Proposal to end the misuse of shell entities for tax purposes

On 22 December 2021 the European Commission presented a key initiative to fight against the misuse of shell entities for improper tax purposes. Based on the proposal, it should be ensured that entities in the European Union that have no or minimal economic activity are unable to benefit from any tax advantages and do not place any financial burden on taxpayers. This will also protect the level playing field for the vast majority of European businesses, who are key to the EU's recovery, and will ensure that ordinary taxpayers do not suffer additional financial burden due to those that try to avoid paying their fair share.

While shell or letterbox entities can serve useful commercial and business functions, some international groups and even individuals abuse them for aggressive tax planning or tax evasion purposes. Certain businesses direct financial flows to shell entities in jurisdictions that have no or very low taxes, or where taxes can easily be circumvented. Similarly, some individuals can use shells to shield assets and real estate from taxes, either in their country of residence or in the country where the property is located.

The aim of this proposal is to tighten the screws on shell companies, by establishing transparency standards, so that the misuse of such entities for tax purposes can more easily be detected. The proposal establishes objective indicators that help national tax authorities detect firms that exist merely on paper: when that is the case, the company will be subject to new tax reporting obligations and will lose access to tax benefits. New monitoring and reporting requirements for shell companies shall make it harder for them to enjoy unfair tax advantages and easier for national authorities to track any abuse arising from shell companies. Once adopted by the Member States, the proposal should come into force as of 1 January 2024.