Unshell – the name given to the third anti tax-avoidance directive (ATAD III) – would have a “huge impact for Luxembourg, especially for Luxembourg” said Carlo Fassbinder, tax director at the Luxembourg finance ministry. In particular, he is concerned that the fund industry would be the victim of some unpleasant unintended consequences.
“The Unshell proposal should ensure 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,” said the European Commission on the publication of the draft for ATAD III on 22 December. In their sights are companies which “are often used for aggressive tax planning or tax evasion purposes.”
No problem, but
“We have no particular problem with shell companies in general,” Benjamin Angel, director for direct taxation at the European Commission told the “The new international tax landscape and its impact in Luxembourg” conference organised on 11 January by the UEL (Luxembourg Employers Association). “What we’re trying to address is misuse for tax purposes of shell companies, which is a very common disease in the tax world,” he added. He mentioned that tax dodging by corporates and individuals are both being targeted by this measure.
“First we have to bear in mind what instruments we already have to address the targets of this proposal,” countered Mr Fassbinder speaking after this presentation. He hopes the Commission would “not shoot above the target” but seek to address problems in a measured fashion. “I’m thinking about the investment fund industry which uses thousands of Soparfis [Financial Participation Companies] in Luxembourg for various reasons: regulatory reasons, legal reason, the segregation of risks, the segregation of investments, co-investments and so on.” He fears that these holding companies could be captured by the directive. With this in mind Fassbinder cautioned about the need to be “very careful to design this directive in order to not to go beyond its targets.”
Mindful Commission
It appears that the Commission may be mindful of these concerns, judging by the comments from Angel. “We want to do it in a prudent way with a significant carve-out, but also thorough way, which allows member states to ensure an effective taxation, while preventing double taxation,” he said.
In its August communication to the Commission on this topic, ALFI requested “a carve-out of all investment funds (UCITS and AIF) and of investment fund managers and management companies from any definition of “shell entities”.” Fassbinder said that Luxembourg and the few other EU countries potentially affected by these measures would make their views known in the Council of Ministers. Unanimity is required to pass tax legislation at the EU level.
More proposals of this nature are coming down the pipe to deal with non-EU activities. Angel added that: “that there will be another package coming this year… it’s important to put our house in order.” He said the aim of these measures is “to address some of the difficulties identified in the Pandora Papers, which are more in in third countries [i.e. outside the EU] and that is where our reflection will develop this year.”
Specifically on Unshell, the draft directive relates only to intra-EU situations for undertakings and legal arrangements that are resident in a member state for tax purposes. The text talks of a “substance test,” which imposes additional tax compliance obligations on taxpayers, features a set of sanctions for the non-compliant, and extends the scope of automatic exchange of information between member states’ tax offices.
Implications
“Implementation of the draft Directive would lead to additional compliance obligations for many taxpayers…[and] also has significant compliance implications for tax authorities,” said Bart Van Droogenbroek EY Luxembourg partner and tax leader. He cited an example of one aspect which would “significantly increase the administrative burden with respect to the granting of tax residency certificates”.
On timing, the Commission says transcription into domestic legislation would be by 30 June 2023 for implementation from 1 January 2024. Luxembourg funds will await the outcome of discussions between member states with interest, not least as these will set the tone for future action even if, as is widely expected, Unshell is amended.