The European Parliament voted to widen the scope and toughen associated sanctions in respect of the proposed ‘unshell’ Directive, which is aimed at clamping down on the misuse of shell companies for tax purposes.
The proposal, first announced by European Commission in December 2021, is designed to ensure that shell companies with no or minimal economic activity will not be able to enjoy tax benefits. It will introduce a ‘filtering’ system for EU corporate entities, requiring them to pass a series of gateways relating to income, staff and premises, to ensure there is sufficient ‘substance’.
Entities that are deemed to lack substance will be presumed to be ‘shell companies’ and, if they are unable to rebut this presumption through additional evidence demonstrating a commercial, non-tax rationale, they will be excluded from any tax benefits granted through bilateral tax treaties or EU Directives.
MEPs voted – by 637 votes to two in favour, with six abstentions – to amend the Commission proposal, by lowering the thresholds below which a company is exempt of the reporting requirements of the Directive and proposing that companies subject to the reporting requirements should be obliged to provide more detailed information.
MEPs agreed that penalties should amount to a minimum of 2% of an undertaking’s revenue in the relevant tax year for failure to report correctly and 4% of revenue for making false declarations. In the case of zero or revenue falling below a threshold set by the national tax authority, the penalty should be based on the undertaking’s total assets.
To allow a better distinction between legitimate shell companies and those existing for tax purposes, MEPs also amended the information sharing requirements between member states to ensure a better quality and completeness of data being exchanged.
The Directive is to be implemented as the third revision of the EU Anti-Tax Avoidance Directive (ATAD).
Negotiations between the Commission, Parliament and EU Member States will now continue. The Commission hopes the proposal will come into force on 1 January 2024, although unanimous support of member states will be needed for the Directive to be enacted.