Skip to main content

Luxembourg Frowns on EU’s Shell Company Initiative

10th February 2022

The EU Commission’s plan to target shell companies isn’t a hit with every country in the bloc. Luxembourg’s finance ministry recently claimed the Commission’s proposal “oversteps the mark.” What is Luxembourg so upset about? On December 22, 2021, the EU released a draft law that penalizes shell companies for aiding in tax avoidance or evasion. Shell companies have zero economic substance and exist only for strategic tax-avoidance purposes. But proving a company exists solely for tax avoidance is complicated, so the EU Commission has set up three levels of criteria—and if a company meets even one of them, it’s flagged as shell company and as a consequence, could be denied certain tax benefits. If it meets all three criteria, it will lose tax benefits and also be subject to additional reporting requirements.  

The EU will determine a business a shell company by examining passive income, cross-border transactions, and employment: Any company that generates more than 75% of passive income is flagged. Any company that does most of its business—and generates most of its income (at least 60%)—through cross-border transactions is also suspect, and if day-to-day operations have been outsourced over the last two years, then the company will be called out. If member states agree on the EU’s proposal, it would go into effect in 2024. 

Luxembourg’s Ministry of Finance is worried that companies could be misidentified, claiming the proposal would target “companies with real economic utility” and weaken the EU’s competitiveness overall. But that doesn’t mean Luxembourg isn’t committed to preventing base erosion and profit shifting. In fact, Luxembourg’s tax administration plans to hire 500 employees over the next five years, not because of the EU’s shell company directive but because it’s preparing to handle the changing tide in global tax—a sign that it’s not just shell companies that have something to worry about.