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Shell Shock: How New Shell Entity Rules Combat Tax Avoidance

new rules

In January 2023, the European Commission adopted a resolution aimed at preventing the misuse of shell entities for tax purposes. The resolution, which can be found at the Official Portal of the European Parliament, includes several key measures to combat tax avoidance and ensure that companies and individuals pay their fair share of taxes. In this post, we’re explaining how the new shell entity rules will change the game for your business. 

Main Provisions of New Shell Entity Rules

The resolution is a clear signal that the European Commission is taking the issue of tax avoidance seriously, and it is likely to be followed by further measures to combat tax havens and other forms of tax avoidance. The following lines explain the key purpose and provisions of the new Shell Entity Rules 

Economic Substance

One of the main provisions of the resolution is a requirement for companies to demonstrate “economic substance” in any jurisdiction where they are registered. This means that companies will need to show that they have a genuine presence in the country, with real employees and a physical office, rather than simply using a shell entity as a front for tax avoidance. 

Ultimate Beneficial Owners Disclosure

The resolution also includes measures to increase transparency and make it more difficult for companies to hide their ownership structures. This includes a requirement for companies to disclose their ultimate beneficial ownership, as well as measures to improve the exchange of information between tax authorities. 

Combatting “Letterbox Companies”

The resolution also includes measures to tackle the use of “letterbox companies”, which are companies that are registered in a certain jurisdiction but have little or no real economic activity there. These companies are often used to take advantage of tax havens and other low-tax jurisdictions, and the resolution aims to ensure that they are subject to the same rules and regulations as other companies. The resolution is a significant step forward in the fight against tax avoidance, and it is likely to have a major impact on companies and individuals who have been using shell entities to avoid paying their fair share of taxes. 

shell entity rules
Source: Unsplash

Businesses that are Subjects to New Shell Entity Rules

The resolution is not a magic solution, and it will still require ongoing efforts by tax authorities and governments to ensure that the rules are properly enforced. Yet, companies and individuals who have been using shell entities to avoid paying taxes will need to take note of the new rules, and they may need to make significant changes to their business models in order to comply. The resolution is not just limited to companies or entities registered in EU member states, it also applies to those that have activities or carry out transactions with EU member states. 

If you need more clarity on how the new Shell Entity rules impact your business, feel free to contact Chern & Co. Our experts will suggest on the best strategies for you to continue running a compliant business with new realities.

To Summarise

In conclusion, the new resolution adopted by the European Commission is a strong step towards a fairer and more transparent tax system. It will make it harder for companies and individuals to abuse shell entities for tax avoidance and it will increase transparency and cooperation between EU member states. It is important to note that this is not the end of the road, but rather a continuous effort by the European Commission to fight tax avoidance and make sure that everyone is paying their fair share of taxes.

Disclaimer: The content of this page is for acquainting purposes only and is subject to change. It does not constitute any professional advice. No liability is accepted by Chern & Co for any actions taken or not taken in reliance on the information set out in this article. Professional, legal or tax advice should be obtained before taking or refraining from any action

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