Reporting of aggressive tax planning, transparency register and the “EU Anti Tax Avoidance Directive” happening right now.
In my career in international tax, that is now spanning over 15 years I have seen many changes, upgrades and developments. Every time something “new” got introduced we thought: “This is the end of it, they (the OECD, the EU, the local revenues, the courts etc) cannot possibly put more control and compliance into the sector!” First, as it was difficult to imagine what would could possibly come next and secondly because we thought: “No client will ever accept this!”.
They have. And clients accepted.
Increased mobility = increase tax compliance
Somehow the development is logically. To follow along the development of the economy in general and along the immense mobility of businesses and persons. So, anyone wondering and even finding it unfair: The revenues are finding it also unfair that they lose revenue, so of course they will try to make it as difficult as possible.
Funnily enough my advice and approach has not changed too much over the last years. As I was always trying to assist clients with real structures and real operations. Surely with one of many benefits being a tax benefit, but if you play by the rules, there is nothing wrong with that.
The mobility of persons and businesses is an uncontrollable phenomenon that is playing in the hands of some countries currently, including Malta. This again is the world turning and countries being countries, having different advantages at different stages in history.
But that is my own philosophy, surely subjectively and surely benefitting my own peace of mind.
In any case, there have been updates again and this time, at least for me, they are as far reaching as never ever ever ever EVER before. Whereas the BEPS project made and is making sense to me, the following goes beyond what I think it justifiable – but I might be laughing about this statement in a couple of years.
Shall we start?
Reporting of aggressive tax planning
Put simply, this is the end of the client privilege. We have to report ANY cross-border structure, that could potentially be aggressive.
P O T E N T I A L L Y.
What does that mean? How to quantify aggressiveness? There are hallmarks from the EU to guide advisers what is POTENTIALLY aggressive.
Put simply: everything.
I can only see us not reporting, those clients who are thinking of relocating Malta or living already here. That will not only take this reporting away, it also brings a number of personal tax benefits, that I am happy to discuss personally. For any reporting there is form DAC6, which reports the “scheme” to the local tax office. What they (in our case the Maltese Inland Revenue Department) do with that information, we do not know.
See the hallmarks here:
Transparency Register – Who is the Ultimate Beneficial Owner (UBO)?
Introduced with the 4th and 5th Anti Money Laundering Directive and by courtesy of Panama and Paradise papers, the “UBO”, the ultimate beneficial owner of any limited company in the company registry of any EU member state has to be transparent to anyone with a “legitimate interest”.
Don’t ask me who has a legitimate interest and how he or she justifies that or not. It doesn’t matter anyway, because any accountant, lawyer, banker has access to the local system and anyone can find a person with such access, should one NOT be able to justify a legitimate interest. In that aspect: Any person who really wants to have access, will have access. Period.
What is a UBO?
“UBO” means NOT per se the shareholder but any natural person owning 25% of more of the company, directly or indirectly. Meaning, it does not matter if you use 3 Panama trusts and 2 Liechtenstein foundations between you and company in the registry: Through a certain form (in Malta it is the BO2 form) you will be visible. This form is mandatory for every new company formation.
Does the transparency register work?
Yes. I have tried it. One click and 5 EUR later, you have it all.
So if someone, despite, FATCA, CRS, the Panama/Paradise Papers database in place, is still bonkers enough to try to hide behind a certain structure: You have found your master, if you utilize an EU entity. Needless to say that many countries follow that example. We are very very transparent.
The Anti-Tax Avoidance Directive “ATAD”
The ATAD is the implementation of a good chunk from the BEPS initiative into the EU member state tax laws. It defines a minimum of what EU member states must provide for.
Legally speaking, this is also debatable, talking about “sovereignty in tax matters” for EU member states. But the politicians decided, and the law makers were asked to put it into reality and since the first of January 2019, every EU member state needs to have the following a minimum of protective tax laws in place.
Some countries, including Malta, cannot and should not be used as “bridge” countries anymore.
