On December 22 2021, the European Commission presented a proposal for a directive laying down rules to prevent the misuse of shell entities for tax purposes and amending Directive 211/16/EU of February 15 2011 on administrative cooperation in the field of taxation.
In Portugal, this proposal was little noticed, perhaps because a directive regarding a global minimum tax rate was issued on the same day. However, it could have a great effect on EU member states’ tax systems – and particularly on Portuguese tax litigation matters.
What the proposal means
Under the proposal, qualifying ‘shell’ companies will be requested to report their economic substance on their tax returns. The information provided will give member states’ tax authorities an overview of the company and enable them to assess whether an audit should be conducted.
If the relevant criteria are not met, treaty and directive benefits may not be granted. Furthermore, all this information is shared between the tax authorities of the member states.
In the EU, at present, only a few member states have national rules to test and audit the economic substance of EU companies.
Although member states have a common general anti abuse rule (GAAR), and other anti-abuse rules to deal with abusive structuring, following the application of the new proposal, from January 1 2024, member states will apply common rules on the misuse of shell companies together with a framework for administrative cooperation regarding the economic substance of companies.
In preparation for this, tax authorities are now ‘testing the field’ for the upcoming rules, leading to an increase in litigation between tax authorities and taxpayers.
For example, last month, Spanish tax authorities denied an internal withholding exemption on the payment of interest after receiving information from the Dutch tax authorities that the Dutch company receiving the interest did not comply with Dutch internal substance rules.
In Portugal there are no substance requirement rules yet. The lack of substance of holding and financial companies is generally deemed by courts as a sign of an abusive structure, mainly when tax authorities apply a specific or targeted anti-abuse rule or GAAR.
Recent case law
Recent case law regarding the Portuguese GAAR is becoming increasingly clear regarding the proof of the GAAR requirements by the tax authorities: “tax authorities do not have to prove ‘abusive’ intent by the taxpayer” but simply “prove that the structure does not have a rational purpose in the light of the legal system” (January 2022 decision of the Supreme Administrative Court).
Recent Portuguese GAAR case law suggests that courts are tending to increase the burden of proof for the taxpayer and soften the investigation duty of the tax authorities, following the international trend.
However, the existence of these rules also means that Portuguese tax law will have to provide more legal certainty regarding the definition of ‘economic substance’ which is not clear today.
Having minimum substance indicators, presumptions and exemptions previously established in European law and transposed to the national legal system may give more certainty to taxpayers when developing their business structures as well as bringing new and easier control tools for the tax authorities. In Portugal it is expected that new litigation will arise regarding compliance with the ‘shell’ standards of the directive proposal.
CJEU clarification needed
Regarding anti-abuse rules litigation, it will be very important for the Court of Justice of the EU (CJEU) to solve the following question: is the ‘shell’ standard in the directive proposal the same as the standard in the GAAR of the anti-tax avoidance directive and the CJEU’s interpretation of the principle of abuse?
Or better still: can we decide if a structure is abusive under the GAAR, using the substance requirements of the directive proposal? In Portugal, courts might lean towards a decision favourable to the tax authorities on the application of any anti-abuse rule if the structure has a company previously marked as ‘shell’ for the purposes of the directive proposal.
It is unclear where this path might lead. Nonetheless, we must keep in mind that, in abuse matters, the burden of proof remains with the tax authorities and cannot be reversed to the taxpayer without breaching the principle of proportionality. According to the ECJ’s analysis: “The imposition of a general tax measure automatically excluding certain categories of taxpayers from the tax advantage, without the tax authorities being obliged to provide even prima facie evidence of fraud and abuse, would go further than is necessary for preventing fraud and abuse” (Equiom and Enka, Case C‑6/16, paragraph 32).
Miguel Teles
Associate, Morais Leitão
