EU Directive to end the misuse of Shell Companies

misuse of Shell Companies

By Caitlyn Buchanan, 24.02.2022

It is known that there are many shell corporations set up in foreign countries which exist only to shield their owners from local tax liabilities. On 22nd December 2021, the European Commission presented a key initiative to fight against the misuse of EU Shell Entities for improper tax purposes. The ‘Unshell Directive’ aims to ensure that shell entities in the EU with no or minimal economic activity are unable to benefit from tax advantages. The proposal seeks transparency to alleviate the financial burden on taxpayers and promote a level playing field for European businesses.

Which Entities will be affected by the ‘Unshell Directive’?

Entities that cross all three of the following gateways will be considered in scope of the directive and therefore required to report substance indicators along with their annual tax return.

  • The bulk of the company’s income is from passive sources (dividends, interest on bonds, etc).
  • The majority of transactions are cross-border.
  • Management and administration are outsourced.

While this proposal only addresses the issue within the EU, the Commission is expected to present a new initiative to respond to the challenges posed by non-EU shell entities in 2022.

What is a Shell Company?

A shell corporation is an entity without any active business operations or significant assets. Shell companies have no employees and are not traded publicly as they do not deliver goods or services in return for revenue. Despite this, shell companies can open corporate bank accounts, engage in financial transactions, purchase real estate, and own royalties and copyrights. Shell companies can also be set up remotely and owned from a different country. Popular shell company locations include the Bahamas, Bermuda, the British Virgin Islands, the Cayman Islands, the Channel Islands, Luxemburg, and Switzerland.

What are Shell Companies used for?

Shell companies can be used by private individuals or large public companies. Generally, they are used for one of three purposes – for legitimate reasons, such as a start-up using the entity as a vehicle to go public, for illegitimate reasons such as to disguise business ownership from the public/law enforcement or they may be used to engage in financial crime.

Legitimate reasons for the use of a Shell Entity:

  • Companies can use shell corporations to establish business operations in countries outside of their own.
  • The structure can be used by a start-up company/individual to collect and store funds required to start a new business venture prior to the incorporation of the new company.
  • Making investments in foreign markets. Owning a shell entity in a foreign country can make it easier to process financial investments or purchase real estate in that country.
  • Storing assets in offshore shell companies to protect these valuables from economic crashes and disasters. This can prevent the potential devaluing of company assets.

If you have any questions about the information in the article or if you would like to incorporate a company in Europe, please contact us today.


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