The European Union launches the fight against front companies
Posted on Dec 22, 2019 2021 at 18:55Updated 22 Dec. 2021 at 19:07
Good things come to those who wait for. But the wait has been long. And it’s not over yet. The European Commission on Wednesday presented an initiative to combat the misuse of screens of companies created within the European Union (EU) for tax evasion purposes. In a second step, Brussels attacks fictitious companies entering abroad.
These empty shells make it possible to direct the financial flows of a company or a high net worth individual towards jurisdictions which have zero or very low taxation or which can easily bypass taxes. Clearly, a shell company is just a letterbox through which the profits transit to tax havens.
60 billion less tax revenue each year
The Commission estimates the tax loss at around € 60 billion per year, of which € 40 billion comes from investors outside the EU. These figures are almost mainly from two European countries: the Netherlands and Luxembourg. According to a study by the International Monetary Fund (IMF), foreign investment flows entering the EU and passing through Luxembourg represent 56 times the GDP of the small duchy.
New monitoring and reporting requirements will be put in place as well as more demanding transparency standards. “The problem is that, until now, there was no precise legal definition of what a front company was”, notes Daniel Gutmann, head of tax doctrine at CMS Francis Lefebvre. It is chosen made, in part at least.
Three criteria
Three criteria have been dictated by the Commission for tracking down corporate screens. If an entity meets these three criteria, then it will have to provide new information to the tax authorities, such as the address of the company’s premises, access to its bank accounts, the tax residence of its managers and employees. .
This will be the case if more than 75% of the total revenue of a company registered in the European Union during the two preceding fiscal years will not arise from its commercial activity or if more than three quarters of its assets are real estate or other private goods of particularly high value. If the company receives the majority of its income through transactions related to another jurisdiction or if it transfers this income to other related companies abroad, then it will be deemed to be a shell company. Finally, the third criterion concerns the internal or external treatment of management and administration services.
Tax penalties
It will be up to the tax administration of the country concerned to decide whether the entity is considered a shell company. “This leaves a possibility of subjective assessment to the tax administration to decide whether the entity in question is a shell company. The directive may be interpreted differently depending on the state, ”emphasizes Daniel Gutmann.
If the entity is a shell company, it will not be able to benefit from tax breaks or special tax provisions. Payments to third countries will not be treated as passing through the front entity and will be subject to withholding tax at the level of the entity that made the payments to the front company. Therefore, inbound payments will be taxed in the state of the shareholder of the shell company. The same tax principle will be applied to the assets of the front company. A Member State may also ask another Member State to carry out a tax audit of any reporting entity in that latter State and to communicate the results of the audit to the requesting State.
With a problem all the same: before entering into force at the beginning of 2024, the directive must be approved unanimously by the 27 members of the EU. A gauge.