By Pierre-Régis Dukmedjian, Partner – Head of Tax, and Eléonore Delville, Associate, Simmons & Simmons Luxembourg LLP
Luxembourg Finance Minister Yuriko Backes on February 10 notably commented that the new ATAD III draft anti-tax avoidance directive “overshoots the mark” and questioned the need for the proposal in an interview with local media (Telecran – Martina Folscheid).
Context of the statement – brief overview
As a reminder, ATAD III is a draft directive from the European Commission, released on December 22, 2021.
The directive aims to tackle the misuse of shell undertakings for tax purposes within the European Union. A shell undertaking is one with no minimal substance, no actual economic activity, and is used for the purpose of obtaining tax advantages. ATAD III establishes a set of measures to identify such shell undertakings along with the tax consequences tax authorities will apply in EU member states. One such consequence would be the denial of a tax residence certificate for the shell undertaking. Under ATAD III, this would prevent the undertaking from benefitting from the relief or reduction of withholding tax based on EU directives or double tax treaties. Some entities, such as alternative investment funds, are out of scope of the proposed rules.
If the draft directive is adopted in its current form, member states will need to implement the proposed measures into their domestic tax legislation by June 30, 2023 and apply them by January 1, 2024. A test to determine whether an entity falls within the scope of the draft directive would have to be carried out in the preceding two tax years. As a result, in practice, the draft directive is retrospective as from 2022.
What did Finance Minister Backes say?
Note: The following Q&As are an unofficial translation of the Luxembourg government’s statement from the original German.
Question:
“What do you think about the ‘unshell’ proposal for a directive with which the EU Commission announced on December 22 that it would take massive action against letterbox companies?”
Backes’s answer:
Luxembourg generally supports the fight against aggressive tax planning and has proven this over the past years.
In this case, however, we have concerns that the proposed directive in its current version overshoots the mark. Above all, there is the question of the added value of this initiative in view of the whole range of instruments that have been created in this area over the last few years. These instruments already serve to combat tax avoidance and the use of company constructions for purely tax reasons.
Since the criteria of the directive in its current version are extremely broad, a problem of proportionality arises. There is also a risk of new market entry barriers and restrictions that could impair the functioning of the EU internal market. This would then also weaken the EU’s competitiveness vis-à-vis third countries.
The discussions on this in the Ecofin Council have not yet started. Luxembourg will work for a solution that is reasonable and appropriate.
Technical grounds of the statement—instruments already available to fight shell entities
As the finance minister notes, the misuse of shell undertakings isn’t a new issue. Measures have already been taken at different levels (domestic, EU, and international) to prevent their harmful consequences. The instruments referred to in the statement certainly highlight the many anti-abuse provisions that have been adopted at the EU and international level in recent years; two examples of provisions tackling shell undertakings—in addition to the existing anti-tax avoidance directives (ATAD) and European Court of Justice case law—are the general anti-abuse rule (GAAR) under the EU parent-subsidiary directive and the principal purpose test (PPT) in double tax treaties.
The GAAR precludes the EU parent-subsidiary directive-based benefits for non-genuine arrangements that are implemented for the main purpose—or one of the main purposes—of obtaining a tax advantage that defeats the object or purpose of the directive. Arrangements should be considered non-genuine where they lack valid commercial reasons that reflect economic reality.
The multilateral instrument (MLI) that implements, in particular, the PPT under the OECD Action Plan 15, also tackles shell undertakings. Indeed, the benefit of double tax treaties is denied when the tax administration has reasonably concluded—having taken into account all relevant facts and circumstances—that obtaining this benefit was one of the principal purposes of any arrangement or transaction, unless it is shown that the granting of the benefit is in line with the object and purpose of the considered provision of the tax treaty.
Conclusion
General substance tests can be found in various measures already implemented, especially at the EU level or international level. Thus, it is questionable whether an additional layer of anti-abuse provisions is necessary.
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Pierre-Régis Dukmedjian is a partner and Eléonore Delville is an associate with Simmons & Simmons Luxembourg LLP.
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