The European Commission has published a proposal for a Directive laying down rules to prevent the misuse of fraudulent entities for tax purposes and amending Directive 2011/16 / EU, also known as the ATAD Directive 3.
The directive thus lays down reporting requirements for EU tax-resident companies, regardless of their legal form, with certain passive revenue streams and inadequate operational content. In certain cases, inadequate content, benefits of tax agreements, and EU directives may be denied, which would result in an increased tax burden after deduction, as well as potential penalties for non-reporting or inaccurate reporting.
If the proposal is adopted, EU Member States will have to implement the proposed measures in their domestic tax legislation by 30 June 2023 and implement them by 1 January 2024. It is important to note that to determine whether a company falls under the Directive, a two-year review rule would apply, meaning that from 1 January 2022, companies could become a reference point.
The new rules could potentially affect companies that have hired third-party service providers to act as external directors for companies that are tax residents in the EU. Therefore, companies should carefully review their corporate structures to pre-adjust their business to new requirements.
SHOULD A COMPANY REPORT TO THE EU?
It is first necessary to determine whether a company in the EU is required to report. The answer is “yes” if more than 75% of the revenue in the previous two years is relevant revenue (defined in the Directive as mobile or passive revenue) if it is engaged in a cross-border activity and if in the previous two tax years the company hired external associates to carry out daily tasks and make meaningful decisions.
There are several exceptions to this rule, which mostly concern regulated financial companies, investment funds, companies with transferable securities listed on a regulated market, companies with at least 5 full-time employees performing activities that generate this type of income, etc.
Likewise, any company that meets the above criteria may request an exemption from the reporting obligation if it proves that its existence does not reduce the tax liability of the beneficial owner and/or his group. Such exemption is granted for one year and may be extended for up to five years.
IF THE COMPANY NEEDS TO REPORT TO THE EU
EU companies that are required to report must indicate in their tax return whether they meet certain minimum requirements such as office space, an active EU bank account, and so on. It must also meet one of the following two criteria, which are:
- that most of the company’s employees are residents or live near the company’s jurisdiction, and these employees are qualified to perform a revenue-generating business, and
- that there is at least one company director who:
- lives near the jurisdiction of the company,
- is qualified and authorized to make relevant decisions,
- actively, independently, and regularly uses its powers and,
- is not an employee or director of any other unrelated company.
WHAT ARE THE CONSEQUENCES OF THE ABUSE OF FALSE ENTITIES FOR INAPPROPRIATE TAX PURPOSES IS PROVED?
If the misuse of fraudulent entities to misuse tax relief is proven, the following consequences will occur:
- if the company has an EU shareholder, the competent authority will tax the shareholder’s relevant income following its national law;
- the reporting company will no longer receive a tax residency certificate and the Tax Authority will issue an amended tax residency certificate stating that the company is no longer entitled to benefits from various agreements or relevant EU directives.
EXCHANGE OF INFORMATION, PENALTIES, AND TAX AUDITS
The central database will be available to all Member States with information relating to all EU companies that are considered reporting companies and which are required to declare this in their tax return.
Member States may impose penalties of up to 5% of annual revenues on companies that do not report or report inaccurate reports, and may even ask other Member States to initiate a tax audit if they suspect that an EU company does not comply with the Directive.
