EC proposal to end misuse of shell entities in EU for tax purposes could reveal those used in trade-based financial crimes

The European Commission (EC) has published Anti-Tax Avoidance Directive 3 (ATAD 3) laying down rules to prevent the misuse of shell entities for improper tax purposes throughout the European Union (EU).

While the directive aims to clamp down on the use of shell companies for aggressive tax planning or tax evasion purposes, its introduction of reporting requirements for EU tax-resident companies can also be expected to unearth shell companies used in trade-based financial crimes.

ATAD 3 scope

Any EU tax-resident entity, irrespective of its legal form and typically with passive income streams and inadequate operational substance, could be deemed to be a shell company.

Such companies will forfeit tax rights and may be denied a tax residence certificate if ATAD 3 comes into force. The directive also contemplates penalties for failure to report or incorrect reporting.

Three gateways

The proposal introduces a filtering system comprising three ‘gateways’. If a company crosses all three gateways, it will be required to annually report more information to the tax authorities through its tax return.

The first gateway is met if more than 75 per cent of an entity’s overall revenue in the previous two tax years is mobile or passive income such as interest, royalties, dividends, leasing or real estate.

Cross-border considerations

The second gateway requires a cross-border element. If 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, the company crosses to the next gateway.

The third gateway focuses on whether corporate management and administration services are performed in-house or are outsourced.

Minimum substance requirements

An entity that crosses all three gateways must then declare it meets the minimum substance requirements in its tax return.

These are that it owns or has exclusive use of premises in the entity’s member state; holds an active bank account in the EU, and has at least one qualified director who is tax resident in the entity’s member state or employs a majority of full-time employees who are tax resident in that state. All declarations need to be accompanied by supporting evidence.

If an entity fails at least one of the substance indicators, it will be presumed to be a ‘shell’.

Further details about and links to documentation associated with ATAD 3 can be found here.


Categories: Trade Based Financial crimes News

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