EC is tough on front companies

On December 22, the European Commission (EC) announced tougher rules aimed at “front” companies.

European Union (EU) Commissioner for Economic Affairs and Taxation Paolo Gentiloni during a press conference in Brussels, Belgium, February 17, 2020. Photo: AFP/VNA

Accompanying that is a detailed plan for the implementation of an international agreement to impose a minimum tax rate of 15% on large multinational companies.

Speaking at a press conference, the European Union’s Economic Affairs Commissioner Paolo Gentiloni emphasized that the aim of the rules was to tighten the management of “shell” companies, which are used to avoid or evade taxes. “Front” or “cover” companies are companies that exist only on paper, often without offices or any employees, and are used for the purpose of legitimizing processes.

However, the above plan needs to receive final approval from the European Parliament and all 27 EU member states before coming into force from 2024 as the target. The above set of rules evaluates 3 items: the company’s passive income, checking whether most of its transactions are conducted across borders, and whether the company’s management and administration is safe. outsource or not. If all 3 items are checked, the company will be considered a “cover” company that is subject to new tax reporting obligations and will not receive tax relief.

Alternatively, an EU country can require another member state to examine the tax payment of a company that is characterized as a “front” company. These characteristics include indications that a company derives more than 75% of its global revenue elsewhere other than from its business, or if more than 70% of its assets are real. expensive real estate or high-value dividends.

Commissioner Gentiloni also said a minimum tax of 15% would be imposed on multinational companies in the EU, in accordance with the directive proposed by the EC on December 22. According to the official, the directive issued by the EC will ensure a minimum tax rate of 15% for large companies will be applied in a way that is fully compatible with EU law.

Accordingly, any large corporation, domestic or international, with a total financial turnover of more than 750 million euros per year and having a parent company or subsidiary located in an EU member state, will be subject to proposed rule. In order for the directive to take effect, it needs to be unanimously approved by EU member states. The European Parliament and the European Economic and Social Commission will also be consulted.

The minimum tax rate of 15% applied to multinational corporations was established among the countries of the Organization for Economic Co-operation and Development (OECD) and subsequently adopted by the G20 group. The goal is to address the tax challenges of the digital economy.