Freeports, letterboxes and shell companies | AML | EPRS

On 18 October 2018 the thinktank of the European Parliament (EPRS) published “Golden visa, free ports and letterbox companies from a money laundering and tax evasion perspective“.

Golden visa, free ports and letterbox companies from a money laundering and tax evasion perspective

Posted by IMPT
October 18, 2018
Written by Ron Korver

Taxation and money laundering are hot topics these days. Following numerous scandals such as the ‘Lux leaks’ revelations, the ‘Panama Papers and the continuing banking scandals, many people ask whether the current system in which some companies and the super-rich get away with low or zero taxes – whereas ordinary citizens have to foot the full tax bill – is still fair. With public expenditure under pressure, some feel they have to compensate for the ‘race to the bottom’ in the area of corporate taxation to keep the public sector going.

Today’s meeting of the European Parliament’s Special Committee on Financial Crimes, Tax Evasion and Tax Avoidance (TAX3) will be devoted to ‘golden visa’, ‘free ports’ and ‘letterbox companies’ from a money laundering and tax evasion perspective. During the meeting on 18 October 2018, in-house researchers from the EPRS Ex-Post Evaluation Unit and the European Added Value Unit will present three in-house studies to TAX3 Members.

The first study, on citizenship by investment (CBI) and residency by investment (RBI) schemes in the EU analyses the state of play and issues surrounding citizenship and residency by investment schemes (also known as ‘golden passports’ and ‘golden visas’) in the EU. It looks at their economic, social and political impacts and examines the risks they carry in respect of corruption, money laundering and tax evasion. The study compares the schemes offered by several EU Member States.

The second study provides an insight into the money laundering and tax evasion risks in connection to free ports, particularly those that function as (semi-) permanent storage for high value goods, such as art, antiques, diamonds or luxury wines. It provides an appreciation of the effectiveness of the Union Customs Code, the EU Anti-Money Laundering Directive and the Directive on Administrative Cooperation in addressing these risks and makes the connection to the unregulated market of ‘investment art’. Part of the research consists of a case study into the legal and supervisory framework at ‘Le Freeport’ in Luxembourg.

The third study gives an overview of shell companies in the European Union, the main common feature of which is the absence of real economic activity in the Member State of registration. The study aims to contribute to a better understanding of the phenomenon of shell companies by seeking to estimate the incidence of such companies, by means of a set of ‘proxy’ indicators at Member State level. It also explains the main risks associated with shell companies and current policies aimed at mitigating the risks identified.

The three studies contribute together to provide the TAX3 Committee with a comprehensive overview of the policy options for dealing with tax avoidance in the EU.

Shell companies
The third report gives the following definitions in regard of ‘shell companies’:

Anonymous shell companies: this type of ‘shell’ company provides anonymity as a key element, while simultaneously guaranteeing control over the shell company and its resources. The ultimate beneficial owner (UBO) remains hidden behind this company, or behind a chain of interconnecting shell companies, often in several jurisdictions. This type of company has featured prominently in many International Consortium of Investigative Journalists (ICIJ) reports over the past years, not least those based on the Panama Papers leaks. Such companies are often mentioned in relation to tax evasion, corruption, money laundering and terrorist financing.

Letterbox companies: this second type of ‘shell’ company, also referred to as a ‘mailbox’ company, is generally a company registered in one Member State while its substantive economic activity takes place in another Member State. These companies are sometimes used to circumvent labour laws and social contributions in the Member State in which the substantive economic activity is taking place. These ‘letterbox’ or ‘mailbox’ companies are generally mentioned in the context of circumvention of the Posting of Workers Directive.

Special purpose entities (SPEs): this third type of ‘shell’ company refers to entities whose core business consists of group financing or holding activities. These are entities with no or few employees, little or no physical presence in the host economy, and whose assets and liabilities represent investments in or from other countries. In this context, SPEs are usually mentioned with regard to their possible use in aggressive tax planning.

The main common feature of the above three types of shell company is the absence of real economic activity in the Member State of registration. This generally means that such companies have no (or few) employees and/or no (or little) production and/or no (or little) physical presence in the Member State of registration.

It is interesting to see what ‘anonymous’, ‘absence of real economic activity’ and other elements of the definition mean.

Over Ellen Timmer, advocaat ondernemingsrecht @Pellicaan

Verbonden aan Pellicaan Advocaten, http://www.pellicaan.nl/, kantoor Rotterdam, telefoon 088-6272287, fax 088-6272280, e-mail ellen.timmer@pellicaan.nl ||| Weblogs: algemeen: https://ellentimmer.com/ || modernisering ondernemingsrecht: http://flexbv.wordpress.com/ ||| Motto: goede bedoelingen rechtvaardigen geen slechte regels
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