The Commission prevents the misuse of shell companies

Today, the European Commission published its long awaited proposal for a Directive aimed at preventing the misuse of shell entities for tax purposes. It lays down a substance test designed to help Member States in identifying undertakings that are engaged in an economic activity, but which do not have minimal substance and are misused for the purpose of obtaining tax advantages (so called “shells”). Reporting duties are imposed in relation to the substance test. 

A qualification of an undertaking as a shell based on the substance test would trigger significant tax consequences, such as a denial of tax benefits under tax treaties or EU Directives in the source Member State (i.e. where the company making payments to the shell is established) or the inclusion of the shell’s income in the Member State of its shareholder(s). 

The draft Directive envisages an automatic exchange of information and the potential to request substance related tax audits by other Member States. 

Member States will have apply these rules from 1 January 2024.

Groups having entities with limited substance and which are engaged in cross-border holding activities (shares, real estate, IP, etc.), insurance activities, lending, banking or other financial activities or the provision of services which are outsourced to other affiliates should carefully assess the potential tax impact of the Proposal and timely amend their structures if needed. 

A summary of this proposal can be found here.