Wishful thinking vs. reality
For the bigger countries and /or those with traditionally higher taxes, those measures are being put in / or are already in place to protect their tax base. And for the “lower tax” countries they bring nothing, quite the contrary: they supposedly work to a disadvantage to those “low tax” countries, as they supposedly shall make the choice of jurisdiction less easy, less flexible through more bureaucracy, more rules, more formalities, new taxes and less “less affaire”.
If this works or not, will tell us time. I have my own thoughts on that, which I will share over the next weeks.
Anyway, let us get technical. What has the ATAD in its basket for us.
Exit Tax (from 01/1/2020 latest)
This affects companies (not individuals) which shift assets from one country to another. This is not only physical assets, i.e. cars or goods. This can be also intangible assets like rights or contracts. Whereas those assets are rather obvious, it becomes more interesting with assets where you, as the business owner, do not even know they exist. Those are called “immaterial assets”, and believe me, this is where the fun starts.
Example: You have company in Germany. And you are thinking of expanding the business through Malta. You want to do everything right. You open a real office, you hire a real director and you plan to physically work from this office. You have a client in your company in Germany and this client is international and you want to start servicing the client from the Maltese company. You make a contract and the Malta company starts servicing your client. By the book? Don’t you think? Think again.
What you may not have noticed is, that you have transferred an asset from Germany to Malta. Hang on? What asset? The profit chance.
This is a classical “immaterial asset”. The Malta company could be seen as a “low risk distributor”, as it got this lucrative client without own or with only low own risk. Readily served on a silver plate, and most probably for free.
That is exactly where the exit tax might grab you. You will have to establish for how much you would have sold the “PROFIT CHANCE” (the asset) to an unrelated third party. This is the value of the asset and this what exit tax will be payable upon when the asset is transferred to another country. The “exit of the asset”.
This can be tricky and abstract because: How do you value something that you don’t even know it existed?! Exactly.
Value = future profit = future loss of tax revenue.
Switch over rules: Note the switch over rules were eventually not introduced as part of the ATAD. I am still leaving themn then in as similar rules will apply very soon. Be prepared.
Interestingly enough, a very similar context and effect will also be delivered by the implementation of the upcoming “MULTILATERAL INSTRUMENT”, which is sort of looming on the horizon and is waiting to be brought into international tax law.
Almighty participation exemptions
Some countries apply a relaxed application of their participation exemption or similar beneficial “tax / capital” import mechanics.
Meaning, that a dividend from (example) Panama is exempt as long as very minor criteria are being met.
Whereas the tax free “import” is not so much of a problem, the subsequent tax free treatment between Malta and any EU member states is a problem. As the same “Panamesian” non-taxed dividend could be routed on to another EU country and that other country would not know that the original dividend came from a country that it would not have granted the tax exemption in the first place.
Smart tax avoiders
As smart tax avoiders might think: “Nice, Malta does not tax active dividends from an offshore company and dividends from Malta to Germany are also tax exempt, so I am am just SWITCHING OVER the dividend.” – nope, you don’t. Not anymore at least, under the ATAD.
Personally I never recommended such structures anyway, not only for tax purposes, but mainly for bank compliance purposes. The “source of funds” are much better explained if one can show a clean tax accounting trail instead of a letter box company in the caribbean.
Nevertheless, those type of dividends will have to be accounted for and brought to charge to tax under the ATAD.
In many, many articles over the last 5 year I have always preached: No-tax setups are dead. From a legal and from a practical point of view. Just get used to it.
Interest limitation: “I have a very good idea”, tells the CFO to the CEO of an international company. “Why not lending money from Malta to Germany and charge 10% interest!” “Brilliant”, replies the CEO, “let’s charge 20% interest!”.
(Possible) Historical failure
This example would probably not have even worked 3000 years ago under Roman protectorate. But you get the drift. A loan is potentially a viable instrument to also avoid tax. Especially when the amounts involved are huge, when even 4% interest or something more “arm’s length”, can mean a lot of money. Lost on one side, gained on the other. Moved in a matter of days.
