Fair Taxation: The European Commission is investigating shell companies

The European Commission has launched an initiative to combat the misuse of shell companies for tax purposes. In the future, shell companies will be required to comply with monitoring and reporting obligations. This is intended to make it more difficult to take advantage of unfair tax benefits. For national authorities, this means it will be easier to detect the abusive use of shell companies. Your tax advisor in Düsseldorf and Oberhausen explains what the European Commission plans to do in the coming years.

The Challenge of Shell Companies

With this proposal, the EU Commission is targeting companies in the EU that have no or only minimal business activity. These companies should not be able to claim tax advantages and should not place a financial burden on taxpayers. Furthermore, this is intended to ensure a level playing field for the vast majority of European companies, as they play a major role in the EU’s economic recovery. Ultimately, the expected additional revenue is also intended to be used to provide financial relief to taxpayers.

The Abuse of Shell Companies

In general, shell companies can serve useful commercial and business functions. A problem arises only when they are misused by multinational corporations or even individuals to engage in aggressive tax planning or to evade taxes. To keep tax rates low or avoid them entirely, some companies channel their financial flows through shell companies to countries and territories where this is possible. A slightly different phenomenon occurs with individuals. They use shell companies to funnel assets and real estate past the tax authorities, either in their country of residence or in the country where the assets are located.

The European Commission’s Initiative

Using objective indicators, national tax authorities should be able to more easily determine whether companies exist only on paper. This is another important step in the fight against tax avoidance and evasion in the European Union.

The European Commission states that it intends to tighten the screws on shell companies. The new transparency standards will make it easier to detect the abusive use of these companies for tax purposes. If such a company is identified, new tax reporting requirements will apply to the business. As a result, it will lose its entitlement to tax benefits.

Background to the new initiative

The proposal is set to take effect on January 1, 2024, following adoption by the member states.

This new plan to combat tax evasion by shell companies is part of the Commission’s toolkit to combat abusive tax practices. Following this decision, the European Commission agreed on additional measures. In December 2021, the Commission presented a proposal aimed at swiftly implementing the international agreement on a minimum tax for multinational corporations. The Commission will present another proposal to promote transparency before the end of 2022. This proposal is intended to require certain large multinational corporations to disclose their effective tax rates. In cooperation with tax authorities, the eighth directive is planned for 2022. This is intended to provide tax administrations with the necessary information for dealing with crypto assets.

In addition to the new regulations for shell companies within the EU, the European Commission intends to announce how to deal with shell companies outside the EU. The initiative is scheduled to be presented in 2022 and will address the challenges associated with these companies.

Tax Consulting in Düsseldorf and Oberhausen

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