Ferma welcomes captive exclusion from shell entity rules

Ferma has welcomed the fact that regulated financial services are set to be exempt from coming EC rules designed to clamp down on the use of shell entities for tax purposes.

The confirmation that regulated firms, such as captives, will remain exempt and as such should not be considered as shell entities provides relief for captive owners and managers, the federation said.

The European Parliament voted on the EC’s proposal to prevent the misuse of shell entities for tax purposes on 17 January.

“Some relief for the world of captives was contained in the vote, namely in the form of the regulated financial services derogation remaining in the text,” explained Ferma. “This is to be welcomed since the implication is that captives will not de facto be considered shell entities. The next step in the legislative process is trilogues,” added the federation.

A trilogue in Brussels-speak is an informal tripartite meeting on legislative proposals between representatives of the European parliament, council and commission. The aim is to reach a provisional agreement on a text acceptable to both the council and the parliament, which would then pave the way for further action.

In this case the overall goal is to come up with a set of rules to prevent the misuse of shell entities for tax purposes.

“While shell companies – entities that have no or minimal economic activity – can serve useful commercial and business functions, they are sometimes abused by companies or individuals for aggressive tax planning or tax evasion,” explained the European Parliament.

“To ensure sustainable public finances under the exceptional circumstances imposed by the Covid-19 pandemic, in December 2021 the European Commission presented a directive on preventing shell companies from misusing their structure for tax purposes,” it continued.

The proposal introduces a ‘filtering’ system for EU company entities that will have to pass a series of gateways relating to income, staff and premises, to ensure there is sufficient ‘substance’ to the entity.

Those entities that are deemed to be lacking in substance are presumed to be ‘shell companies’ and, if they are unable to rebut this presumption through additional evidence,  will lose any tax advantages granted through bilateral tax treaties or EU directives, thereby discouraging their use, explained the European Parliament.