EU Eyes New Powers to Block Breaks for Corporate Tax Dodgers

(Bloomberg) -- The European Union will propose giving countries sweeping new powers to clamp down on shell companies in order to tackle tax avoidance, according to a draft proposal seen by Bloomberg.

The new rules would give member states the ability to block benefits used by companies deemed to have little economic purpose other than to gain tax advantages, according to the draft, which is still subject to change. The EU would give countries the power to deny tax perks previously approved under bloc-level directives.

The rules, which are slated to be published this week, would require companies to go through a brand new process for determining and reporting on whether they are a shell company.

A European Commission spokesperson declined to comment when asked for details on the draft proposal. 

The EU defines shell companies as legal entities with minimal substance that are used for improper tax purposes, such as tax evasion and avoidance, according to the draft. The new rules would apply a substance test to determine whether entities are considered shell companies.

Companies that meet certain risk factors, such as whether the firm has cross border activities that are geographically mobile, would be required to report additional information on its tax return. Firms that are considered at-risk would face additional reporting requirements to explain how much real substance they have in a jurisdiction. 

The reporting focuses on factors like whether they have their own premises and bank account, and whether there’s a dedicated director or sufficient number of employees involved in core activities.

EU tax authorities will also automatically exchange details about the at-risk companies to be sure all member states have access to the information.

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