On December 22, 2021, the European Commission released a proposal for a Council Directive laying down rules to prevent the misuse of shell entities for tax purposes and amending Directive 2011/16/EU. This so-called “Unshell proposal” should ensure that entities in the European Union that have no or minimal economic activity are unable to benefit from any tax advantages and do not place any financial burden on taxpayers. On January 17, 2023 the European Parliament approved the Commission proposal as amended and called on the Commission to alter its proposal accordingly, in accordance with Article 293(2) of the Treaty on the Functioning of the European Union. In this article we will discuss some of the amendments as proposed by the European Parliament.
Insertion of a new Paragraph 1a to the Recital
The European Parliament proposes that a new Paragraph, Paragraph 1a is inserted in the Recital. The newly to be inserted Paragraph 1a seems to intend to avoid that the Directive leads to an overkill. The text of the newly to inserted Paragraph 1a reads as follows:
“There can be valid reasons for using companies with minimal economic substance. Therefore, it is important to guarantee a proportionate legal framework that safeguards the position of small and medium-sized enterprises (SMEs) that use legal structures to promote investments, comply with national laws or operate in different national markets while, at the same time, legislating in concrete terms on the misuse of shell entities to avoid taxation. The quality and completeness of data are therefore essential in order to reap the greatest benefits from this Directive.”
With respect to recital 8 the EP proposes that the following text is added:
“The requirement relating to premises in a Member State should take into account the growing prevalence of remote working, for which legitimate enterprises downscale their premises and move away from retaining exclusive premises.”
By making this amended the EP seems to react to the impact the covid 19 pandemic has had the last few years on the way in which businesses conduct their business.
It’s proposed to ad an additional sentence to Recital 9 that provides the government with the possibility to reduce the administrative burden of both tax authorities and taxpayers. The text of the proposed text that is to be added to Recital 9 reads as follows:
“In order to allow Member States to allocate the resources of their tax administrations efficiently, Member States should be able to determine a period during which the undertaking is presumed to have minimum substance, provided that the factual and legal circumstances of the undertaking remain unchanged during that period.”
Recital 11 – Upfront certainty
The EP also proposes to amend Reciital 11. Recital 11 arranges that in certain situations a taxpayer can obtain upfront certainty from the tax authorities by asking the tax authorities to issue
a decision which exempts them from complying with the proposed rules altogether and upfront. The proposed amendment arranges that a taxpayer can ask the tax authorities to issue such a without the taxpayer being required to perform the substance test, if it can prove the lack of tax benefit for the entity concerned.
Article 3 - Definitions
The EP proposes to insert a new sub 6a, to Article 3, Paragraph 1 which defines the term ‘tax benefit’ as meaning a reduction in the obligatory liabilities of an undertaking to the government of tax residence.
Article 6 - The reporting undertakings
Frirst of all the EP proposes the Directive to be amended in such a way that it clarifies that the criteria as laid down in Article 6, Paragraph 1 of the Directive are cumulative criteria.
Furthermore the EP proposes to lower the percentages as mentioned in article 6, Paragraph 1, sub a and b with as a result that the reporting requirements as laid down in the Directive will quicker apply to an entity.
Article 6, Paragraph 1, sub a and b are proposed to be amended as follows:
“Member States shall require that undertakings meeting the following criteria to report to the competent authorities of Member States in accordance with Article 7:
(a) more than 65% (ITP: was 75%) of the revenues accruing to the undertaking in the preceding two tax years is relevant income;
(b) the undertaking is engaged in cross-border activity on any of the following grounds:
(i) more than 55% (ITP: was 60%) of the book value of the undertaking’s assets that fall within the scope of Article 4, points (e) and (f), was located outside the Member State of the undertaking in the preceding two tax years;
(ii) at least 55% (ITP was 60%) of the undertaking’s relevant income is earned or paid out via cross-border transactions;”
By proposing to add “to a third party” to Article 6, Paragraph 1, sub c the EP proposes that entities get the opportunity to outsource the administration of day-to-day operations and the decision-making on significant function to a related party in the preceding two tax years. The proposed amended text of Article Paragraph 1, sub c reads as follows:
“in the preceding two tax years, the undertaking outsourced the administration of day-to-day operations and the decision-making on significant functions to a third party.”
The EP proposes to amend Article 6, Paragraph 2 is amended in such a way that the safe harbor of having at least five own full-time equivalent employees or members of staff exclusively carrying out the activities generating the relevant income will be deleted.
Article 7 - Indicators of minimum substance for tax purposes
The EP proposes to amend article 7, Paragraph1, sub a in such way that the entity is also allowed to share premises with entities of the same group.
The EP proposes to amend article 7, Paragraph1, sub b that such way that next to having at least one active bank account it is now also satisfying if the entity has an e-money account in the Union through which the relevant income is received.
A proposed amendment that I personally find remarkable is that the condition that the Directors of the undertaking have to be qualified to take decisions in relation to the activities that generate relevant income for the undertaking or in relation to the undertaking’s assets is stricken. After the amendment the only condition that has to be met is that the Directors are authorised to take decisions in relation to the activities that generate relevant income for the undertaking or in relation to the undertaking’s assets.
Furthermore the condition 3 and 4 from Article 7, Paragraph 1, sub c, under i are stricken.
The documentary evidence that shall accompany the undertaking’s tax return declaration is extended with an overview of the structure of the undertaking and associated enterprises and any significant outsourcing arrangements, including the rationale behind the structure, described in the context of a standardised format and with a summary report of the documentary evidence submitted containing in particular:
- a brief description of the nature of the activities of the undertaking;
- the number of employees on a fulltime equivalent basis;
- the amount of profit or loss before and after taxes.
Above we discussed some of the proposed amendments we find most interesting. However the EP has proposed more amendments to the original proposal.
The full text of the original proposal for a Council Directive laying down rules to prevent the misuse of shell entities for tax purposes and amending Directive 2011/16/EU you can find here.
The document containing all the amendments that the European Parliament proposes to be made to the original proposal for a Council Directive laying down rules to prevent the misuse of shell entities for tax purposes and amending Directive 2011/16/EU you can find here.
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