Abuse, Shell Entities and Right of Establishment: A Plea for Refocusing Current Proposals and Achieving Deeper Coordination within the Internal Market

Abstract

This article aims at identifying the most relevant shortcomings of any initiative of fighting against abuse of the right of establishment on the basis of a priori set substance indicators. It does so by reference to the Unshell Directive proposal against the broader background of the need to ensure consistency between secondary and primary EU law. In the process, it provides constructive criticism on possible paths that could be explored to align possible rules with underlying aims, highlighting the need to distinguish the addressing of shell entities from issues of corporate residency and transfer pricing. It also addresses issues concerning legislative technique, such as the need for greater fine-tuning when cross-referencing pre-existing EU secondary law and on the merits of the tenuous distinction between gateways and substance indicators. From a substantive viewpoint, it then examines each gateway and indicator in depth, highlighting possible loopholes and criticalities, also in conjunction with the foreseen exclusions. The article then focuses on an assessment, essentially based on the primary law framework in light of the case law of the Court of Justice of the European Union (ECJ), of the system of presumptions envisaged by the proposal and on the tax consequences of an entity being labelled as a shell. The feedback also raises the issue of the multiplication of reporting requirements, suggesting the aggregation of all of them in a single modular instrument, which could be used – across the internal market – each time a taxpayer is required to report tax relevant data which are not directly related to a specific income tax return. Scrutiny is also devoted to the possibility of requesting tax audits and the potential issues that may arise from this practice if not reconciled with the broader DAC framework. Finally, the article raises questions from the perspective of the safeguard of fundamental rights in connection with the envisaged “minimum penalty” encompassed by the proposal.