Shell companies: the new EU directive

Last December 22, 2021, the European Commission published a proposal for a directive that establishes rules aimed at combating the abusive use of shell companies: the rule will have to be transposed into the national law of member states by June 30, 2023 and will come into force on January 1, 2024.

The directive targets entities in EU member states primarily involved in cross-border activities whose day-to-day management and decision-making are outsourced. Certain businesses are considered low-risk from the outset and are therefore excluded from the scope: these are listed companies and regulated financial firms, and with at least five full-time employees employed in tasks closely related to the business activity. On the other hand, specific reporting obligations have been introduced to identify so-called shell companies.

Once qualified as a “shell company”, a company would lose the benefits of the EU Treaties. For this reason, companies are already invited to verify their structure in order to anticipate the potential impacts that could arise with the implementation of the new rules.

In order to identify companies subject to the reporting obligation, and which therefore risk being classified as “shell companies”, four criteria have been identified:

(a) accumulate income derived 75% from passive income (particularly interest, royalties and dividends);
b) Engage primarily in cross-border activities or transfer revenues to foreign shareholders;
(c) outsource day-to-day management and decision-making for significant functions.

A company deemed “at risk” may apply for an exemption from its reporting requirement if it can provide evidence that its existence does not limit the tax liability of its beneficial owners, or its group. This exemption is granted for 1 year and can be extended up to 5 years.

All other businesses considered “at risk” will instead be required to report in their tax returns at least three “minimum substance” indicators, namely, the presence of a physical location and space to conduct business, the ownership of an EU bank account, a director working exclusively and the presence of full-time employees. These statements must be accompanied by documentary evidence.

The member states will establish penalties of at least 5% of the company’s turnover in the tax year in question in the event of non-declaration or late declaration.

If the report reveals that a company meets all indicators, it is presumed not to be a shell company. If, on the other hand, it does not meet at least one of the indicators, it will be identified as such, in which case it may rebut this presumption by providing some specific additional information demonstrating the conduct and full control of the business activities that generated the relevant income (or, in the absence of income, the assets of the business) and the taking of risks.

Finally, companies that are confirmed as shell companies will be denied the right to a residence certificate and the benefits provided by tax treaties between EU countries, such as those on double taxation.

The team of Malta Business Agency offers to all companies the opportunity to perform a pre-analysis to identify any critical issues and get in full compliance in view of the entry into force of the new directive. To find out more or to book a consultation please fill in the following form.