A new European Commission initiative launched May 20 is exploring ways to fight the continued use of shell companies, i.e., entities with little or no economic substance, in cross-border arrangements for purposes of avoiding taxes.
The Commission explained that although the EU has taken several actions to address abusive tax arrangements, the use of shell companies continues to be a problem. The Commission added that while there are measures addressing the substance of legal entities in the context of specific preferential tax regimes, there are no EU legislative measures defining substance requirements for tax purposes within the EU.
In addition to reviewing current national practices and the role of EU “soft law” instruments, the Commission stated that it is considering “several options” for a new legislative initiative in this area. Such an initiative would define tax-related substance requirements for legal entities and arrangements operating in the EU. It would also include mechanisms for enhanced cooperation, monitoring, and enforcement.
EU-level action on tax-related substance requirements and on countermeasures to address the use of shell companies for tax avoidance would ensure greater consistency on such issues across EU member states, the Commission stated. Such measures could also make tax administration more efficient and minimize unfair tax competition.
Comments are invited on the initiative by June 17.
The question becomes what is a shell company. The EC initiative notes the Cadbury where an Irish financing affiliate was booking significant profits. But aren’t financing affiliates rather common? We also see several alleged IP holding affiliates which have few employees. Are these shell companies? I know – rhetorical questions which will continue to be debated.