STEP Response on the European Commission Consultation on Fighting the use of shell entities and Arrangements for Tax Purposes

The EU in the recent years has been relentlessly working on new tools to curb the use of abusive and aggressive tax structures by companies operating across borders.

The EU now has the shell companies in its crosshair, aiming to adopt a directive by the first quarter of 2022. The preparation of said directive has just finished the “Public consultation” phase, during which the EU consulted with the industry on the key issues. STEP took part in this consultation by filling out the questionnaire that the EU has prepared, and also published a paper on the taxation of the shell companies.

BékésPartners is a proud member of STEP, and as such we hereby share STEP’s response to the questionnaire issued by the European Commission.

The preparation of the response was a collective effort by the whole STEP, and although BékésPartners contributed to its preparation as member, the paper by no means is our own intellectual property.

Should you have any questions regarding the paper, the planned directive or the shell companies in general, do not hesitate to contact our experts below.

dr. Balázs Békés
dr. Balázs Horváth

STEP Response on the European Commission Consultation on Fighting the use of shell entities and Arrangements for Tax Purposes

About Us

STEP is the worldwide professional association for those advising families across generations. We help people understand the issues families face in this area and promote best practice, professional integrity and education to our members.

Today we have over 22,000 members in over 100 countries and over 8,000 members in the UK. Our membership comprises a range of professions, including lawyers, accountants and other specialists. Our members help families plan for their futures: from drafting a will or advising family businesses, guiding international families with cross border interests, and protecting vulnerable family members.

We take a leading role in explaining our members’ views and expertise to governments, tax authorities, regulators and the public. We work with governments and regulatory authorities to examine the likely impact of any proposed policy changes, provide technical advice and support, and respond to consultations.

STEP Response

The below responses in bold and underlined reflect STEP’s answers to the multiple choice questionnaire issued by the European Commission.


The key to this questionnaire is understanding the concept of “shell entity” and the extent to which shell entities continue to be used in spite of a significant number of measures taken by the EU over recent years.

It is understood that a “shell entity” in this context is an entity that, beyond having a registered office and a local domiciliation agent, has no other substantial presence, does not carry on its core activities in its country of incorporation or residence, and has no commercial rationale other than to avoid tax.

While this appears to be an initiative that builds on the Economic Substance initiative of the Organisation for Economic Co-operation and Development (OECD) and EU in relation to so-called “tax haven” jurisdictions, it should be made clear that the context for this initiative is very different. Each EU country has its own tax regimes and are thus not tax havens and that, given the various measures in place to ensure a commercial rationale for a structure, there is already generally a bedrock of substance built into EU structuring arrangements.

Thus the “Substance” and “Economic Rationale” are concepts that can only be tested in the context of a particular entity or structure. This appears to have been recognised in the context of the tax haven initiative (arising from BEPS Action 5) where the substance measures apply differently depending on the type of activity being conducted. The central question is whether a degree of definitive guidance along those lines is needed or desirable in an EU context.

While there will still be cases of letterbox entities that have escaped scrutiny, it is likely that these are in the minority and another series of measures, which will no doubt involve more onerous resources and cost, should not be introduced without being sure that there is a clear need and that the cost of the measures required to be taken will be materially outweighed by the benefit. Thus, while the economic substance measures imposed on the tax haven countries may be instructive, the policy objectives and considerations giving rise to them are very different from the current context, as per the introductory comments above.

The EU needs to take account of the international context and the stiff competition from the US, Asia and the offshore jurisdictions in providing an investor friendly environment. It needs to be aware of the need to operate on a level playing field and, to be pragmatic and realistic if it wishes not to damage its competitiveness and ultimately its own economic well-being.

The measures taken to date include:

  • Numerous Directives on Administrative Assistance, including automatic exchange of information in various areas, including the Common Reporting Standard (CRS), Exchange of rulings, and DAC 6
  • The two ATADs
  • Increased focus on transfer pricing principles
  • The Multilateral Instrument, in particular the principal purpose test
  • Rules on deductible payments made to non-cooperative jurisdictions
  • Beneficial ownership registers

The efficacy of these initiatives remains to be fully tested, in particular in terms of determining whether the significant cost incurred by tax authorities, intermediaries, and taxpayers is justified by the benefit in particular to the EU as a whole. Those tests should be fully carried out before another set of potentially artificial and costly measures are introduced with probably minimal additional benefit. If the existing rules work then these new proposals are not required. If they do not work, then they should be scrapped and proposals which do work should be introduced.

