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Over a year ago, we wrote an article called “She sells corporate shells” about the EU Commission’s proposal for a directive imposing new rules to prevent the misuse of shell entities for tax purposes.
In January 2023, the European Parliament approved the European Commission’s draft directive known as ATAD 3 to prevent the misuse of shell entities for tax purposes.
The directive includes several indicators of minimum substance to assess if an entity has no or minimal economic activity, which could result in the denial of certain tax benefits based on treaties or EU directives.
Unlike Pillar 2, ATAD 3 is not limited to international or domestic groups with global revenues exceeding EUR 750 million, meaning it will impact many small and medium-sized enterprises with an EU presence, increasing the administrative burden.
The European Council is not bound by the amended text and may still amend or decide not to issue the directive.
The Council will have the final vote, and ATAD 3 will be on the agenda of the European Council Ecofin meeting of 16 May 2023.
Member States are meant to transpose ATAD 3 into domestic law by 30 June 2023, and the directive would apply as of 1 January 2024, although the European Commission may relax the timeframe in light of the short timeframe for final adoption and implementation.
ATAD 3 targets passive undertakings that are tax resident in an EU Member State and deemed not to have minimum substance.
The directive aims to bring more entities into scope by lowering some gateway thresholds but clarifies that the intra-group outsourcing of the administration of day-to-day operations and decision-making on significant functions is not considered a gateway.
Certain entities, including UCITS, AIFs, AIFMs, and certain domestic holding companies, will benefit from a carve-out and be exempt from reporting obligations. However, entities owned by regulated financial undertakings that have as their object the holding of assets or the investment of funds did not retain the proposed amendment to introduce a carve-out.
If an entity passes all three gateways, it will have to report certain information regarding indicators of minimum substance through its annual tax return.
Failure to comply with the reporting obligation triggers a penalty of at least 2% of the entity’s revenue, and for false declarations, an additional penalty of at least 4% of the entity’s revenue would be due.
If an entity lacks substance in one of the indicators or fails to provide adequate supporting documentation, that entity is presumed to be a shell entity. However, an entity has the right to rebut this presumption.
If the entity cannot rebut the presumption, it will not receive a certificate of tax residence from its EU Member State of residence, resulting in the disallowance of any tax advantage gained through bilateral tax treaties of the entity’s resident jurisdiction or through EU Directives.
Regardless of whether the entity is classified as a shell, the reported information will be exchanged automatically.
Additionally, the European Commission is working on a new taxation package, including the Securing the Activity Framework of Enablers initiative and the FASTER proposal, aiming to introduce a new EU-wide system for withholding tax to prevent tax abuse in the field of withholding taxes.
The implementation of ATAD 3 and other initiatives to restrain the use of shell entities and aggressive tax planning may have an important impact on existing structures, and entities should be carefully checked on a case-by-case basis before the relevant date of entry into force.
If you have any queries about this article, or the matters discussed more generally, then please do not hesitate to get in touch
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.
Norway has seen a rise in the number of its billionaires leaving the country, in response to increased taxes.
The Norwegian government has implemented stricter rules for taxing its citizens, including the abolition of the five-year period for exit taxation of unrealized gains on shares and other assets.
This means that any gains on assets such as shares will be taxed immediately upon transfer or sale, rather than being taxed over a five-year period.
Additionally, the rules will be extended to include transfers of shares to close family members living abroad.
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As a result, many of Norway’s wealthiest individuals, whose net worth exceeds 1 billion Norwegian kroner (approximately 100 million euros), have reportedly relocated to countries such as Switzerland.
One of the main reasons for this trend is the significant difference in tax rates between Norway and other countries.
According to an analysis by the Heritage Foundation, the top tax rate in Norway is 47.8%, while the country’s total tax burden is 39.9% of total domestic income.
In comparison, Switzerland has a top income tax rate of only between approx. 25% to 40%, and its total tax burden is 28.8% of total domestic income.
Moreover, corporate profits are taxed at 28% in Norway, and dividends are taxed again at 28% income tax rate, leading to a de facto tax of 48.16% on company profits.
In contrast, Switzerland has lower profit taxes (between approx. 12% and 20%), lower income taxes (dividend privilege; between approx. 13% and 30%), lower wealth tax (0.1% to just under 1%), and certain cantons have regulations defining the maximum tax burden to prevent confiscatory taxation in special cases (especially in the case of large non-income-producing assets).
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The Swiss tax system is generally considered advantageous for high-net-worth individuals compared to other countries for several reasons.
First, Switzerland’s federal, cantonal, and municipal tax system allows for relatively low tax rates, especially for high-income earners.
In addition, Switzerland has favorable tax treatment for certain types of income, such as dividends and capital gains.
Dividends from significant shareholdings (10% or more) held as part of an individual’s private assets are subject to preferential taxation.
Capital gains from the sale of private assets are generally tax-free, with an exception on capital gains on Swiss real estate, which are taxed under a special regime.
The Swiss tax system is also decentralized, with each canton having the power to set its own tax rates, leading to a high degree of tax competition between the cantons. This can result in lower overall tax rates for individuals and companies.
Additionally, Switzerland has strict banking secrecy laws that provide wealthy individuals with a high degree of privacy and discretion in their financial affairs, and an extensive network of double taxation treaties that help avoid or significantly reduce double taxation and foreign withholding taxes on dividends.
Switzerland is also known for its high standard of living, excellent infrastructure, and high-quality health and education systems, making it an attractive location for wealthy individuals seeking a stable and prosperous environment.
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In conclusion, the increase in taxes in Norway has led to a rise in the number of billionaires leaving the country.
Switzerland has become a popular destination due to its advantageous tax system, which allows for relatively low tax rates, tax competition between cantons, strict banking secrecy laws, an extensive network of double taxation treaties, and a stable and prosperous environment.
Facing higher taxes in Norway? Don’t wait – see how relocating to Switzerland could dramatically reduce your tax burden and protect your wealth. Get in touch with an expert and take control of your finances now!
Facing higher taxes in Norway? Find your international tax expert here to explore tax-efficient solutions. Considering relocating to Switzerland? Get expert advice on Swiss tax benefits and start protecting your wealth today!
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.