PO Box firms soon to be doomed?
On December 22, 2021, the European Commission took concrete steps to combat the establishment of PO Box firms to avoid or evade taxes.
More specifically, the Commission has put forward a proposal that broadly implies that various (tax) advantages be taken away from PO Box firms. Or that they could even be penalized, in order to discourage their founders.
Reason and goals of proposal
The rationale and purpose of the proposal can both be traced to certain characteristics of the PO Box firms themselves.
Indeed, PO Box firms are legal entities without minimal substance and economic activity, used for improper tax purposes, such as tax evasion and avoidance.
There can certainly be valid reasons for the use of such entities. Still, there is a need for further measures to address certain situations. Situations where taxpayers evade their tax obligations or act contrary to the very purpose of the tax code by misusing companies that do not engage in real economic activity.
Indeed, the result of such situations is to reduce the total -tax payable by taxpayers. This, in turn, then leads to a shift in the tax burden at the expense of honest taxpayers.
If these situations are not effectively addressed, they create an environment of unfair tax competition and unfair distribution of the tax burden.
Indicators and possibility of dispute
The proposed new measures will establish transparency standards for the use of P.O. Box Firms so that their abuse can be more easily detected by tax authorities. Using a number of objective indicators regarding income, personnel and business premises, the proposal will help national tax authorities detect entities that exist purely on paper.
It should be noted, however, that entities that do not meet all the substantive indicators will still have the opportunity to rebut the presumption that they are a shell company. In this regard, they will have to present additional evidence, such as detailed information on the commercial, non-tax reason for their establishment, the profile of their employees, and the fact that decision-making takes place in their tax residence state.
Sanctions and entry into force
If a company is permanently considered a shell company, it will no longer be able to claim tax relief in the first place.
In addition, the Commission proposes that the various member states determine penalties that can be imposed in the event that companies fail to comply with, for example, the obligation to communicate more information. Those penalties will have to be effective and dissuasive as well as proportionate.
Whether those penalties will be administrative or criminal remains to be seen, although the European Commission has already preliminarily stated that at least an administrative penalty amounting to 5% of the firm's turnover should be provided for.
Once member states reach an agreement, the proposed Directive would come into force on Jan. 1, 2024.
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