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Avoiding legal and regulatory pitfalls in digital transformation projects
This article first appeared in the September 2024 issue of Financier Worldwide.
Global | Publication | January 2022
On December 22, 2021, the European Commission published a proposal for a Directive to prevent the misuse of what it sees as shell entities.
The Directive has far-ranging consequences for groups with entities which are deemed to be shell entities under the proposals and are resident in any Member State. Most importantly, it potentially denies the benefit of double tax treaties and the EU Directives and allows Member States to tax shareholders on a look-through basis. If the Directive is adopted – and it is probable that it will be - many EU non-operational companies owned by multinational groups and private equity companies (notably those established in the context of investment funds structures) will potentially be within its scope. These will include:
For international groups and private equity funds, it is likely that unless the entity is itself regulated or holds listed securities, it will be necessary to prove managerial and operational substance. The standards proposed seem to go beyond what is currently required to show that the entity has beneficial ownership of its income and is not established for tax avoidance purposes. While there has been a focus on these requirements following the so-called Danish CJEU cases held in February 2019, the Commission proposal will now force the concerned groups to look at the role and activities of their intermediate entities.
The Commission’s aim is that legislation implementing the directive in each Member State will be in effect from January 1, 2024. Because many of the tests have a two year look-back period, it is important that groups and asset managers consider immediately whether they may become impacted by the proposals.
The proposal sets out three cumulative gateways. If an entity passes all three gateways, it will be required annually to report additional information to the tax authorities as part of its corporation tax return and will run the risk of being deemed to be a shell entity:
If the gateways are passed, unless a Safe Harbour applies (see below), the consequences are as follows:
There are two main consequences if an entity fails the substance test and is therefore deemed to be a “shell entity”:
There are a number of safe harbours that can apply:
The following are excluded:
An entity will be able to rebut any presumption that it is a shell entity for the purposes of the Directive by:
A renewable exemption (of up to five years) can be requested if the presence of the undertaking in the structure does not lower the tax liability of its beneficial owner or of the group as a whole.
Multinational groups and asset managers that may potentially be within the scope of the Directive should look carefully at its provisions to see how they may be affected. Because many of the safe harbours have a two year look back period, it is important to review the current structure in light of these new rules. Whilst the Directive has not yet been adopted and Member States generally still have some time to issue their own proposals on how they intend to implement it, it would appear unwise to wait for its actual implementation before considering its actual impact on current holding structures and the standard to establish new structures of intermediary entities within the EU.
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This article first appeared in the September 2024 issue of Financier Worldwide.
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The Digital Markets, Competition and Consumers Act (DMCC Act) received Royal Assent on 24 May 2024 and is generally expected to come into force in autumn this year.
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On 26 July 2024, the People’s Bank of China (PBOC) and the State Administration of Foreign Exchange (SAFE) jointly released revised rules in respect of the investments into China’s financial market through the Qualified Foreign Institutional Investor and Renminbi Qualified Foreign Institutional Investor (collectively, QFII) regime (the New Rules).
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