In recent years, the tax environment has been going through major changes and greater attention has been paid to the taxation of multinational groups and the prevention of aggressive tax planning within foreign structures, including holding, licencing and financial ones.
The shift in the legislation and the approach of the financial administration
The extension of reporting obligations (TP appendix, reporting of tax-exempt income, record of ultimate beneficial owners) or extension of automatic information exchange between tax administration authorities. These are only some of the measures, which contributed to frequent controls and reviews of foreign structures by the tax administrator, namely in certain locations. These do not just include tax havens, but also EU countries. More and more often, the tax administrator uses generally available information they “google” on the Internet – company presentation on its website, articles in the media, databases of entities or map portals. As part of the tax controls, the tax administrator can therefore have stronger arguments for the denial of the title for the use of tax advantages, including e.g. the tax deductibility of expenses, tax exemption or application of treaties for the avoidance of double taxation. Individual transactions or the structure as such can be challenged as well.
Minimum requirements for sufficient economic substance
In recent years, we can see that more and more countries have introduced or are introducing the substance requirements, i.e. the minimum requirements for sufficient economic substance, namely for companies with passive income (dividends, interest, licence fees). Such requirements may include e.g. a certain number of employees, their qualifications, sufficient own space or capital adequacy ratio of the company. In December 2021, the European Commission also presented the minimum requirements for substances within the EU with the aim of preventing the abuse of “shell entities” (empty shells without economic substance) for tax purposes. The new rules should become effective on 1 January 2024 but according to the proposal, the two preceding taxation periods should also be taken into consideration.
The proposal was presented in more detail in the January article Proposed EU directive regarding minimum substance requirements.
If you pay dividends, interest, licence fees, lease or outsourcing of services in a foreign country, it is high time you review the settings of foreign structures, not only with regard to the new requirements, but also in the context of the entire group’s business plans, especially if the restructuring was carried out some time ago. Also, if you are planning an expansion to foreign markets, entry of an investor or considering an IPO, you should not wait for the due diligence findings, which will reveal the tax risks.