On 22 December 2021, the Commission published two proposals for directives. The first one, also known as ‘Unshell proposal’, is aimed to fight against the misuse of shell entities for improper tax purposes. The second one is to ensure a minimum effective tax rate for the global activities of large multinational groups.
The proposed new measures aim to establish transparency standards around the use of shell entities, so that their abuse can more easily be detected by tax authorities.
The proposal introduces a filtering system for the entities in scope. These indicators will constitute a gateway. Once a company crosses three gateways, it will be required to annually report more information to the tax authorities through its tax return.
If a company is deemed to be a shell company, it will not be able to access tax relief and the benefits of the tax treaty network of its Member State and/or to qualify for the treatment under the Parent-Subsidiary and Interest and Royalties Directives.
Given the cross-border nature of tax avoidance and tax evasion, it will be possible for EU member states to exchange information on shell companies. To this end, the proposal will make adjustments to the EU Directive on cross-border tax arrangements (DAC6).
Proposal for global minimum tax rate
The proposal for a directive aims to convert into EU law the so-called Pillar 2 of the OECD agreement introducing a new global minimum tax rate for multinational enterprises (MNEs).
The scope of the proposal covers the MNEs but also large-scale domestic groups with revenue exceeding €750 million.
The proposal introduces several technical rules to calculate the level of taxation and allowing member state to collect tax if the effective tax rate does not meet the minimum rate:
- Income Inclusion Rule imposes a top-up tax if the effective tax rate for entities in a certain jurisdiction does not meet the minimum 15%.
- Undertaxed Payments Rule which functions as a backstop rule and applies in situations where, for example, a group is based in a non-EU country which does not apply the minimum rate.
The directive will not cover:
- government entities, international organisations, non-profit organisations, pension funds and investment funds that are the parent entity of a multinational group;
- minimal amounts of income (to reduce compliance burden) (de minimis income exclusion);
- fixed amount of income relating to substantive activities such as buildings and people (substance carve out) where companies will be able to exclude from the top-up tax an amount of income that is at least 5% of the value of tangible assets and 5% of payroll;
- income earned in international shipping, as this particular industry is subject to special tax rules.
The proposal also introduces a transition period for the substance carve out.
The Council will need to agree unanimously. The European Parliament and the European Economic and Social Committee will need to be consulted.