Issue link: https://maltatoday.uberflip.com/i/1447668
L ast December, the European Com- mission presented a key initiative to fight against the misuse of shell entities for improper tax purposes. At the same time presented its proposed legis- lative text to impose a 15-percent mini- mum tax on corporations as worked out between OECD countries and approved by the G20 (Malta signed as well with some reservations). It is estimated that in the EU tax avoid- ance linked to the misuse of shell compa- nies amounts to around 23 billion euros. Once adopted by Member States, the proposal should come into force as of 1st January 2024. e proposal does not apply to entities in third countries. e Commissioner for Economy, Paolo Gen- tiloni, said: is proposal will tighten the screws on shell companies, establishing transparency standards so that the mis- use of such entities for tax purposes can more easily be detected. What is the gist of such directive and will it target Malta's own list of compa- nies (Shells reputed to add up to 500). e answer is that the directive will con- sists of three benchmarks. It starts by as- sessing the extend of a company's passive income, whether most of its transactions are cross-border, and if its management and administration is outsourced. Tax advisers in Malta will have a tough job to screen their clients and determine whether clients fall into the category since if they do, they be subject to new tax reporting obligations and unable to benefit from tax breaks. is will protect the level playing field for the vast major- ity of European businesses, who are key to the EU's recovery, and will ensure that ordinary taxpayers do not suffer addi- tional financial burden due to those that try to avoid paying their fair share. Readers may ask - what are the uses for Shell companies? ese can serve use- ful commercial and business functions (such as offshore oil and gas drilling), but there are abuses when used for aggres- sive tax planning or tax evasion purpos- es. Malta can be criticised that due to our competitive corporate tax structure, this may attract shell companies. Lux- embourg and the Netherlands have on many occasions been labeled to serve as havens for individuals to use such juris- dictions to shield assets and real estate from taxes, either in their country of res- idence or in the country where the prop- erty is located. At a time, when the EU has pumped so much recovery assistance into trou- ble-stricken companies (due to the pan- demic) obviously it wants to make sure tax leakages are minimized. Executive Vice-President for an Economy that Works for People, Valdis Dombrovskis, said: Shell companies continue to offer criminals an easy opportunity to abuse tax obligations. In two years' time, if the directive is approved by all Member States it shall be monitoring shell companies. It will make it harder for them to enjoy unfair tax advantages and easier for nation- al authorities to track any abuse arising from shell companies. An entity must satisfy all three indicators in order to meet the minimum substance require- ments. ese are: · own or have exclusive use of premises in the entity's Member State; · hold an active bank account in the EU; and · have at least one qualified director who is tax resident in the entity's Mem- ber State or employ a majority of full- time employees who are tax resident in the entity's Member State (or as close- by as can sufficiently carry out activi- ties). at more than 75% of the income ac- crued by the company in the previous two tax periods is passive income (e.g., dividends, interest, etc.) or, alternatively, the book value of the equity investments it holds or of its movable and immovable property with a book value in excess of €1 million is more than 75% of the total book value of the assets. If the entity does not meet all of the minimum substance requirements (or does not provide sufficient evidence to prove it does), it will be classified as a shell entity. An entity crossing all three gateways will be required to report in- formation in its tax return related, for example, to the premises of the compa- ny, its bank accounts, the tax residency of its directors and that of its employees. ese are known as substance indica- tors. All declarations need to be accom- panied by supporting evidence. e con- sequences of being classified as a shell company are three-fold: · tax benefits provided by the Par- ent-Subsidiary Directive or the Interest and Royalties Directive and bilateral tax treaties are denied; · new taxing rights over the income are provided to the shell entity's sharehold- ers (deducting any tax paid by the shell entity assuming both entities are resi- dent in an EU Member State), and · a request for a tax residence certifi- cate will be denied or issued with a warn- ing to prevent claiming double tax relief in another jurisdiction. One may ask if exemptions exits under the proposed directive. e answer is yes. A number of exemptions for certain entities exist as well as a rebuttal of presumption for genuine activities. ere is also the op- portunity to request an exemption where it is possible to demonstrate there is no tax advantage arising from the use of the shell entity. e list of exempt entities includes listed companies; regulated financial undertaking; domestic holding entities; and entities that have at least five full- time employees exclusively carrying out income-generating activities. ese exemptions should be helpful for large groups that have sufficient people on the ground. In case of investment man- agers, the exemption for regulated fi- nancial undertakings will be helpful for entities within the fund structure that are regulated, however holding compa- nies further down the chain will prove more difficult and may need to rely on one of the other exemptions to relieve themselves. It also captures legal arrangements, such as partnerships, that are deemed residents for tax purposes in a Member State. In the case of payments to/from a deemed shell entity and a third country, the allocation of taxing rights should be determined by existing double tax agree- ments. Unfortunately all companies in Malta need to pass the test as there is no exemption for small and medium sized enterprises. Proposed EU Commission directive on shell companies George Mangion George Mangion is a senior partner of an audit and consultancy firm, and has over 25 years experience in accounting, taxation, financial and consultancy services. His efforts have seen PKF being instrumental in establishing many companies in Malta and ensured PKF become one of the foremost professional financial service providers on the Island 8 OPINION 3.2.2022