Problem definition, policy options and impacts

1. Despite the recent introduction of new measures against tax avoidance in the EU, tax avoidance seems to remain a problem.
Please consider the relevance of the following possible causes.
This is assumes that tax avoidance remains a problem. It would appear to be too early to form a view on this given the significant number of measures introduced over recent years. The question would be better posed as “Does tax avoidance continue to be achieved through the use of shell entities”?
  • Inadequate legislation on tax avoidance – Not relevant at all
  • Insufficient information of tax administration on potential tax avoidance structures – Not relevant at all
  • Insufficient capacity of tax administration to process the available information on tax avoidance structures – Relevant
  • Insufficient cooperation between EU Member States – Not relevant
  • Insufficient enforcement of existing legislation in Member States – Not relevant
2. The EU toolbox to fight tax avoidance has been recently enhanced and new tools came into effect from 2019 and 2020. With which of the following statements do you agree?
  • The impact of the new measures is not quantifiable yet. The EU should wait before taking new measures to fight tax avoidance until the impact of the existing measures is measurable.
  • While the impact of the new measures is not quantifiable yet, there is margin for improvement. The EU should take action to complement the existing framework as soon as possible.

3. “Shell” or “letterbox” entities is a term often used in the tax area to describe entities with little or no substance in their place of establishment or elsewhere. Do you agree with this definition?

  • yes
  • no
4. Please explain your reply.

This explanation of the term is inadequate in encapsulating the relative nature of the concept and the fact that the need for substance depends on the context and the nature of the activity carried out. In its true sense, a shell entity is one that has no commercial rationale and its existence is evidenced by only having a registered office and letter box. While some of these no doubt still exist, for the most part this is no longer a concept that applies in an EU context.

5. Please indicate the extent to which you agree or disagree with the following statements
  • Shell entities are used in the EU mostly for abusive tax purposes – Strongly disagree
  • Current EU rules in the field of taxation already provide tools to tackle aggressive tax planning schemes including through the use of shell entities – Strongly agree
  • Current EU rules cannot fully and effectively address the use of shell entities for tax avoidance purposes – Strongly disagree
  • While the EU legal framework includes adequate rules to address the use of shell entities for tax purposes, they are not properly implemented and monitored – Disagree
6. Can you provide examples of how shell entities are or can be used in an abusive manner for tax purposes?

As per our comments above in Q5 there is very little scope for the use of these which remains in the EU. The historical use of shell entities has largely disappeared, in particular so as to benefit from tax treaties, from EU parent subsidiary directive, or to reduce the tax base in other countries by pricing arrangements other than on an arm’s length basis.

7. In your opinion, to what extent the following elements could indicate that a certain entity could be considered a shell entity for tax planning purposes?
  • Use of trust and company service providers – Not indicative at all
  • Low number of employees – Neither indicative nor not indicative
  • Lack of own premises – Neither indicative nor not indicative
  • Lack of own bank account – Indicative
  • Passive income as main source of income (rents, interests, royalties etc.) – Neither indicative nor not indicative
  • Outsourcing of income generating activities – Indicative
  • Mostly foreign sourced turnover – Neither indicative nor not indicative
  • Majority of directors non-resident – Indicative
8. Can you indicate commercial rationales that justify the establishment and operation of shell entities?

If one applies a consistent meaning to the term “shell”, the answer is that, by definition, they do not have a commercial rationale. It is important that, not to be a “shell”, the entity has a commercial rationale and therefore has certain core activities to give effect to that rationale.

9. Which of the following business activity do you consider most likely to be performed by shell entities for tax purposes?

None of the business activities provided apply providing they are actually doing what they purport to do. However, each will require a certain (and varying) number of resources to carry out such activities.

