The EU wants to step up the fight against shell companies

The European Commission wants to tighten up regulations on shell companies to combat tax evasion more effectively. Tax evasion accounts for €60 billion in tax losses for the European Union every year.

France ranks 4th worldwide for tax evasion

On Wednesday December 22, the European Commission presented an initiative to combat tax evasion by tightening regulations on shell companies. These fictitious companies, based in tax havens, aim to conceal financial transactions in order to slip under the radar of the tax authorities in the country of residence.

Of the 60 billion euros in annual tax losses, 40 billion relate to investments made outside the European Union. Most of this money passes through Luxembourg and the Netherlands. Foreign investment flows through Luxembourg represent 56 times its GDP.

France loses $20 billion in tax revenue every year, ranking 4th in the world in terms of tax evasion. On a European scale, France is behind the UK, with an annual loss of $39 billion, and Germany, with an annual tax loss of $35 billion.

Transparency criteria and concrete sanctions

To combat tax evasion and shell companies, the European Commission has decided to demand greater transparency from companies.

It proposes to adopt 3 vigilance criteria to better identify likely shell companies. If one of these companies meets these 3 monitoring criteria, it will be required to provide additional information to the tax authorities of EU member states. This will require access to the company's bank accounts, the address of its premises, and access to the tax residence of its employees and directors.

 

The three criteria are as follows: firstly, any entity registered in the European Union will be likely to be considered as a shell company if, over the last two tax years, more than 75% of its total revenue does not derive from its commercial activity, or if more than 75% of its assets are real estate or other high-value private property.

Secondly, a company may be under suspicion if the majority of its income is derived from transactions linked to another jurisdiction, or if a significant proportion of this income is transferred to companies based abroad. The third and final criterion concerns the management and administration of the company. If these services are outsourced, the controlled entity is likely to be considered a shell company.

The tax authorities of each EU member state will be the sole decision-makers as to whether an entity qualifies as a shell company. If this is the case, the company will not be able to benefit from tax breaks or specific tax treaties set up by the member state. To ensure compliance with these measures, the country's tax authorities will not issue a certificate of residence to the company concerned, or will specify on the certificate that it is a shell company.

In addition, incoming payments will be taxed in the country of residence of the shell company's shareholder, and payments to third countries will be subject to a withholding tax. As for shell companies owning real estate, these will be taxed by the state in which the property is located.

The EU directive is due to come into force at the beginning of 2024, provided that all 27 member states approve it, which promises to be a perilous task.