Filenews 12 February 2023 - by Eleftheria Paizanou
Five professional bodies are ringing a bell in the event that the European Directive establishing rules to prevent the abuse of shell companies for unfair tax purposes is adopted.
In a joint letter to the Minister of Finance Konstantinos Petrides, CIBA, Step Cyprus, ICPAC, the Cyprus Chamber of Shipping and CYFA call on him to proceed with the adoption of the Directive to take immediate measures to prevent the adoption of the Directive. They talk about a possible conflict with the primary law of the European Union (EU), as well as causing negative effects on the Cypriot economy.
What the Directive provides for
The EU Directive establishes rules to prevent the abuse of virtual entities for tax purposes and to amend Directive 2011/16/EU." The aim of the Directive is to tackle the abuse of virtual entities for tax purposes and to adopt a stronger and EU-wide approach against tax avoidance and evasion. The directive ensures that entities in the European Union that have no or minimal economic activity cannot benefit from tax advantages and do not place a financial burden on taxpayers. The Directive will help protect the level playing field for the vast majority of European businesses, which are key to the EU's recovery, and ensure that ordinary taxpayers do not suffer an additional financial burden from those trying to avoid paying their fair share.
The abuses
According to the EU, shell companies can have useful commercial and business functions, but some international groups or even individuals abuse them for the purposes of aggressive tax planning or tax evasion. In fact, some businesses direct financial flows towards virtual entities in jurisdictions with zero or very low taxes or in jurisdictions where it is easy to avoid paying taxes. Also, some individuals can use virtual entities to protect assets and real estate from taxes, either in their country of residence or in the country where the assets are located.
It is worth noting that last month the European Parliament had proposed broadening the scope of the legislative proposal and called for the sanctions to be tightened, with the aim of combating the use of letterbox companies for tax purposes. According to a report adopted, MEPs had called for the European Commission's proposal to be amended, slightly lowering the thresholds below which a company would be exempt from reporting requirements under the directive, as well as providing for sanctions to be imposed on companies with zero or low revenues. Moreover, in relation to sanctions, MEPs argue that they should amount to at least 2% of a company's revenue in the relevant tax year due to incorrect declaration, and 4% of revenue if they relate to false declarations. In the case of zero revenue or revenue below the threshold set by the competent national tax authority, the penalty should be based on the total assets of the undertaking.
The risks that arise
According to the letter, those affected argue that if the relevant European directive is adopted, a number of negative consequences will occur. Among other things, they consider that there is a possible violation of EU primary law, including the principles of subsidiarity by relinquishing the state sovereignty of the Republic of Cyprus, the Principle of Proportionality, EU rights, including the freedom of occupation, the right to work, the freedom to conduct a business and the right to property.
At the same time, they warn of losing investments and taxation to the Republic and moving them to other member states. At the same time, they argue that Invest Cyprus' effort to attract and maintain foreign investments is hampered as the directive radically hinders the physical presence of businesses in Cyprus.
According to those affected by the Directive, there will be an inability to provide services, companies, trusts and cooperatives as they will be considered as shell companies, and potential participants in tax avoidance procedures. In addition, they note that there is a possibility of inability to implement bilateral double tax treaties.
They also say there is a risk of moving investment mechanisms and schemes, including trusts, to other countries outside the European Union, such as England, the United Arab Emirates and Singapore. The reservations focus on specific provisions of the Directive relating to the indicators of the existence of shell entities, such as the absence of a bank account in the name of the entity in an EU Member State, the absence of at least five full-time employees in terms of the turnover of each enterprise, the absence of a specific place of exclusive use of the conduct of business for each entity; as well as the absence of at least one full-time manager with expertise in the work of each company.
As the five agencies argue, the definition of shell entities included in the EU Directive is vague and there is a lack of proportionality, targeting entities used for fully legitimate purposes, both in the context of planning and executing business transactions and in the context of the protection of assets, individuals and family. In fact, they are calling on the relevant ministry to examine whether the directive is compatible with other EU legislation. It is noted that from time to time the affected people have transferred their positions and reservations to the technocrats of the competent ministry.
They express readiness to help
The organizations that sign the letter to Mr. Petrides express their readiness to strengthen the work of the Republic, to prevent adverse effects but also to observe the principle of legality. In addition, they call on the Cypriot authorities to take immediate action. "In the context of observing the principle of transparency as well as for the purpose of informing the members of the organizations, on this very important issue, with direct negative consequences for the economy of Cyprus, the organizations will inform their members," they add. In conclusion, they emphasize that they are at the disposal of the Ministry of Finance, with the sole aim of observing the Principle of Legality, within the framework of the decisions of the Court of Justice of the EU and ensuring the health of the country's economy.
The letter has been shared with House Speaker Annita Demetriou to assist the Parliament's work. It was also sent to Attorney General George Savvides, due to the legal issues and risks they claim arise.