  • Banking activities
  • Insurance activities
  • Financing/leasing activities
  • Holding and managing equity
  • Holding and managing real estate
  • Holding and managing IP assets
  • Headquarters services
  • Investment Fund Management
  • Shipping
  • Off-balance structures

10. Please provide examples of any other business activity you consider likely to be performed by shell entities for tax purposes. Please consider for instance situations where a company receives types of income not related to its main business activity (e.g. interests, royalties etc. received by logistics or sales companies).

The activities covered in Q9 would all be carried out to give effect to a commercial rationale and therefore could not be carried out by a shell company unless the core activities are simply not carried out or are carried out in a country that is not the country of incorporation or residence of the entity.

The essential characteristic of passive income is that the level of activity needed to generate such income, once the structure is in place, is low and requires regular monitoring rather than active day to day management. Provided that the passive income earned by an otherwise active operating entity is ancillary to the main activity, this is unlikely to give rise to a material tax avoidance risk.

11. Which of the following legal forms do you consider likely to be used to create or operate shell entities that will be used for tax purposes?

  • Companies
  • Partnerships with legal personality
  • Partnerships without legal personality
  • Foundations
  • Trusts or fiduciary
  • Other

12. Please explain your response to the previous question and provide examples.

The legal form is largely irrelevant as it is what an entity does or purports to do that is key. However, unless the transparency of entity is not consistently applied (and thus bringing into play anti-hybrid rules) entities with no legal personality can be ignored.

13. While Small and Medium Enterprises (SMEs) can also be or make use of shell entities for tax avoidance purposes, an initiative targeting shell entities could risk to put a burden on genuine small business. For a future intervention, which of the following options would you consider most appropriate to alleviate any negative spill-overs to SMEs?
  • Use thresholds (e.g. on turnover or income) to exclude SMEs from the scope of such initiative
  • Include SMEs within the scope of such initiative only to the extent they perform mobile activities
  • No need for specific rules for SMEs
  • Other

14. Please elaborate if you replied “other” to the previous question.


15. In a scenario where an entity is found not to have substantial economic activity (e.g. because it has some of the features indicated under 3.7) in the Member State of residence, in your view, what would be the most appropriate consequences?

The features indicated under Q7 are not necessarily indicative of an absence of an economic activity. It is unclear what is meant by “substantial” economic activity. Provided that an entity has a commercial rationale for its existence and it has commercial activities that should be sufficient, the level of those activities will in turn determine what resources are required for conducting those activities and how those resources are obtained and managed.

Thus the answers below need to be predicated on the fact that the entity in question, based on an objective assessment of the activity in question, including the resources applied to conduct such activity, and does not in fact carry on the activity it purports to be undertaking.

  • Denial of any tax advantages/benefits (e.g. relief from double taxation, deductibility of costs, application of tax treaty benefits) for the entity
  • Denial of any tax advantages for the group of entities to which the shell entity belongs
  • Increased audit risk
  • Making data on the shell entities public (e.g. list of shell entities)
  • Monetary sanctions on the entity
  • Monetary or other sanctions on the directors
  • Monetary or other sanctions on the beneficiaries
  • Consequences to be determined by Member States as they deem fit
  • Other
16. Please elaborate.

The principle sanction, which already exists, is to ignore the entity for tax purposes and treat it as transparent.

17. The use of shell entities for tax avoidance purposes can have impacts. In your view which ones are the most relevant impacts?
  • Member States do not have the necessary resources to implement public policies
  • Tax burden is distributed unfairly within the society, at the expense of compliant and/or low income taxpayers.
  • Unfair competitive disadvantage to tax compliant entities
  • Unfair competitive disadvantage to SMEs that have less access to cross-border tax avoidance structures
  • Other impact
  • No opinion
18. Please elaborate.

The principle impact is reduction of taxable base in other countries where the activities in question are actually being carried out. This may have indirect consequences for the country in question and its society but that will depend on the political and tax regimes in the particular country. There are significant measures already in place to deal with this.

19. Are you aware of any existing national rules targeting specifically the use of shell entities for tax purposes?

A summary of the numerous initiatives taken at OECD and EU level that have been implemented nationally is included in the introduction. These initiatives do not set specific rules for determining what constitutes a shell company and how that is determined, provided such rules reflect the economic reality of the commercial activity in question.

