On 14 July 2020, the European Commission recommended that EU member states do not grant financial support to companies with links to countries that are on the EU’s list of non-cooperative tax jurisdictions. Restrictions should also apply where it has been established that a company or its owners have been convicted of serious financial crimes, including, among others, financial fraud, corruption, non-payment of tax and social security obligations. It is up for the member states to implement this non-binding recommendation.
The Commission has in the past months approved virtually all emergency aid measures to face the consequences of the Covid-19 crisis without strictly assessing their compatibility with EU State aid rules. The recommendation may signal a move towards reintroducing some checks. It also seeks to protect member states’ tax bases and complement the set of measures already adopted to mitigate base erosion and tax avoidance practices. Several member states already announced that they would not grant state support to entities with links in blacklisted jurisdictions.
If the recommendation is implemented by member states, a company should be denied State aid if:
- It is tax resident or incorporated in a blacklisted jurisdiction; or
- A direct or indirect shareholder (natural or legal persons, and looking up to the UBO), direct or indirect subsidiary, permanent establishment or other entity in the group to which that company belongs is located in a blacklisted jurisdiction.
Carve-outs to this general principle essentially cover situations where there is substantial economic presence and activities in the blacklisted jurisdiction, where there is no erosion of the tax base in the member state or where there is a legally binding commitment to cut ties with the blacklisted jurisdiction within a short period.
To facilitate implementation, the Commission suggests that member states could accept self-certifications and perform more detailed audits at a later stage, also making use of exchange of information tools. An immediate enhanced verification should be conducted if the entity claims the benefit of a carve-out. Adequate dissuasive sanctions should be introduced; these should as a minimum entail the recovery of unduly granted financial support.
The impact of this recommendation is uncertain, because of its non-binding character. However, the budgetary situation of many member states and likely public and media pressure to further act against profit shifting and tax avoidance makes it likely that the recommendation will produce some effects. Member states will have to report to the Commission about the adopted implementing measures (if any). Taxpayers planning to ask for State aid should therefore anticipate additional questions about their group’s structure.
Compliments of Loyens & Loeff – a member of the EACCNY.