Proposed EU directive targets shell companies after Pandora Papers exposed offshore system abuses

The European Union Commission wants to deprive enti­ties that have lit­tle to no eco­nom­ic activ­i­ty of tax benefits.

The European Commission pro­posed a new direc­tive this week to tar­get shell com­pa­nies, less than three months after the Pandora Papers inves­ti­ga­tion by the International Consortium of Investigative Journalists exposed the large-scale use of anony­mous vehi­cles to hide mon­ey, avoid tax­es and dis­guise asset ownership.

The pro­pos­al, dubbed “Unshell,” would seek to ensure that let­ter-box com­pa­nies that have “no or min­i­mal eco­nom­ic activ­i­ty” in the EU can­not ben­e­fit from any tax advan­tages, the text of the pro­pos­al says.

Recent inves­ti­ga­tions such as OpenLux or the Pandora papers were anoth­er reminder of the injus­tices that char­ac­ter­ize our eco­nom­ic sys­tem today,” econ­o­my com­mis­sion­er Paolo Gentiloni said at a press con­fer­ence on Wednesday.

OpenLux, by Le Monde and oth­er news orga­ni­za­tions, showed how Luxembourg’s invest­ment fund indus­try helps peo­ple laun­der mon­ey and avoid tax.

Pandora Papers, an ICIJ inves­ti­ga­tion in col­lab­o­ra­tion with 600 reporters world­wide, is based on a leak of 11.9 mil­lion finan­cial records from 14 off­shore finan­cial ser­vice providers. The data unveiled details on shell com­pa­nies and trusts owned by 29,000 peo­ple from around the world, includ­ing coun­try lead­ers, pow­er­ful busi­ness peo­ple, crim­i­nals and celebrities.

Those peo­ple used shell com­pa­nies reg­is­tered in secre­cy juris­dic­tions, includ­ing the British Virgin Islands, the United Arab Emirates and the Cook Islands, to own real estate, pre­cious art­works and antiq­ui­ties, and invest­ment port­fo­lios, the doc­u­ments show.

European Commission Paolo Gentiloni appears at a European Parliament ses­sion on Oct. 6, 2021, where mem­bers dis­cussed the impli­ca­tions the Pandora Papers have on efforts to com­bat mon­ey laun­der­ing, tax eva­sion and avoidance.

Among shell com­pa­ny own­ers in Pandora Papers, ICIJ and its part­ners iden­ti­fied promi­nent European politi­cians includ­ing Czech Republic’s for­mer Prime Minister Andrej Babis, who used a web of shell com­pa­nies to own lux­u­ry estate in Southern France, and Dutch Finance Minister Wopke Hoekstra who invest­ed in a shell com­pa­ny with inter­ests in a safari enter­prise in Kenya. They both denied wrongdoing.

According to a 2018 study com­mis­sioned by the European Parliament’s finan­cial crimes com­mit­tee, a “‘shell’ com­pa­ny pro­vides anonymi­ty as a key ele­ment while simul­ta­ne­ous­ly guar­an­tee­ing con­trol over the shell com­pa­ny and its resources.”

The use of shell com­pa­nies can be legal, the study adds, but “when asso­ci­at­ed with anonymi­ty … they can be mis­used and thus entail seri­ous risks of tax avoid­ance, tax eva­sion, mon­ey laun­der­ing and abuse of social rights.”

Unshell’ proposal

Three cri­te­ria will deter­mine whether an enti­ty exists only on paper and, con­se­quent­ly, is deemed unable to obtain tax relief and tax ben­e­fits, accord­ing to the new direc­tive pro­posed by the commission.

The cri­te­ria are: the nature of the company’s income, the pro­por­tion of cross-bor­der trans­ac­tions for the company’s busi­ness, and whether the company’s man­age­ment is out­sourced or per­formed in-house.

The pro­pos­al “will enable us to step up the fight against tax avoid­ance and eva­sion by tight­en­ing the screws on shell com­pa­nies – or let­ter­box com­pa­nies – used as vehi­cles for tax avoid­ance or eva­sion,” Gentiloni said.

The new rules will estab­lish trans­paren­cy stan­dards around the use of shell enti­ties, so that their abuse can more eas­i­ly be detect­ed by tax author­i­ties,” he said.

If the enti­ty is a shell com­pa­ny, it will have to com­ply with new tax report­ing oblig­a­tions and “inbound pay­ments will be taxed in the state of the shell’s share­hold­er,” accord­ing to the pro­pos­al. If the company’s pur­pose is to own lux­u­ry real estate, the asset will be taxed by the state where the prop­er­ty is locat­ed “as if it were owned by the indi­vid­ual direct­ly,” the doc­u­ment says.

The new direc­tive will also increase exchange infor­ma­tion across the bloc and enable mem­ber states to request anoth­er mem­ber to con­duct a tax audit of any shell company.

In addi­tion to the ini­tia­tive on shell com­pa­nies, the commission’s pro­pos­al also includ­ed the imple­men­ta­tion of a min­i­mum tax of 15% for large cor­po­ra­tions that have their par­ent or a sub­sidiary in the EU.

The min­i­mum tax require­ment fol­lows a “his­toric deal” agreed upon by 136 coun­tries and bro­kered by the Organization for Economic Co-oper­a­tion and Development last October, and is aimed at stop­ping the glob­al race to the bot­tom in terms of cor­po­rate tax rates.

The EU Tax obser­va­to­ry, a research think tank led by econ­o­mist Gabriel Zucman, esti­mat­ed that such reform in the EU would increase the cor­po­rate income tax rev­enue by more than $90 bil­lion a year.

Once adopt­ed by EU Member states, the pro­posed direc­tive will come into effect in January 2024.

Original source of arti­cle: https://www.icij.org/

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