20. Coordination at EU level, e.g. on what qualifies as shell entity for tax purposes and how should be treated in terms of taxation, is fundamental to tackle the problem of shell entities in the internal market. How much do you agree with this statement?

The only area in which further co-ordinated efforts might be helpful (given the measures already in place) would be some considered guidance as to what would be sufficient substance in any given situation to ensure that the entity would not be treated as a “shell”. This would also ensure that the entity would be treated as beneficial owner of its assets and income and be treated as a resident for tax purposes.

Great care needs to be taken to reach a compromise between the need for legal certainty and for flexibility given the fact that substance is such a relative concept. As described above, any such guidance should also depart from an appropriate definition of “shell” as opposed to the direction the questionnaire appears to take.

21. Please provide other reasons for which you consider that the EU should take action to enhance the fight against tax avoidance through the use of shell entities.


22. Please provide other reasons for which you consider that the EU should not take action to enhance the fight against tax avoidance through the use of shell entities.

All necessary action has been taken.

23. If the EU took new action targeted at the use of shell entities for tax avoidance purposes, which of the following objectives should be pursued in priority?

  • Provide more incentives for voluntary tax compliance to taxpayers akin to use shell entities.
  • Promote effective implementation and enforcement of the existing anti-tax avoidance tools.
  • Ensure coordination of all Member States on what qualifies as shell entity for tax purposes and how it should be treated in terms of taxation.
  • Promote transparency on shell entities across the EU.
  • Monitor the implementation by Member States of any new EU rules targeted at shell entities.
  • All of the above
  • Other

24. Please indicate other objectives that should be pursued.


25. Please provide here any comments regarding your response to the previous question and available examples.


26. If the EU took new action to target the use of shell entities for tax avoidance purposes, which of the following means do you consider most likely to be effective?

  • New EU action should be primarily of soft law nature so as to take into account the specific circumstances of each case and the situation of each Member State.
  • New EU action should be of hard law nature, i.e. a new EU Directive. This would ensure the necessary level of coordination in the EU to effectively tackle the problem


27. Please describe any other means or combination thereof that the Commission should consider for EU action in this field.

This is not an area that lends itself to hard law but rather to guidance that makes it clear that it needs to be adapted to the situation in question. This would also enable the guidance to be adapted over time as circumstances change and to take account of ECJ decisions.

28. If the EU took no further action in the short-term to target the use of shell entities for tax avoidance purposes, which of the following scenarios do you consider most likely?

  • Member States are keen to implement the existing tools against shell entities. In a few years they will have gained the necessary experience to tackle the problem themselves.
  • Without EU action targeted at shell entities, the problem will remain.

29. If new requirements were imposed on EU taxpayers and tax administrations to tackle the use of shell entities for tax avoidance purposes, what would be the main economic impact in your view?

  • Tax collection across the EU would increase.
  • Resource allocation across the EU would be optimised through better distribution of tax burden.
  • Competitiveness of the internal market would increase.
  • Competitiveness of individual companies would increase.
  • Shell entities would be moved and set up outside the EU to maintain tax avoidance structures.
  • None of the above would apply in any material way.


30. Please describe any further major impacts you consider likely to arise from a new EU action against shell entities, towards the above stakeholders (taxpayers, tax administrations etc.) or other.



31. If new monitoring mechanisms were envisaged to check Member States’ implementation of tax avoidance rules against shell entities, what would be the main consequence in your view?

  • A level playing field would be encouraged. Member States would have more incentives to implement effectively the rules.
  • Member States would face a new burden, while instead they should be free to implement the rules as best fits with their legislation and practice.

32. Please select which of the following you would consider to be an effective monitoring system as regards Member States’ implementation of EU rules to fight tax avoidance.

  • Peer review mechanism, e.g. in the context of Code of Conduct Group on Business Taxation
  • Regular publication of anonymized data on compliance of entities in each Member State and on enforcement actions (audits performed, sanctions imposed)
  • Commission scoreboard on Member States’ performance on the basis of regular reporting by Member States to the Commission
  • Other



Final remarks

STEP’s additional comments can be found in the following position paper.

Other publications