ALFI welcomes the European Commission public consultation on fighting the use of shell entities and arrangements for tax purposes and is pleased to hereby provide its views in this respect. ALFI, as the representative of the Luxembourg investment fund and asset management industry, supports the EU initiatives to fight tax avoidance and aggressive tax planning.

As a preliminary remark, ALFI notes that this public consultation does not provide for a clear definition of “shell entities” nor does it clearly detail the type of entities that would fall in the scope of any new legislation.

ALFI observes that, as described in the Study of the European Parliamentary Research Service of October 2018 that has identified three possible categories of “shell entities” i.e. 'anonymous shell companies', 'letterbox companies', and 'special purpose entities', there is a lack of common understanding on the meaning of a “shell entity” so that the scope of the consultation may be open to interpretation, as well as a lack of available data on shell entities in the EU so that the scale of the issue is unknown. Further information should therefore be gathered and clarification should be provided as to the exact objective being pursued.

One of the first questions of the consultation refers to the possibility that the existing legislation might be insufficient to take into account the situation of “shell entities” and to tackle any harmful consequences of their existence. On that point, ALFI is of the opinion that the legislation that was passed over the last 7 years, in particular DAC as amended and ATAD as amended, as well as the one that is upcoming, notably stemming from the OECD work dealing with the challenges of the taxation of the digital economy, represent a major step forward in the fight of anti-tax avoidance and on tackling aggressive tax planning. ALFI thus believes that before implementing any new legislation, it should first be ensured that the existing rules, and in particular the general anti-abuse rules as provided for by ATAD, are applied and effectively fulfil the objectives for which they were introduced. In this perspective, ALFI supports an approach whereby the impact of existing and applicable legislations is reviewed to evaluate how they perform on their own and in combination with other related pieces of legislation and measures are taken to ensure that information already available is effectively used (Please refer to section I of the detailed analysis here below).

Such an approach should be an integral part of the process undertaken through this consultation. It would help in the definition of the type of measures (directive, recommendation, or best practices) that would be required and would hence contribute to a robust and stable framework for industries, taxpayers and national tax authorities.

This is also of particular importance if one considers that any new legislation entails administrative efforts and related implementation costs for stakeholders, among which the investment fund and asset management industry.

With regard to the industry, ALFI would like to recall that the investment fund and asset management industry is a highly regulated industry. UCITS, alternative investment funds and their affiliates, as well as investment managers and management companies, operate in accordance with EU directives and regulations. Their objective is to raise funds from investors, invest these funds in accordance with their investment policy and provide investors with a return on their investment. They are tax-neutral entities that generally operate on a pan-European basis and are used for pure investment purposes. They provide a key platform for EU and non-EU investors to channel capital in particular to EU entities in a regulated manner, under strict investor protection rules governed by EU directives, and thus play a key social and economic role in this context.

In terms of substance, in order to be authorised in Luxembourg as well as in other Member States, the operational set-up of investment funds and investment fund managers has to comply with the rules set by the national competent authority. The substance required under EU and any applicable domestic regulatory rules correspond to the economic substance and should therefore also be recognised for tax purposes.

The investment fund industry is thus concerned that any new legislation resulting from this consultation that would not consider the specific legal, regulatory, operational and tax features of investment funds, investment fund structures and investment fund managers could ultimately harm the investment funds’ sector. Accordingly, based on the specificities of the investment funds industry, ALFI calls for a carve-out of all investment funds (UCITS and AIF) and of investment fund managers and management companies from any definition of “shell entities”.

ALFI is also of the opinion that any action taken in relation to “shell entities” should avoid a “one size fits all” approach and the introduction of fixed criteria without any consideration for complex and diverse realities. Any new legislation should take a global economic approach to the activities carried out by tax neutral entities usually operating on a pan-EU basis and used for pure investment purposes that are included in investment fund platforms and should not consider them as “shell entities” as long as they are not part of wholly artificial arrangements and they carry out genuine economic activities as outlined through the case law of the Court of Justice of the European Union.

Read the full ALFI response HERE

Press release by ALFI

Publié le 31 août 2021