Intercompany loans under fire since a long time
We probably have to ratify at this point, that intercompany loans have undergone already a lot of scrutiny over the last couple of years. It’s no longer just a one page loan agreement and charging whatever interest you want.
Already and before the ATAD there have been transfer pricing rules, and the question if the loan makes sense, why does it have to be provided from the related company in a low tax jurisdiction and why not from the local bank? Would it not have been cheaper from a third party? Does the receiver really need the money? All of those questions, and similar, existed BEFORE the ATAD and still companies kept on lending and lending and lending.
EU says NO.
So the EU said: “Ok, we’ve had it. Even so you comply with all the red tape we have already attached to intercompany lending, it still seems to be SO interesting for you, that we step up our game again. We introduce an interest limitation. We LIMIT the amount of INTEREST you are allowed to pay over one year.”
Everything on top of that is artificial. The current limit is 30% of the EBITA (earnings before interest taxes depreciation and amortization) – which I think it still quite high!
In any case: I never recommended any such structures to any client therefore my clients should not be really affected by these new rules. Even if I repeat myself: Since well over 5 years I have been preaching: intercompany loans as a tax avoidance instrument are dead.
The GAAR – the General Anti Abuse Rule(s): As we know, businesses change, strategies change and also the cleverness ot tax advisors change. And lawmakers cannot cater for any such change with a new legislation process.
Therefore, just in case a smart business with an even smarter tax advisor finds one or more loopholes which is/are NOT covered by the ATAD: If such loophole or the mechanic has mainly an abusive nature and has nothing to do with economic reality or again is only applied to achieve a tax benefit – then, even so not tackled or caught by the ATAD, a general rule or general rules to combat such abusive strategy, a GENERAL ANTI ABUSE RULE need(s) to exist in all EU member state.
No tax advantage or loophole is ever left on purpose or to be discovered or used, is what the GAAR is also trying to tell us.
CFC RULES – Controlled Foreign Company Rules: Being German and having a lot of interaction with German tax law, for me it is very difficult to understand why in ONLY in 2019 (ONLY) the concept of CFC was made mandatory in the EU.
The inventors of CFC
In Germany, a much stricter version of the CFC rules that are now becoming mandatory for EU member states were introduced in 19 SEVENTY THREE. SEVEN THREE. Over 40 years back. Quintessentially those type of rules are the most logical consequence and answer to low tax countries:
The high tax country says: If you are a tax resident in MY country, and you set up a company in another country and pay taxes in that other country and if that other country charges a lot less in taxes than my country, I will make sure that your setup in that other, the low tax country, is real.”
How is that not fair and normal? I mean, the country of which you are resident and of which you use the infrastructure could also just say “No”. Just make low tax countries illegal. But it does not. It just tells you: “Be real. Live what you claim and I will allow you the tax benefit.“
This is also not a philosophical or idealistic question. It is just COMMON sense.
So what the heck is CFC?
Sorry, what are CFC rules exactly? Basically a set of rules that prescribe how to run a company in a low tax country. Have substance, have an office, have a principal, commercial purpose, have a director, have staff, create real values. Normally there is a benchmark or threshold to trigger “dominating influence”.
Meaning, if you happen to own 5% of an offshore fund in Cayman, you will not be made to rent an office in Cayman.
But if you own 50% (example) of a company in Malta (while living in the EU) than you have to have substance in place, otherwise, your local tax man will “look through” the structure and will most probably attribute the income to you personally as if the the CONTROLLED FOREIGN COMPANY was not there.
Mind you that in some countries the threshold is as low as 20% so check out the local rules before setting up company in Malta.
Since I am in the tax business (15 years and counting) I have ALWAYS advised client to have the substance in place. Strikes me proudly that the lawmakers are now catching up. We are actively helping clients to have the proper substance in place.
A lot more to do, to follow and to regard. Move to Malta and forget about it.