. In addition, payments to third countries will not be treated as flowing through the shell entity and will be subject to withholding tax at the level of the entity paying the shell entity. Accordingly, inbound payments will be taxed in the state of the shell’s shareholder.

Once adopted by Member States, the proposal should come into force as of 1 January 2024.

More details will follow soon on the impact of such new directive on funds activity. In the meantime, do not hesitate to contact us for any question.