European Commission launches Directive proposal to fight use of Shell Entities for tax purposes
The European Commission has proposed a new directive to fight against the misuse of shell entities for improper tax purposes (COM(2021) 565 final). The proposal aims to ensure that entities in the European Union that have no or minimal economic activity are unable to benefit from any tax advantages.
The proposal would prescribe a presumption of minimum substance for tax purposes formed by objective indicators related to income, staff and premises. Undertakings that are presumed to be a shell entity would 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 Directive (2011/96) and Interest and Royalties Directive (2003/49).
Additionally, the proposal would establish reporting obligations for those entities which meet, simultaneously, the following features:
- a test based on economic activity, i.e. 75% of an entity’s overall revenue in the previous two tax years does not derive from the entity’s trading activity or if more than 75% of its assets are real estate property or other private property of particularly high value;
- a cross border element, i.e. the company receives the majority of its relevant income through transactions linked to another jurisdiction or passes this relevant income on to other companies situated abroad; and
- outsourced corporate management and administration services, i.e. in the preceding two tax years, the undertaking outsourced the administration of day-to-day operations and the decision-making on significant functions.
Member States’ authorities would automatically exchange information on all entities in scope of the Directive, regardless of their qualification as shell entities. Additionally, it would enable Member States to request another Member State to conduct a tax audit of any entity that should report in the latter State and communicate the outcome to the former Member State in a reasonable time frame.
Once adopted, Member States must transpose the Directive by 30 June 2023 and apply these rules as of 1 January 2024.
As can be seen from the reading of the law, the reasons for the introduction of the Directive are similar to those that inspire the Italian national legislation (art. 30 of Law 724/94), aimed at identifying shell companies understood as “empty boxes” that they are not exercising an effective economic activity. The effects and consequences are different (in the internal legislation a minimum taxable income with a surcharge is attributed, while in the European legislation there is a denial of the benefits of the Conventions and Directives on withholding taxes), but a future modification of the Italian regime is also expected, which over time will have to adapt to the European indications provided on this issue.
LDP remains at your disposal for any further clarifications.