he European Commission has recently presented a proposal for a directive to combat the misuse of these fictitious companies (shell entities) which are being used for unfair tax purposes. That is, when we say fictitious companies we mean companies that do not have a physical presence and real economic activity and are used to avoid paying taxes in the country where the income is actually generated.
The Commission proposal proposes that legal entities in the European Union which have zero or minimal economic activity (shell entities) should not benefit from tax advantages, in order to ensure fair and efficient taxation to prevent unfair competition.
The proposed directive sets out some objective indicators of the existence of a substance which helps the national tax authorities of the Member States to identify companies that exist only on paper. These companies identified in this way will be subject to new tax reporting obligations and will no longer be able to benefit from several tax benefits.
More specifically, the proposed provisions apply to all businesses and legal entities that are considered tax residents of an EU Member State. and who can obtain a tax residence certificate from that state.
Excluded are listed companies, supervised financial corporations, holding companies whose actual beneficiaries, but also the trading companies in which they participate, are residents of the same Member State, companies employing at least five employees solely in the income-generating activity etc.
Legal entities that meet all of the following criteria should provide further information regarding their status:
- Companies whose 75% of the income in the previous two years is included in the so-called passive income, as they further specialize, e.g. Dividends, interest, royalties, income from real estate, banking and financial activities, banking, leasing, services provided by affiliated companies, etc.
- Companies that have mainly cross-border activities.
- Companies that outsource their day-to-day management and decision-making on important functions.
The above companies must declare annually in their tax return if they meet the following minimum distance indicators:
-το have only their own office facilities,
-to have their own active bank account within the EU.
-to have at least one tax manager resident in the same Member State, who has the necessary qualifications and is exclusively engaged in the activities of the company,
-to have a power of attorney, etc. company to be tax residents of the Member State, etc.
The above must of course be sufficiently substantiated by documentary evidence, which will accompany the tax return.
In the event that the tax administration of a Member State ultimately finds that a company is not real, the latter has the right to put forward arguments and evidence to the contrary. If the rebuttal is formally accepted by the tax authorities, it is valid for the relevant year and for another five years provided that the legal and factual circumstances do not change.
It is worth noting that a company, even if it is judged to have no substance, can be exempted from the application of the directive if it proves and is officially accepted by the tax authorities that it was established purely for commercial reasons and without the intention of tax evasion or avoidance.
If a company is deemed to be fictitious and not real, it will not be able to obtain a tax residence certificate from the Member State in which it is established, it will not be entitled to the protection of bilateral double taxation agreements, it will not be entitled to apply the parent-subsidiary directive for the exemption from withholding tax on dividends and the corresponding directive on royalties and interest, etc.
Member States’ tax authorities will automatically exchange information (8th Directive of EU Commission) on non-performing companies established in their territory with other Member States. This information will include their VAT number, shareholders and final beneficiaries, an indication of which other Member States the information may relate to, etc.
Member States will set penalties for companies failing to comply with the directive, which proposes a minimum fine of 5% of their turnover. This Commission Directive should be adopted by the Member States by 30/06/2023 and come into force on 1 January 2024.
