European Commission to fight shell entities

At the end of 2021, the European Commission presented an initiative to fight the misuse of shell entities for improper tax purposes. These so-called ‘shell companies’ are used for tax evasion purposes and aggressive tax planning, by directing financial flows towards jurisdictions that have lower taxes or by shielding assets, such as real estate, from taxes.

The European Commission aims to ensure that entities with no or minimal economic activity will no longer be able to benefit from any tax advantages and will not place further burden on taxpayers. The new indicators will ensure that shell companies existing merely on paper will be more easily detected and the authorities will be able to take more precise and swift measures against them.

The  directive proposal sets out three getaways under which a company is deemed to be a shell, namely:

1) 75% of the company’s overall revenue in the previous two tax years does not derive from trading activity.

2) The company receives the majority of its relevant income through transactions linked to another jurisdiction or passes its income on to other companies situated abroad.

3) The third gateway relates to whether the corporate management and administration services are performed in-house or are outsourced.  

If a company crosses all three gateways, it will be required to annually report more information to tax authorities to establish the status of a shell company (so-called “substance indicators”), such as premises of the company, bank accounts, tax residency of the directors, etc. If a company fails at least one of the substance indicators, it will be presumed to be a ‘shell’ and it will not be able to access tax relief. The Member State of the residence of the company can either deny it a tax residence certificate or the certificate will specify the company is a shell. This includes shells that own real estate assets but have no income flows that would be taxed by the state where the assets are located.

Member States will be able to exchange information automatically, regardless of whether the companies are shell companies or not. Member States will have to conduct tax audit at the request of another Member State.

The Directive will come into effect on 1 January 2024.

By Boyana Milcheva, Dimitrov, Petrov & Co., Bulgaria, a Transatlantic Law International Affiliated Firm.  

For further information or for any assistance please contact bulgaria@transatlanticlaw.com

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