EU Member State COVID-19 relief should not benefit tax havens, Commission says

By Francesca Amaddeo, Researcher, Tax Law Competence Centre (SUPSI), Manno, Switzerland

On 14 July, the EU Commission released recommendations proposing that European state COVID-19 tax relief measures not be linked with a tax haven in any way.

These new rules aim to define the fine balance between state aid and tax avoidance in the light of the COVID-19 pandemic. It is up to the member states to decide whether to implement this non-binding recommendation.

The recent pandemic had – and it is still having – a profound impact on the economy. Member States are forced to support their citizens and businesses by adopting proper domestic relief measures, including tax measures.

The Commission states that it is aware that such interventions are crucial. Tax incentives and other selective financial support measures still must be approved by the European Commission to ensure that the requirements under state aid rules are met, though.

These relief measures must fulfill a series of narrow conditions to avoid the detrimental effects on the internal market, the Commission said.

No links with non-cooperative tax jurisdictions

According to the new EU recommendations, a beneficial undertaking must not be linked in any way with a tax haven, or better, with a non-cooperative jurisdiction listed by the EU.

Thus, it follows that taxpayers benefiting from EU COVID-19 relief should not be resident for tax purposes or incorporated under the laws of American Samoa, Cayman Islands, Fiji, Guam, Oman, Palau, Panama, Samoa, Seychelles, Trinidad and Tobago, US Virgin Islands or Vanuatu.

On the one hand, the taxpayer must not be controlled, directly or indirectly, by shareholders in such countries and, on the other hand, the taxpayer must not control subsidiaries or own permanent establishment in these states, the Commission states.

These new rules seem highly restrictive!  Indeed, each Member State should ensure that not only the immediate shareholders but also the ultimate owner and all the undertakings under the same ownership are not tax resident in, or incorporated under the laws of, such a jurisdiction.

Carve-outs

Businesses with a substantial economic presence assessed through relevant facts and circumstances and which perform a substantive economic activity in black-list jurisdictions are not addressed by such rules.

Moreover, undertakings whose level of tax liability over a given period of time in the Member State is considered adequate shall benefit from support, even if linked with tax havens.

Taxpayers who make legally binding temporary commitments to remove their ties to black-list countries, subject to proper follow-up and sanctions in case of non-compliance, are excluded, too.

The new guidance states that the owners of an undertaking that receives financial support may be legal entities, legal arrangements, or natural persons.

Monitoring and self-certification

To simplify the access to State tax relief and to help tax administrations correctly assess the procedure, self-certifications are accepted.

The applicants should present such a document as evidence of their compliance with the requirements.

Later on, tax administrations will monitor the truthfulness of these taxpayer certifications through enhanced audits and controls, exploiting mechanisms as country-by-country reporting, automatic exchange of financial account information, and so on.

Moreover, each jurisdiction must introduce effective, proportionate, and dissuasive sanctions, including, at least, the recovery of unduly granted financial support.

Member States must also inform the Commission about the measures taken in response to these recommendations.

Thoughts

COVID-19 has brought radical changes in the tax scenario.

The relationship between tax sovereignty of the Member States and state aid rules has been in the eye of the storm for a long time.

Government financial support in such extraordinary times morally due. This is a chance, also, for taxpayers, especially for businesses, to show their honesty. Don’t let us down!

-This article has been clarified to fix an editing error that suggested that these rules were mandatory. 

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Francesca Amaddeo

Lecturer-researcher at Tax Law Competence Centre, Department of Business Economics, Health and Social Care, University of Applied Science and Arts of Southern Switzerland (SUPSI)

Dr. Francesca Amaddeo, PhD in European law and national legal systems, is an Italian lawyer that works as Lecturer-researcher at the Tax Law Competence Centre, Department of Business Economics, Health and Social Care, University of Applied Science and Arts of Southern Switzerland (SUPSI).

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