28/01/22

GLOBAL REGULATION: EC’s final consultation on adoption of directive on the use of shell entities now open.

As published on step.org/industry-news, Thursday 27 January, 2022.

A final public consultation has now opened on the European Commission's (EC’s) proposal for a directive to prevent the misuse of shell entities, published at the end of 2021.

The directive would require EU tax-resident entities meeting certain criteria to be disclosed in tax returns, so that Member States can assess whether they are 'shell entities' and thereby deny them benefits of tax treaties and EU tax law. All Member States will have automatic access at any time to information on EU shell entities, even those that have rebutted the shell presumption, or are exempt.

A preliminary consultation, to which STEP contributed, was held in 2021 before the final text of the directive was issued. The current public consultation asks for comments on the proposed text to be submitted by 24 March 2022. STEP will also respond to this consultation.

'While there will still be cases of letterbox entities that have escaped scrutiny, it is likely that these are in the minority', said STEP in its response to the original 2021 consultation. 'Another series of measures, which will no doubt involve more onerous resources and cost, should not be introduced without being sure that there is a clear need and that the cost of the measures required to be taken will be materially outweighed by the benefit.' STEP commented that the international context also needs to be taken into account to ensure there is a level playing field so that EU businesses can remain competitive. Noting that the past few years have seen the EU enact many anti-avoidance measures, the impact of which is not yet quantifiable, STEP suggested the EU should wait before taking new measures to fight tax avoidance until the impact of the existing measures is clear.

Unanimous support of Member States will be needed for the directive to be enacted into EU law. There is likely to be opposition from some Member States, but if it is adopted the EC hopes Member States will be required to implement it by 30 June 2023, for application from 1 January 2024. The next step, says the EC, will be to focus on shell undertakings established outside the EU.

'Given that the gateway criteria (i.e., indicators to determine whether an undertaking is a risk or not) will be assessed based on information available in the preceding two years, it is advisable [for businesses] to proceed with an evaluation of existing structures already in 2022', commented Luxembourg law firm CMS. 'In particular, the criterion related to the administration of day-to-day operations should be monitored carefully and properly documented'.