The six member states are: Cyprus, Hungary, Ireland, Luxembourg, Malta, and the Netherlands.
On May 20, 2020, the European Commission proposed key recommendations for six EU member states on tackling aggressive tax planning.
These six member states are: Cyprus, Hungary, Ireland, Luxembourg, Malta, and the Netherlands.
According to the Commission, features of the Cypriot tax system such as absence of withholding taxes on outbound dividend, interest and royalty payments by Cyprus-based companies to third country residents, and the corporate tax residency rules, may continue to facilitate aggressive tax planning.
Likewise, the Commission noted that the absence of withholding taxes in Hungary on outgoing income to offshore financial centres could provide an escape route for profits to leave the EU without paying their fair share of taxes. While the outgoing income flows such as royalties, interest and dividends towards offshore financial centres were relatively small in 2013-2017, Hungary records volatile and relatively high capital inflows and outflows through special purpose entities suggesting potential vulnerability to aggressive tax planning practices, it noted.
With respect to Ireland, the Commission pointed out that the high level of royalty and dividend payments as a percentage of GDP suggests that Ireland’s tax rules are used by companies that engage in aggressive tax planning, and the effectiveness of the national measures will have to be assessed.
“The high concentration of corporate taxes, with the top ten firms accounting for 45% of corporate taxes, their volatility and potentially transitory nature, along with their rising share in total tax proceeds (record of 18,7% in 2018) underline the risks of relying excessively on these receipts for the financing of permanent current expenditure,” the report notes.
The Luxembourg tax system too, in the Commission’s view, needs improvement. The Commission noted that the high level of dividend, interest and royalty payments as a percentage of GDP suggests that the country’s tax rules are used by companies that engage in aggressive tax planning.
According to the Commission, the majority of foreign direct investment is held by special purpose entities. In addition, the absence of withholding taxes on outbound (i.e. from EU residents to third country residents) interest and royalty payments, and the exemption from withholding taxes on dividend payments under certain circumstances, may lead to those payments escaping tax altogether, if they are also not subject to tax in the recipient jurisdiction.
Next, the treatment of resident non-domiciled companies as well as the investor-citizenship and investor-residence schemes, which do not even require an individual to be resident for tax purposes in Malta, pose a risk of double non-taxation for both, companies and individuals.
Finally, the high level of dividend, royalty and interest payments made via the Netherlands suggests that the country’s tax rules are used by companies that engage in aggressive tax planning.
A large proportion of the foreign direct investment stock is held by special purpose entities, the report notes. The absence of withholding taxes on outbound (i.e. from EU residents to third country residents) royalties and interest payments from EU residents to third country residents may lead to those payments escaping tax altogether, if they are also not subject to tax in the recipient jurisdiction.
The author is Alex Hunter, Editor, TP News. He oversees and updates the publication and also regularly writes news stories about transfer pricing and international tax law. Alex is reachable at email@example.com